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:
- 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.
- Firm-fixed-price type contracts where the company agrees to design and build the hardware per the requirements for a fixed agreed-to price.
Before we go any further, it’s important to understand the following distinction. In cost-plus type contracts, companies profit from cost overruns and schedule slips. In firm-fixed-price type contracts, companies lose money with cost growth and schedule slips.
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 type 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.*
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.
To understand why NASA contracts expand, let’s look at how cost-plus type contracts are typically managed.
In massive cost-plus type 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.
Cost-plus contracts ballon, in part at least, because NASA program managers and engineers want everything to be perfect and without risk, and the contractor wants everything to be out of scope with the contract terms so they can do more analysis—which means more work (profit).
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:
“Yes. But it’s out of scope, and we’ll need additional funds.”
What makes this even worse is that current NASA program managers are afraid NOT to have every single problem that comes up fully assessed by the contractor team.
Can someone say fear?
This is Old Space to the core.
A Story About ISS
I worked on the International Space Station program in the early days and then moved to NASA Headquarters in Washington, D.C. for a one-year developmental assignment.
In my first meeting with a Congressional staffer, he asked.
“What happened on ISS?”
I was surprised at the tone of his question because I was proud to say I worked on ISS.
“What do you mean?” I replied.
“ISS is so over budget that it’s giving NASA a black eye.”
He continued, “NASA never follows through on its promises.”
I tried to disagree tactfully, but I knew I wasn’t going to change his mind.
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.
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 future articles.