In today’s issue of The Space Review a couple authors take different tacks on reforming how NASA procures hardware and services. In one piece, Derek Webber advocates moving from cost-plus to fixed-price contracts for the space agency. Such a switch would avoid cost overruns and allow for milestones to monitor whether the contractor is making progress. As for space being “different” somehow and thus not fit for fixed-price contracts, Webber, the former director of procurement for Inmarsat, responds:
Don’t tell me that you cannot use fixed-price contracting for space technology because it is so special, or so difficult, that nobody would take the risk of competing and winning, and then possibly losing money on the deal. Well, welcome to the real world! That’s the normal commercial risk that well-managed companies face all the time in deciding whether to bid or not, and at what price, for new equipment or services. We build bridges and buildings that way. And, ever since the early 1970s, communications satellites have been designed, built, and launched entirely on the basis of fixed-price contracts. Nevertheless, each new generation has pushed the technology envelope to its limits in order to meet the needs of the satellite services industry.
Meanwhile, Taylor Dinerman is concerned about the growing use of contract protests for government procurements, primarily in the defense sector but increasingly in the space arena, given PlanetSpace’s announcement that it is protesting the ISS Commercial Resupply Services contract awards made last month. “It now seems that once a contract has been awarded its fulfillment relies on the goodwill or a calculated decision by the loser not to contest,” he writes. “This effective veto power will eventually strangle the entire system and force through a set of reforms—possibly on an emergency basis—and the results will not be pretty.”
Procurement reform is not just for the big primes though. I believe in small projects, and the big-project procurement machinery cripples them in almost every way from people to services to hardware.
Because of the pain of small procurement, the system pushes you toward one big contract with a prime for things where smaller players are a far better solution and should get a look in. How else does an agency find itself buying all desktops and support from that well known computer company – Lockheed Martin?
The real inequity in the system is between small and large. Whether deliberate or not, the procurement playing field is massively tilted toward large established players.
There are many types of contracts to fit the many types of projects. Those people who want to go all to firm fixed price contracts are lazy and don’t want to do the work to put the right type of contract on the right type of work.
Projects that involve great risk should be cost plus. Then the government has the task of really monitoring the contract – not just pretending to and holding the contractor to hazy requirements.
Many space programs are not nearly as well understood as a bridge. The Constellation program (for instance) involves lots of development and you cannot simply pull milestones out of thin air and hold any company to them. Communications satellites are well understood and can be built on firm fixed price contracts – of course the government should not be doing them any more.
Contracts that are not risky can be firm fixed price – we are probably at that point with ISS resupply.
Anyone who wants all contracts to be cost plus is also abdicating their responsibility.
A larger issue with (government that I know of, could be other situations as well) contracting is the often resentful and competitive relationship between the contracter and contractor. When I was in the AF I was told that the first rule of contracting is “The Contractor Is The Enemy” but the unspoken truth was The Contractor Is The Future Employer.
Anyone who says that we should blindly apply the same type of rules to all situations just does not know what they are talking about.
“I had always thought that it was obvious, but perhaps it needs to be explicitly stated: there is absolutely no incentive for a contractor on a cost-plus contract to ever finish the job.”
This statment is not true and does not make sense. A cost plus contract allows the contractor to spend up to 50% more than the negotiated value. The catch is, the contractor makes zero profit on that 50% over run amount. They make full profit on everything up to the negotiated value of the contract, usually about 10%. The reason the system works to the contractors advantage is because they never over run!
How is that possible, you ask. How can they drag programs out year after year and never over run? The key to that is the US Congress. They never fully fund any contract. And how does that help the contractor? The funding profile is in the contract. If Congress doesn’t meet that funding profile the contract has to be renegotiated. When it is renegotiated, the cost over runs from the previous year are rolled into the current year’s funding, and *poof* the over run disappears.
So what does putting contractors on a firm fixed contract do? Absolutely nothing for the US taxpayer. The contractors weren’t over running before, and they won’t be over running with a firm fixed contract. The one thing the firm fixed contract does for the contractor is it gets rid of the award fee system. Right now, contractors have to be nice to their government customers because if they’re not the customer can trim back their profit to nothing. The defense contractors dearly want to go to firm fixed contracts so they don’t have to be nice to their customers anymore without having their profits axed.
People like Derek Webber are nothing more than shills for the contractors.
