Nelson testifies cost-plus contracts have been a “plague” on NASA

https://payloadspace.com/nelson-testifies-cost-plus-contracts-have-been-a-plague-on-nasa/

by aml183 • 4 years ago

193 141 4 years ago

mulmen• 4 years ago

What happens when a fixed-price project hits a delay? Presumably the bidder eats the loss at first but what happens when they run out of appetite? Does the project just... end?

timdiggerm• 4 years ago

You mean if they don't deliver the product after they signed a contract?

smnrchrds• 4 years ago

I don't know what would happen initially, but eventually, the contractors wise up and start baking the risk of delays into their quotes.

dr_orpheus4• 4 years ago

Yes, this definitely happens and is why in some situations people think fixed price contracts can end up costing more.

Contractors will be extreme sticklers about their requirements on a project. So that if anything starts look off-plan or may impact something like a schedule delay they will say "nope, that's outside of our scope of work we need an extension/additional funding".

dr_orpheus4• 4 years ago

Theoretically the bidder eats the loss and assumes all of the risk in a fixed-price contract. Ending projects certainly is a possibility, but there are typically termination penalties within the contracts as well.

If there is an unanticipated issue contractors will often try and get a contract modification because they consider it new scope of work or something like that.

bryanlarsen2• 4 years ago

Yes. https://spaceflightnow.com/2020/01/22/boeing-withdraws-from-...

badwolf• 4 years ago

More current fixed-price example, also from boeing: https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-...

golem142• 4 years ago

Here's how simple me thinks about it: Cost-plus is just a lazy version of fixed price, where instead of accountants looking at details before new funding is released, there's automatic approval of overruns.

teruakohatu3• 4 years ago

there's automatic approval of overruns.

That is not quite correct. Cost-plus specifies how charges are priced, it does not specify budgets.

I could sell you pencils at cost-plus. How many pencils you buy is up to you, not I.

fergbrain• 4 years ago

They eat the cost: https://simpleflying.com/boeing-ceo-air-force-1-deal-mistake...

vkou• 4 years ago

Presumably the bidder eats the loss at first but what happens when they run out of appetite? Does the project just... end?

That's why these contracts go to large companies, as opposed to small ones.

If a small company loses interest in finishing a fixed-cost project, they might go bankrupt, and leave the government up crap creek without a paddle.

If a big company loses interest, they'll keep struggling along, because they can get hit with the stick of 'you'll never get another contract from us ever again.'

tssva• 4 years ago

If a big company loses interest, they'll keep struggling along, because they can get hit with the stick of 'you'll never get another contract from us ever again.'

It is an extreme and rare measure for an agency to ban a large contractor for lack of performance and in the rare cases it has happened to large contractors have almost always had the ban lifted upon appeal to the GSA. In most cases where there has been a failure to deliver substantial or primary responsibility can be laid at the feet of the government agency.

uberman2• 4 years ago

Yes, the project just ends and it will end sooner than expected under fixed bidding as the government will almost certainly demand non-contracted changes mid-project that in my experience can have dramatic costs.

Most government projects are structured and paid for in phases and there is no assurance that phase 2 starts at the end of phase 1. No approval to proceed means the project just "ends when it ends".

stonemetal12• 4 years ago

They get a bad CPAR (Contractor Performance Assessment Rating) and are banned from government contracting in the future.

quxpar• 4 years ago

Yes, and the government learns a lesson.

cryptonector4• 4 years ago

What happens when a fixed-price project hits a delay?

It varies. Sometimes the cost of imposing a penalty specified by the contract would be so destructive to the project, and the project delayed but finished would still be worth more than switching vendors (if that's what the penalty would imply, due to bankrupting the original vendor) that the penalty gets waived.

Besides, what happens when a cost-plus project hits a delay? Answer: we pay more and more and more and the project is delayed more and more and more.

