NASA’s Fixed-Cost Contracts Change Vendor (and NASA’s) Risks
This is Part 2 of a 3 part series on Space Exploration v. Economics
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The future of Lunar exploration is fixed… or at least the costs are fixed. NASA is now using commercial suppliers to provide rockets, landers, and more through new fixed-fee contracts. For decades, NASA would contract companies to innovate technologies and pay for the complete development and manufacturing process in addition to paying a fee. Termed cost-plus contracts, these agreements allowed companies to get wildly over budget and extend development times for years with NASA picking up the bill. This kind of model funded aerospace companies that manufactured technologies exclusively for NASA; technologies that might not have any commercial purpose but were vital for space exploration. Think JWST and Mars Curiosity Rover.
On 3 May 2022, NASA Administrator Bill Nelson discussed the plague of cost-plus contracts while testifying before the Senate Appropriations Subcommittee on Commerce, Justice and Science and Related Agencies. In discussing the future of fixed-fee contracts, he said “You get it done with that competitive spirit. You get it done cheaper. And that allows us to move away from what has been a plague on us in the past, which is a cost-plus contract, and move to an existing contractual price.”
This comment was picked up by all sorts of media (1, 2, 3, 4, and more), and was an exceedingly succinct summary of roughly 7 pages of testimony from the NASA Inspector General Paul K Martin that discusses (along with other issues) why cost+fee contracts are wasteful and fixed-fee contracts are required to get NASA budgets under control. This will be a slow process, as there are existing contracts in place, and they state, “NASA continues to use a cost-plus contracting structure for the SLS, Orion, and Ground Systems even though the programs have experienced years of delays and billions of dollars in cost increases. Down the road, NASA officials intend to transition these programs to potentially less costly fixed-price contracts. For example, contracting officials are implementing a fixed-price arrangement for production of SLS boosters beginning with Artemis IV and for Orion contracts starting with Artemis IX.”
With the new fixed-cost contracts, companies are paid a set amount with the expectation that they will provide a service to NASA that is on time for a set amount. This should work the same way I expect a bike I purchase online to arrive on time for the price on their website. Sure, both the bike and a rocket might occasionally get delayed, but the expectation is on-time commercial delivery.
The difference between a bike I might purchase, and (to pick a random example) the flights to the moon NASA is purchasing through the CLPS program is this: Bikes exist and are stored in large warehouses and produced in large numbers in factories, while each CLPS Mission is a bespoke creation. It is clear to the company exactly how much my bike will cost them to make and ship and they know from experience how long it takes to make it. The companies making lunar landers are innovating technologies as they go and have to estimate how much time and money first-time construction will take. As history might lead you to expect, they are consistently guessing wrong.
In the past, failures to estimate the cost and duration of constructing things like JWST and Mars Curiosity got passed on to the taxpayers, and the companies involved were able to deliver unbelievable innovations in design without going bankrupt. Since the missions are considered vital, like a roof on your house is vital, cost overruns were handled the same way homeowners will find a way to pay overruns on roof repairs.
In the new model, it is conceivable that a company could go bankrupt trying to meet the requirements of a terribly mis-estimated contract.
Consider Boeing and Starliner. In 2014, Boeing received a $4.2 billion fixed-fee contract to develop and test a crew capsule capable of flying to the International Space Station (ISS) and to then fly 6 flights to the ISS. (See also this 2019 summary from the NASA Office of the Inspector General). At this point, they have run the uncrewed test flights and the first test flight with people has led to the need to conduct all manner of unexpected tests (which cost money). The best number I have found for Boeing cost overruns is now a year out of date. As of 26 July 2023, CNBC reported that Boeing losses on StarLiner had reached $1.5 billion. With yearly revenue of more than $76 billion, this loss won’t bankrupt Boeing, but not every company in aerospace is this large or working on this diverse a portfolio of products.
We are all learning in real time what happens when capitalism and fixed-fee government contacts mix.
Capitalism works best when there are multiple customers. For example, Crew Dragon is getting used for NASA, Inspiration 4, Axiom series launches, and Polaris Dawn. These multiple income sources and the potential for additional income sources aid in the potential profitability of the vehicle, which in theory keeps it a SpaceX priority. At the same time, Starship HLS (the future human-rated, lunar-to-LEO version of StarShip) only has NASA as a customer at this time, and it is easy to imagine that it won’t get the same attention as the Earth-to-LEO version that will be launching satellites. Meanwhile, Blue Origin is looking at multiple potential customers for their Lunar landing systems, and curious minds (me, I am the curious mind) want to know if this could lead to Blue Origin being ready to land humans before SpaceX. Only time will tell, but these are commercial companies that need to turn a profit and this has the potential to impact development in ways we haven’t seen before.
NASA’s great experiment on fixed-fee contracts is the Commercial Lunar Payload Services (CLPS) program. In 2018, NASA picked 14 companies as vendors for future missions to the Moon. Over time, NASA expects to send a variety of instrument packages and other equipment to the Moon on these companies' landers and other vehicles.
Due to various reasons, from the pandemic to supply chain issues to innovation never going to plan, these missions have been running behind schedule. Since they are fixed-fee, this nominally means they won’t cost NASA additional money, however, NASA will have some financial burdens associated with delays to their payloads. There is also the risk that this experiment will lead to missions that just aren’t developed to the standard one expects from NASA-contract missions.
According to a 2020 report by the NASA Inspector General, “In examining discrete planetary science missions, the Lunar Discovery and Exploration Program (LDEP) is accepting higher risk than necessary in the Commercial Launch Provider Services (CLPS) project, which provides contracts to U.S. commercial entities to develop landers to deliver NASA science instruments and other payloads to the Moon’s surface.”
Space is hard, and failure of early missions is the norm, and that is what we’re seeing. The two missions attempted so far have failed to go to plan. The January 2024 Peregrine Mission by Astrobotic had a propellent leak and didn’t attempt a landing. The February 2024 Odysseus mission by Intuitive Machines came in hot, slid, had a leg break, and fell over sideways before dying after just a few days. This is consistent with past failures by former Google Lunar X-Prize teams, which were (primarily) non-governmental. The Israeli Beresheet lander from SpaceIL crashed in 2019, and the Hakuto-R, led by iSpace, failed in 2022. It can not be said enough - Space is hard. When we try to land on other worlds, we are daring mighty things. But can capitalism support this much failure to turn a profit as missions are built at a loss and then fail to accomplish all their mission goals? In the launch sector, companies go out of business regularly, with Virgin Orbit, SpaceRyde, and Masten Space Systems just being the most recent I know about. How long will it take for companies to go from losing money on fixed fee contracts for bespoke missions to having their version of a bicycle - something fully developed with known pricing and schedule - that they can deliver? The answer to this question is likely core to the success or failure of the fixed-fee NASA contract model.
In part 3 we’ll be looking at how the Fiscal Responsibility Act of 2023 leaves NASA no room for budgetary errors. This is all in a lead up to discussing missions that find themselves on the chopping block.
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The tension between "wildly creative scientific exercise into the unknown" and rigid budgets and annual and quarterly timelines... an old and tragic story.