I appreciate the comments that my original article have generated, some of which have provided me with a deeper insight of the problem. I figured that the procurement approach had something to do with cost escalation and have noted how successful SpaceX have been in building a space program from scratch entirely on a fixed price contract basis. Clearly, we all want better results in the future, so I welcome anyone who wants to put in their 5 cents worth about how to do this. Incidentally, I am nobody’s shill, and so far as I know, there are no people like me, either! I was responsible, however, for over $1B of satellite procurement on a fixed price contracting basis.
A shill is as a shill does. Why don’t you explain how it is that contractors have no incentive to ever “finish the job” based on the part of their contract that carries NO PROFIT? I stand by my use of the word.
OK, Dfens
You are right. I quibbled at the word because no-one is paying me. But I do “work energetically to promote something”, which is Webster’s definition. The something I am trying to promote is US success in space, starting with space tourism (see http://www.SpaceportAssociates.com), but in this particular commentary trying to improve the chances of getting a long range space policy supported by Congress and the American people. I guess you are saying I am off the mark on my proposal, in which case I await ideas from yourself and others on how to do better. I had thought there was some room for improvement in the approach we have been taking.
Damn straight there’s room for improvement, but going to firm fixed contracts is not it. That style of contract would remove the one last ounce of control the government has over aerospace contactors, which is the award fee. That was at least one major reason why the USAF rejected Lockheed’s offer to move the C-5 RERP program to a firm fixed contract.
NASA will only get control of its contractors when it stops paying profit on development. That’s money for nothing. It is a system that pays for process and not for progress. NASA should only pay for finished goods or services and then they should award profit based on how well those goods or services meet their objectives. In other words, they should pay for results.
If they continue to pay for process they will continue to get just that, lots and lots of process. If they pay for results they’ll get results. The system NASA uses is so screwed up that they pay the contractors the same profit on design as they do on hardware production. If I’m making 10% profit on designing a rocket and 10% on building one, I look at where I get the most benefit in each phase of that contract, and ya’ know what, there’s a helluva lot more risk and capital investment tied up in cutting metal than there is in parking a bunch of engineer’s butts in a cube farm cranking out paper. As long as that’s where the most money in my pocket is, that’s the part I want to drag out as long as possible. That’s why the development phase of NASA programs drag out forever, not because of the cost plus portion of their contract.
NASA could go a long ways toward fixing what’s wrong with their procurement system if they’d only do something as simple as changing the profit split between the development and production phases of their contracts. Instead of paying 10% across the board, they could pay 3% in development and 10% for production with a 7% hardware on dock bonus. It would be the same amount of money toward profit but biased toward what NASA wants instead of what they contractor wants. That alone would stop the cycle of endless design, and it’s not that big of a change.
Sounds like a good idea, DFens.
I would support anything that has a chance of working, and gets us progress instead of process. There are no perfect solutions, but your approach would be one way to move us in the right direction without too much hassle. And I still am impressed with what SpaceX has done under the COTS approach, so would favor more of the same.
Companies take a whole different approach to vehicle development when they are spending their own money. One of the more amazing examples in recent history is Lockheed’s recent upgrade of two cargo aircraft, the C-130J and C-5M. The C-130J upgrade was done spending shareholder’s funds and took almost half as long and cost approximately half what similar upgrade development that went into the US Air Force funded C-5 AMP and RERP programs. The same thing is true when looking at the development costs a company like SpaceX generates vs. those of government funded rocket development programs.
The pattern is stark and alarming. Whenever a company spends their own money to develop a vehicle it costs half or less than what a government funded development costs. Even so, we are asked to believe any number of inane things are to blame for this cost difference. At one time we were led to believe it was middle managment’s fault. Damn them. Other scapegoats have included government standards documents, requirements that were too detailed, requirements that were not detailed enough, requirements creep, mission creep, various inadequacies of young engineers, and cost plus contracts, which have had their day in the mill on a number of different occassions.
Most of these are only offered up as red herring excuses to make it look like defense companies that are making record profits are deeply concerned about how little return taxpayers are getting for their dollar. In the case of the firm fixed contract, however, the primary reason it keeps floating to the surface is due to its status as the “holy grail” of waste, fraud, and abuse. It provides profit to the contractors with no chance of that profit being adversely effected by poor performance.