Manuel_D2• 4 years ago

Cost plus contracts are well intentioned, but create perverse incentives. It's also a big issue in the defense industry. The idea is that a contract pays a company the cost of producing a product, plus N% for profit. Thus, profit is fixed and companies cant profit too much off public money.

But in practice, this means that in order to increase profit companies have to increase costs. If you're building a product and you can spend $10 million to build it efficiently or $20 million to build it inefficiently, it's actually beneficial to do the latter. It's disincentivizing cost reductions and incentivizing cost increases.

dr_orpheus4• 4 years ago

Yes, the theory of cost-plus contracts is good. It is a way of saying "this is a new piece of technology with ill defined requirements and we need help developing it along the way." Theoretically, it allows for changes and adaptations in developments of technology. This is all in theory though and what proponents of cost-plus would say. It does suffer from some of the issues you have mentioned above. I think there is a time and a place for cost-plus but there is definitely move towards more fixed price contracts in civil and defense.

Becoming somewhat more common now is a hybrid approach of cost-plus/fixed. Contracts for development phases up to a certain milestone are set up as a cost plus contract and then production comes under a fixed price contract.

tomatotomato37• 4 years ago

I wonder if some of the risks of cost-plus could be mitigated by associating it with industry average running costs rather than a per-project basis. So contractors would get a yearly payment with as long as they are making progress on a project, but any changes to the project are 1-to-1 with additional costs so there would be no benefit to either aggressive cost cutting or sandbagging expenses. Maybe also make it so profit would be rewarded at project completion in proportion to the running costs of however long the project took to prevent pointlessly lagging or rushing projects. Of course there would also have to be bullshit like opportunity cost compensation and shit because these companies are so profit-driven as to crash a project meant for the public good if it means more profit from interest on a 0.5% bank account

nynx• 4 years ago

There must be some way to structure contracts to allow for cost of developing new technologies yet incentivizes minimizing that cost.

bluGill8• 4 years ago

R&D is about managing risk. You can have more micro-managers to ensure that costs are minimized, but the cost of all that management can be more than the abuse of cost-plus (not to mention people hate being micro-manged)

The only good answer I've heard is for the agency to have enough technical experts that they can spot bad things. However that means the government needs to develop technical experts.

dr_orpheus4• 4 years ago

There are Fixed Price Incentive (FPI) contracts that try to address this. Instead of a single price for the contract as in an Firm Fixed Price (FFP) there is a "target" price at which the contractor will get some level of profit. Above that you set a cap on the total cost of a project that you are willing to pay, but the profit of the company goes down as you approach the cost cap. So contractors still have the incentive to minimize cost because if they get cost below the "target" price the contractor still gets that as profit.

However, people aren't usually a fan of them because it requires all of the overhead/audits of a cost-plus contract which typically minimizes how cost effective they can actually be at getting below the target price.

There are also some development-type projects where the government will fund a project, but still require some amount of funds (like 25%) to come from the contractor. But this is really early development type stuff. Basically it is a way to influence where a company is spending their R&D money. Its not really for any operational systems.

Manuel_D2• 4 years ago

Ditch cost plus contracts and use taxes to curb companies that are just profiting off rent-seeking behavior (like sitting on patents). This was done during WWII, marginal tax rates were set to 100% to discourage war profiteering. Companies would still have an incentive to cut costs, to increase profits. But they'd then be incentivized to reinvest those profits because otherwise those profits would be greatly taxed. Granted, how you'd effectively target these taxes outside of unusual circumstances like a world war might be too complicated to be feasible.

BurningFrog• 4 years ago

One simple way is to pay a fixed sum as profit, not a percentage of costs.

chmod775• 4 years ago

There must be some way to structure contracts to allow for cost of developing new technologies

Make companies evaluate and eat the risk by allowing them to set the fixed price...

yet incentivizes minimizing that cost.

... where they are bidding on the contract against other companies.

