Here’s an article about NASA’s administrator Bill Nelson in ArsTechnica, NASA chief says cost-plus contracts are a “plague” on the space agency.
Nelson was asked what, in his opinion, was the biggest threat to NASA’s goal of landing humans on the Moon by 2025. Nelson responded that the agency needed competition in its program to develop a Human Landing System. In other words, he wanted Congress to support NASA’s request for funding to develop a second lander alongside SpaceX’s Starship vehicle.
But Nelson didn’t stop there. He said Congress needs to fund this lander contract with a fixed-price award, which only pays companies when they reach milestones. This contracting mechanism is relatively new for the space agency, which traditionally has used “cost-plus” contracts for large development programs. Such awards pay contractors their expenses, plus a fee.
The backdrop is the Boeing SLS launch system, which has now taken 11 years and $20 billion. The thought was that SLS would maximize use of “heritage hardware” such as main engines from the space shuttle to decrease costs. But overall costs have skyrocketed. Lockheed’s Orion spacecraft, intended to be launched by the SLS, may be in a similar situation. Compare that to SpaceX, which, using fixed-price milestone payments on an Other Transaction contract, was able to build the Falcon 9 for a small fraction of the government projected cost, and quickly moved onto Falcon Heavy, Commercial Crew, Starship, and so forth.
Consider how NASA is trying to move away from cost-plus at the exact same time DoD is moving toward cost-plus. The poster-child of problems with fixed-price development is the KC-46A, which has something near $4 billion in cost overruns and continuing battles over who pays for what fix. Boeing has also taken heavy loss-leaders in fixed-price development on the MQ-25 Stingray, the T-7A trainer, and the VC-25B Air Force One (which itself is $1.1 billion over cost). Frank Kendall, who was USD AT&L during the KC-46 decision, said that the program would have been better as a cost-plus contract because the government would have supervised the contractor “more aggressively.”
It’s hard to imagine that SpaceX needed more aggressive management by NASA on a cost-type contract to succeed. It’s also hard to imagine that KC-46 remote vision system was more technically challenging then building a new launch vehicle from scratch. That the program was indeed highly complex.
BTW, the 2007 Public Law 109–364; 120 Stat. 2329 states that at Milestone B or equivalent (i.e., start of full-scale development), the Milestone Decision Authority shall select the appropriate contract type. Further, the authority shall only select a cost-type contract when “the program is so complex and technically challenging that it would not be practicable to reduce program risk to a level that would permit the use of a fixed-price type contract.” Fixed-price development was encouraged, and yet the acquisition system inevitably seems to hit problems and revert back on the pendulum of reform.
My own take is that neither cost-type nor fixed-price contracts are the major issue. Instead, what NASA did well on their OTA with SpaceX was used milestone payments. So they partitioned the major program into smaller incremental steps, made payments based on that progress, and provided space for the company to solve problems flexibly as they arose. More to the point, breaking major contracts up provides the government options to drop underperforming contractors and seek alternatives rather than getting stuck in a decade-long development that ultimately is unaffordable (or doesn’t meet the requirement at all).
It is modularization of the contract into partitioned tasks that matters more than cost-plus/fixed-price. As a congressional report recognized after the C-5A fiasco of cost overruns where all development and production was built into a single negotiation, “Total-package and other large contracts should be broken down into smaller, more manageable segments.”
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