is there a reason that the PCO should not allow this, since the vendor will not be charging more than what is on the contract?
This is a cost plus fixed fee contract so the Government will be paying the contractor their allowable costs (the labor they used, not what they originally proposed) plus the fixed fee. If the contractor is able to complete the work with less labor hours than they originally proposed it saves the Government money plus the contractor’s actual profit rate will go up which if this is a large business and has stockholders makes the stockholders happy.
I do not know if this was a competitively awarded contract or sole source. If it was awarded sole source it looks like the Government agreed to too many labor hours and by agreeing to higher hours increased the fixed fee the contractor will receive. Another way of saying this is, the contractor padded their labor hours to increase their fixed fee.