To understand cost-plus and firm-fixed-price contracts, it’s important to understand how NASA manages each contract differently.

As I’ve mentioned before, NASA contracts generally come in two flavors:

1. Cost-plus type contracts where the company providing services is reimbursed for all of their costs plus a fee (profit) for managing the work. This fee is usually a certain percentage of total costs.
2. Firm-fixed-price type contracts where the company agrees to design and build the hardware (or provide a service) per the requirements for a fixed agreed-to price.

COST-PLUS CONTRACTS

Unfortunately, many large NASA programs utilizing cost-plus type contracts have been plagued with overruns and delays.

In fact, during my thirty-plus year career at NASA, I don’t recall a single major cost-plus contract that didn’t go over budget and take longer than the company promised. While this might have been the norm even back during Apollo, it seems to have gotten worse over time.

A Few Examples

The Shuttle was originally projected to be able to carry cargo into low earth orbit for $635 per pound at a launch rate of once a week. It turned out to cost $27,000 per pound, and the most it ever flew was nine times in 1985.¹

More recently, there’s the Orion capsule, the James Webb Space Telescope (JWST), and the Space Launch System (SLS) that have all been so over budget and behind schedule that it’s hard to keep up.

I’ll cover those programs in more depth in separate articles. Here, I’ll simply make the point that all three of these more recent programs were significantly over budget and behind schedule.

At first glance, the simplistic blame for cost and schedule creeps might go to the companies slow rolling the contracts. While this is certainly a component, there’s more to it than that.

Program Management

To understand why NASA contracts expand, let’s look at how cost-plus type contracts are typically managed.

In massive cost-plus contracts like Apollo and Shuttle, NASA civil servants play a big part in managing the program. For these types of contracts, each major system has its own civil servant program manager, chief engineer, and support teams.

Put these two forces together, and you get bloated programs that are over budget and behind schedule—every single time. I’ve seen this at play in more canceled programs than I care to say and in every single one that produced flight hardware.

When the program manager asks the contractor for a change—or to perform additional analysis just in case—the answer is always the same:

What makes this even worse is that current NASA program managers are afraid NOT to have every question that comes up fully assessed by the contractor team.

Can someone say fear?

This is Old Space to the core.

FIRM-FIXED-PRICE CONTRACTS

NASA manages firm-fixed-price contracts differently.

On these contracts, NASA takes more of a hands-off approach. NASA ensures that the company meets the requirements of the contracts and scores performance for fee incentives.

And generally speaking, the company that develops the vehicle technology owns the technology. For example, SpaceX owns all the technology for the Falcon 9 vehicle that carries supplies and crew to ISS. NASA is simply paying for a service—an Uber ride of sorts—to and from ISS.

One of the advantages of firm-fixed-price contracts is that since time is money, the company has a financial incentive to keep moving. In other words, there’s urgency because delays mean lower company profits. So does standing up a tiger team to study something that doesn’t need to be studied.

Firm-fixed-price type contracts are popular for things that are predictable—like landscaping, on-site security, and janitorial services, but not so much for things that are less so, like new launch vehicle design and development.

Final Thoughts

I’m certainly not suggesting that Shuttle and ISS should have been a different contract type. That would be too easy. I’m simply pointing out how the system we’ve created to do space stuff has a financial incentive to be slow and over budget—and companies know this and use it to their advantage.

The way NASA manages massive cost-plus type contracts isn’t working. We need a fresh approach.

1. nasaology.com/footnote1

In 2008, NASA took a different approach and awarded two contracts to carry supplies to ISS using firm-fixed-price contracts. I’ll explain the ISS launch services contracts (supplies and then crew) in the articles below.