This only works if you have a market with multiple players, which is possibly the main reason NASA is more heavily leaning towards fixed-price contracts now.

andrekandre2• 4 years ago

minimizing total cost yes, but bidding wars on contract by contract leads to bad outcomes because the incentive is against doing the what is needed until its too late

its better to have trusted suppliers and relationships that lead to long term waste (cost) reductions and quality output (you know your client and your client knows you)

deming said it better than i can: https://deming.org/minimize-total-cost/

treeman792• 4 years ago

This is also where free markets shine. If someone is making absurd profits building in-efficient widgets. It won’t be that long before other people get the idea to make that same widget for less or better quality or both.

But first company will then go out of business or become efficient.

Survival of the fittest evolution style for business.

x86_64Ubuntu• 4 years ago

This assumes that there are no intellectual property encumberances held by the old company, and that the barrier to entry isn't terribly high. And no one with a budget and a deadline is going to wait for one company to go out of business so they can get it cheaper.

ipaddr• 4 years ago

The first company has first movers advantage which lets them signs exclusive deals and builds a regulatory moat plus gains brand awareness.

The new company may be cheaper or have better quality but that isn't an automatic win. The second company needs more money or an event to superseed the first story.

fatbird• 4 years ago

You're leaving out a significant factor in cost-plus contracts in their favour: the buyer pays the actual cost, not the cost-plus-contingency that's built into fixed price contracts. It may not work out that way for the reasons you mention, but the problem of baking in risk costs to fixed priced bids returns. And in observing "how does the contractor increase profits", another issue with fixed price bids is that it encourages corner-cutting internally: anywhere the contractor can save money, it goes into their pocket, which can mean a lot of tissue-thin requirements fulfillment that goes wrong later.

Symmetry2• 4 years ago

In theory the regulating agency overseeing the cost plus contract is supposed to scrutinize the expenses of the overseen entity to prevent this. In practice just form a matter of program complexity this is hard to do. When you bring in politics it gets even worse, "You don't want to endanger our pilots by giving them any less than the most gold plated fighter jets, do you?" argue the defense lobbyists.

The worst example I can think of would probably be the nuclear industry where operators providing grid power on cost plus contracts teamed up with environmentalists after Three Mile Island to get laws passed insisting that nuclear power had to be as safe as possible regardless of cost, which turned into essentially a license to print money.

ClumsyPilot4• 4 years ago

In theory the regulating agency overseeing the cost plus contract is supposed to scrutinize the expenses of the overseen entity to prevent this

The entire point of getting the private sector is that their insentive should be to do it in the most efficient manner possible, and noone has to manage them - the inefficient ones just die out.

The second-best approach is to have the government manage the whole thing, where they have no real incentive to be efficient.

But what we have here is employing the private sector and incentivising them to be as inefficient as possible, and the government must still hire an army of accountants and experts to keep them in check. it's combines the worst aspects of both!

lumost• 4 years ago

In R&D, incentivizing a private enterprise to spend more could be beneficial. Assuming the client (NASA) has some oversight this leads to more engineering freedom and an exploration of a larger design space, whereas fixed cost would incentivize racing towards the best solution as fast as possible.

Depending on program goals, both approaches have their place. However for projects like Artemis which tried to minimize R&D cost and save time through component re-use, the latter approach would clearly be better.

ChrisLomont3• 4 years ago

It's disincentivizing cost reductions and incentivizing cost increases.

Competetive bids drive costrs down. The alternative to cost plus is? Not having fixed profit margins, in which case there is still incentives to increase costs.

In both cases the limit to costing is competition and the contracting side.

Another way to think of it is cost plus lowers costs by lowering risk. If the company were on the hook for uncertainty (which is the case on ANY project), then they would have to price that into the original proposal, as would their competitors, ensuring more costs to cover the risk.

By lowering risk to companies, it provides another avenue to lower costs. This happens in lots of markets - look at cost margins where there is volatility versus margins where there is predictability.

edmundsauto• 4 years ago

This only works if the bids represent the same work, at the same quality, on the same delivery schedule, with the same feedback pathways and the same risk mitigations.

In other words, it is the “spherical cow” of contracting.

zbrozek• 4 years ago

Cost plus isn't used just at NASA. It's even more evil in other arenas, like electricity in California. Our regulators allow for a fixed profit margin for opex and a higher fixed profit margin for capex. This has the twin effects of running things to failure (and igniting the state) in order to avoid opex and instead claim capex, and also motivating as-high-as-possible costs for everything. No competitive bids are possible.

downut• 4 years ago

Wait till you find out about Red and Blue teams submitting bids from the same corporation. I sure loved being a small part of that.

LegitShady2• 4 years ago

The alternative to cost plus is?

Contracts where the contracting party agrees to a % of responsibility. When the project runs over the profit is reduced by the overrun * the percent responsibility.

Lets say the agreement has 25 million in profit and 40% responsibility. If the project runs over by $2m, the contractor eats $2m * .4 = $800k reduction in profit so now it's $24.2m.

Then they're actually incentivized to not have overruns.

photochemsyn• 4 years ago

One of the areas where this seems to have happened is at the NSA, which usually keeps its contracts very secret, but due to William Binney's whistleblowing, it was revealed that the inexpensive solution (ThinThread) was passed over in favor of the expensive solution (TrailBlazer).

https://whistleblower.org/whistleblower-profiles/thinthread-...

Part of the problem here is that the government actors selecting the contracts also want more money flowing through their agency, and they seem to get kickbacks in the form of 'retirement positions' with the very private contractors they're directing contracts to.

colordrops• 4 years ago

Cost plus contracts are well intentioned

Are they though? If a casual layman internet reader can see the problem and see that they always get taken advantage of for profit, couldn't also the NASA officials and contractors signing these contracts? They know exactly what they are doing.

SpaceX signed non-cost plus contracts and delivered far more quickly and cheaply than the rest.

travisporter• 4 years ago

The problem is Congress tells NASA do this with this money this way. NASA has little flexibility. Recently with the CLPS program NASA flexed it’s muscle and it’s paying off so far.

efsavage3• 4 years ago

A better way to align incentives would be to have the bids specify fixed profits and a value engineering process. You bid $10m + $1m profit. The project baloons to a $20m project, you still make $1m. The project meets it's goals with a $5m budget, you get $1m and a percentage of the shortfall. It can still be gamed, but to a much lesser degree.

I worked on a 9-figure construction project and there were two full-time engineers specifically tasked with looking for ways to reduce the cost of the project, because it was essentially free money for the contractor. These two people generated millions in profit for the company.

https://www.fhwa.dot.gov/construction/cqit/vecp.cfm

bryanrasmussen2• 4 years ago

Good, but often people reduce costs by using lower quality supplies so that isn't necessarily foolproof either.

Retric2• 4 years ago

There are a lot of games you can play to make say rent look like a cost on a contract while another entity makes a profit from that rent. Worse you still have incentives to offload costs onto a contract. For example someone finishes an unrelated contract your might as well move them to a profit + contract rather than benching them or immediately laying them off.

In the end markets simply aren’t efficient without pricing information. If you can’t get someone to bid a fixed price you might as well keep in in house.

Closi4• 4 years ago

All these approaches have plusses and minuses and their own risks. The risks with the approach you have described are that:

a) Unless very carefully managed, you can end up with contractors being incentivised to cut corners (i.e. We make more money if we buy the cheapest doors possible, regardless of if they only last a few weeks).

b) If contractors have fixed profits at their bid-price, they will have zero incentive to accept any change requests (unless they come with additional margin, in which case, overspends will magically turn into change requests).

magicalhippo• 4 years ago

I worked on a 9-figure construction project and there were two full-time engineers specifically tasked with looking for ways to reduce the cost of the project, because it was essentially free money for the contractor.

Semi-related story:

Way back I was a trainee for a company, which won a contract to upgrade the the branch servers for some other company, about 500 of them.

The on-site process involved copying over files from the old Unix server to a new NT4 server running Citrix, split maildir and home directory and set proper user-level permissions on each users home and mail directory.

The whole rollout was going on for just a few months, so we had tons of folks doing this in parallel at each site. During the first site I saw the manual our project team had created, and it specified us doing the copying and permission setting using Windows Explorer. To change the ACL that meant scrolling down to find the right abbreviated user name matching the directory name... fun when there was hundred employees at a branch.

I figured there had to be a better way, and started writing some batch scripts. After about a day I had automated the whole process, including sending a mail to our phones (the phone company had a service turning number@phone-company.com into an SMS).

So I just launched the script, went for a 1-2 hour lunch until the phone beeped. Then I just had to go over the logs and verify there were no errors, and job done.

Back at base, I shared the scripts with my coworkers, which obviously loved not having to do the tedious process as specified.

It was only after the end of the project that I learned that the contract included a fixed rate of 3-5 days per site for one or two techs, depending on size. After all, changing all those permissions manually took a lot of time. After I wrote the scripts nobody used more than half a day...

Did I get any extra compensation for that? Of course not, and I was too young and shy to ask.

Oh well, lesson learned.

gabereiser• 4 years ago

This has been my experience as well through contracts with the government.

To further this, there is also no incentive and funds to modernize an already existing product. If it was written in Java 6 using J2EE, it’s going to continue to be that until it dies.

Folks I worked with also didn’t care to up skill or learn new ways of doing things because the incentive wasn’t there. Their cost was fixed, their price was fixed, their profit was fixed. They will do the bare minimum to satisfy the contract.

avalys• 4 years ago

This is why it's ridiculous that the US Affordable Care Act (Obamacare) "caps" profit for health insurers as a fraction of premiums collected. It provides a direct incentive for them to increase healthcare costs, absolutely the opposite of what government policy should be doing.

hash872• 4 years ago

The issue is that without the caps, the insurance companies would be much more motivated to deny lots & lots of claims. Imagine you're a regular person with a middle-class income, you urgently need treatment and the insurance company algorithm says 'denied' because they're simply saying 'no' to x% of claims that week. What are your options? Litigation? Yes insurance companies have regulators, but the sheer scale of denials would start to overwhelm them. At a huge scale, this would degrade the quality of American healthcare even more. It would become normal for legitimate claims to be denied all the time.

Anyways, this was the explicit reasoning of the ACA drafters when they included the profit cap. Maybe they were wrong, but this was thought about & discussed a great deal at the time

maxerickson• 4 years ago

They do potentially face competition (though there is one marketplace insurer operating in my area, so...).

cryptonector4• 4 years ago

Cost plus contracts are well intentioned

For some definition of well intentioned!

whiddershins• 4 years ago

Doesn’t Obamacare essentially turn the entire healthcare industry in the United States into cost plus?

r00fus• 4 years ago

No, the first move in that was "Medicare advantage" by GW Bush.

bryanlarsen2• 4 years ago

Fixed price contracts are also similarly abused.

https://spacenews.com/nasa-inspector-general-criticizes-addi...

Robotbeat3• 4 years ago

But not as easily. Boeing has since had to eat the costs associated with an extra test flight.

nickff2• 4 years ago

Fixed price has cost NASA dearly in the past, because NASA often changes things after making a purchase decision. The 'change orders' are often where contractors make their real money.

NovemberWhiskey4• 4 years ago

Contractors may lose out on the initial fixed-price contract, but they'll make it up on change requests - for any kind of realistic scale, the customer never knows exactly what they want, there are always changes, and by that point it's largely unrealistic to shop those contracts elsewhere.

throwawaylinux3• 4 years ago

https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-...

Over a billion dollars saved for the taxpayer, and a priceless learning opportunity for Boeing (if they choose to take it). A great deal, a real win-win.

bluGill8• 4 years ago

I disagree. Cost-Plus might not be the right model, but fixed price only works if all the risks are known and so easy to account for.

Plenty of builders can make you a house on a fixed-cost. I used to know one, and every spec house he built was within $1000 of his initial price because he could look at prints and know in an hour how much the lumber, labor, plumbing, electric, cabinets... would cost. He could figure this out even if it was the first time building that print. (spec house was important - if it was custom the owners were use to add $30,000 in upgrades)

SpaceX can quote you a fixed price launch of crew dragon to ISS. However if you want to build a new ship - there are too many unknowns. I'm sure if NASA was content to stick with the opportunity rover design they could have thousands on the surface of mars by now for the budget that has gone into the various programs we have done since then - but we learn a lot more from the new programs that opportunity can't give (perhaps we would know more about mars?).

Most of the things NASA does are things where the risk is far too high for anyone sane to take on all the risk in a fixed price contract. Instead NASA needs to take on the risk in some way. Either that means some form of contract like cost-plus, or a lot of smaller contracts such that everyone can succeed at their contracts while the project itself is a failure (I'll make module X exactly to specs, too bad if you mess up the specs). All forms of such contracts are subject to abuse, NASA needs to figure out how to manage that abuse.

gpm6• 4 years ago

NASA doesn't need to be in the business of managing that risk and the abuse that comes with it. NASA can pay a fixed cost equal to the expected cost of the project, and the contractor can buy insurance if they want insurance against cost overruns.

Insurance companies are in a much better place to price this insurance than NASA, because they have the correct financial incentive to do so well, and no political incentives to do so poorly.

teruakohatu3• 4 years ago

NASA can pay a fixed cost equal to the expected cost of the project

Sure they can, but when they decide to tweak the project the company can tell them "no, that sounds risky".

So what will happen is the contract will end up stating something like all adjustments are priced at cost plus... and NASA is back at square one.

NovemberWhiskey4• 4 years ago

Insurance companies are in a much better place to price this insurance than NASA

Is that really a thing? The risks of adverse selection and moral hazards would seem insurmountable.

trothamel• 4 years ago

SpaceX did bid fixed-price for HLS, the moon lander they're working on. That project will required developing refueling from an on-orbit propellant depot to succeed.

The thing with SLS is it was supposed to be low-risk, based on Space Shuttle heritage - it doesn't do much that's new. Despite that, it's on a cost plus contract that's ballooned.

nickff2• 4 years ago

Nobody in their right minds would have touched SLS with a fixed-price contract; NASA is too involved in the design, construction, and testing.

sidewndr462• 4 years ago

Not just heritage, the SLS is basically what you get if you move the Space Shuttle engines onto the propellant tank and remove the orbiter vehicle. Then discard the reusability requirement and you've got SLS.

In the process of this, everything is being modernized. This is where all the cost comes from.

bluGill8• 4 years ago

SpaceX only did that is they wanted to do it anyway, so they were willing for the risk

masklinn• 4 years ago

The thing with SLS is it was supposed to be low-risk, based on Space Shuttle heritage - it doesn't do much that's new.

HLV would have been a low-risk launcher based on the shuttle. SLSs is a new launcher build from recycled parts.

uberman2• 4 years ago

This 100% and it is not just super risky things like "exploring space".

If you have ever PIed on a government contract you will know that the program manager will almost certainly deviate from what is in the contract. They will call unbudgeted out of town meetings, ask for unbudgeted reporting, demand unbudgeted changes to the deliverables.

As a contractor working with the government, "cost plus" is the only sane option. The program manager is not going to have the bandwidth to renegotiate (and bid out?) in the almost certain event of a change in scope.

The alternative to "cost plus" is defensive billing where the contractor attempts to devine and account for extra non-contracted work. That lead us in the past to $1000 hammers and no-one liked that either.

Aperocky• 4 years ago

stick with the opportunity rover design they could have thousands on the surface of mars

Now that's something I'm not against.

bluGill8• 4 years ago

What we could learn from that is a lot less than what we learned from all the other things we have done instead. Eventually you have seen that type of rock before and so all you know is there is a lot of it - which we already have reason to suspect.

dotnet00• 4 years ago

But isn't accounting for risks and having contingencies to minimize their impact part of good engineering practice? Eg. when designing a new rocket, you know that the engines might have issues causing delays, you can't predict exactly what issues but you can estimate how much extra money and time you could lose there.

For instance, as part of their filing for the HLS competition, SpaceX supposedly had around ~400 pages just discussing cryogenic propellant storage and transfer, along with the associated risks and how they would mitigate them.

It's also a bit of a stretch to say NASA isn't taking on risk in fixed price, as they're still paying large sums of money for each agreed upon milestone. The point is that the risk needs to be shared. Cost+ takes away pretty much all of the risk for the company, taking away their incentive to do their best (especially considering that until SpaceX came around and blew the doors open for smaller companies, there were only a handful of competitors who were all basically the same culture wise).

Closi4• 4 years ago

The counter-problem is that a cost-plus contract works the opposite way - you are incentivised to account for none of the risks in your initial bid to make your quote competitive, and the sales strategy is to 'land and expand' (i.e. get the initial contract and then expand it's value - sales teams will openly talk about land and expand behind closed doors).

In practice this means that the quotes you get back are much harder to assess from a commercial perspective, as you are trying to weed out which companies are underquoting.

Also cost plus contracts almost always end up being cost 'plus plus' if you dig enough under the covers in my experiences in procurement/contract management (there are always hidden fees and profit lines, and too many opportunities for conflicts of interest or to charge more to the open book), so even a low % can just mean more 'hidden' profits. You could write a book on all the ways to extract additional profit from an open book contract.

IMO the best model isn't an either/or approach, it's a mix of models where the right model is used at the right time (including open book, fixed price, rate cards, hybrid contracts e.t.c.) where the contracts are adequately sized & scoped (i.e. several small fixed price contracts with set deliverables which have value on their own rather than one huge contract with one massive deliverable at the end).

lamontcg• 4 years ago

Strict fixed-pricing seems like a recipe for something like JWST to fail miserably in the future.

For an expensive one-off like that there needs to be wiggle room to deal with design uncertainties and the unknown-unknowns.

Fixed price might be more reasonable for smaller less expensive missions where the uncertainties are less and the tolerance for failure is higher.

cryptonector4• 4 years ago

I disagree. Cost-Plus might not be the right model, but fixed price only works if all the risks are known and so easy to account for.

Cost-plus has been so much more expensive than fixed-cost that NASA could take lots of risks on fixed-cost and still come out ahead.

rhacker• 4 years ago

Let's say you're Lockheed and you have a 10B budget for X but you have a contract that lets you go over. What's to stop you from immediately placing 9B of that in rich pockets and trying to build the damn thing for 1B. After all there's no incentive to actually deliver for the 10B so asking for another 5B - bringing the total actual effort to 2B (see what I did there).

zardo• 4 years ago

What's to stop you from immediately placing 9B of that in rich pockets

The government accounting that goes along with the contract. They can waste money or do a bad job, but they can't just say they spent the money on executive bonuses.

tomrod• 4 years ago

QA/acceptance requirements. But you are right that this game is hard to play.

simulate-me• 4 years ago

Companies receiving these contracts (either fixed-price or cost-plus) will be incentivized to maximize profit and the expense of the shareholder. I don't think it's possible to remove this incentive. Instead, the government should be more careful with whom receives the contracts. For instance, SpaceX seems dedicated to doing a good job and driving costs down. Therefore, right now, SpaceX should receive more contracts. SpaceX's focus may change in the future, and it's the government's responsibility to pay attention to those changes and change contractors if SpaceX starts leeching off of government funds. Adequate competition for contracts will align incentives more than the structure of any particular contract. Everyone here saying that Lockheed turns a 10B problem into 20B of work due to cost-plus might be correct. But why can't the government find someone to do the work for 10B? With proper competition, incentives will align.

Symmetry2• 4 years ago

Fixed price contracts may cost the government a lot of time and money but they might still be good insurance against political risk. In WWI many companies that won armament fixed price contracts were able to make large profits, partially leading to a backlash in the interwar years over the idea that the US had been led into WWI by corporate interests leading to US isolationism before WWII. By using mostly cost plus contracts in WWII FDR was able to diffuse the political issue.

I sort of worry that even if SpaceX is able to provide launch services for NASA at a far lower rate than other companies, and that even if their absolute profit s are lower than their competitors they'll still have profit margins so high that it'll lead to backlash given the weak competition.

cryptonector4• 4 years ago

Fixed-price contract prices need to be set so the vendor can make a reasonable profit using current technology and labor costs, and if they develop new technology and methods that let them greatly increase that profit, well, that's great great news, and if the public doesn't like it, the public should be explained the benefit (lower prices on future contracts, new technology, etc.).

ineedasername• 4 years ago

Fixed price allows less flexibility if "gotchas" are found during development, which they almost always are.

But you can get to a middle ground: A large project where I work did fixed price but built in $X hours of additional work to the price, to be used on a discretionary basis when unexpected issues arise. More flexible than pure fixed-price and not as open-ended as costs plus.

Still not perfect: the vendor has every incentive to utilize every last $X hour in the pool, but strong oversight kept the worst of that in check.

swarnie• 4 years ago

Cost plus is a fantastic way top do business.

While working on a cost plus contract in the early 2010s i cant begin to describe the amount of cool shit i bought with a one line explanation as to its purpose.

Probably isn't as cool if the taxpayer is pick up the bill mind....

dbg31415• 4 years ago

For those of us who embrace agile methodologies... there is always benefit to cost plus contracts.

Clients never have all the requirements up-front, and even if they did requirements tend to shift as we plan, design, build, test...

It's also nice to not have to go through a lengthy contract negotiation for change orders.

Look, I hear the "lack of incentive" argument, but I think it's less about trying to over-bill clients, and more about trying to adapt to ever-changing needs of clients. Not sure "plague" is the right term.

aurizon• 4 years ago

If one contrasts the bang for the buck between the 'usual NASA suspects' and the performance of SpaceX, there is a lesson there. In addition, the NASA Mil-SPEC process is rooted in a far past era that insisted on x-rays of every resistor and part for making sure nothing ever failed. This is the old For want of a nail... https://en.wikipedia.org/wiki/For_Want_of_a_Nail Modern parts manufacture now makes parts with 7 or higher 9's of reliability. 6 nines = 1 in a million fails, so a spacecraft with a million resistors is a 50:50 effort and so on. This hunt for more 9's has led Nasa down a cost rabbit hole, exacerbated by these fees+ contracts. Of course, there are also overlays of accounting and admin verification that can add 25-50% to a project, esp small runs. On the other hand, we see mention of 60% of Russian weapons fail in various ways in Ukraine - training, bad parts, ruble theft. I have read stories that maintenance crews in Russian warehouses have sold as many as 50% of the diesel engines as well as gold plated circuit boards and edge connectors have been sold by employees for scrap - as well as ruble diversions for $600,000,000 Italian yachts - I think the SpaceX method is the best.

vzaliva• 4 years ago

I run a consulting company. Working with startups, cost-plus model is the only way to go. It is maddening when customer does not know exactly what they want to do because they figuring things as they go, often "pivioting", but yet asks you to provide a fixed cost estimate for the work and sign contract which often includes penalties or payment on deliveiry. Usually my answer is: I will be glad to give you fixed cost quote if you can provide me with detailed spec of whay you want me to do. But this is exactly what you will get. If you want to have a freedom of changing things on the fly, it must be cost-plus.

nullc• 4 years ago

Cost+ has also been a bane for many regulated utilities: If you have a fixed profit margin the only way to increase profit is by increasing costs-- even if the new costs are wasteful you'll make more profit.

formerkrogemp• 4 years ago

All of those billions in stock buybacks are coming home to roost.

Nelson testifies cost-plus contracts have been a “plague” on NASA

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