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

193 points by aml183 4y ago

mulmen 4y 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 4y ago
  You mean if they don't deliver the product after they signed a contract?
- smnrchrds 4y 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_orpheus 4y 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".
    - Goronmon 4y ago
      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". Yup, change orders are how deal with these issues when it comes to fixed-costs contacts. For better or worse, its almost impossible for a project to be perfectly specced out ahead of time. And anything that even comes close to looking like it conflicts with the spec becomes a change order.
      - sidewndr46 4y ago
        According to the article, this is how money is made on cost-plus contracts > About that “plague”: NASA has traditionally procured technology from industry using cost-plus contracts, which allow contractors to charge the agency extra for extensions and changes to their plans. From my experience, the author of that article has no idea what they are talking about.
- dr_orpheus 4y 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.
- bryanlarsen 4y ago
  Yes. https://spaceflightnow.com/2020/01/22/boeing-withdraws-from-darpa-spaceplane-program/ https://spaceflightnow.com/2020/01/22/boeing-withdraws-from-...
  - badwolf 4y ago
    More current fixed-price example, also from boeing: https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-on-trump-air-force-one-plane-deal.html https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-...
- golem14 4y 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.
  - teruakohatu 4y 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.
    - golem14 4y ago
      Sure, but these projects tend to be one-offs or at least small runs where the contract commits to say 10 SLS missions or something like that. Agreed that cost plus for something comparatively cheap like a new army rifle is probably different.
- fergbrain 4y ago
  They eat the cost: https://simpleflying.com/boeing-ceo-air-force-1-deal-mistake/ https://simpleflying.com/boeing-ceo-air-force-1-deal-mistake...
- vkou 4y 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 4y 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.
- uberman 4y 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 4y ago
  They get a bad CPAR (Contractor Performance Assessment Rating) and are banned from government contracting in the future.
- quxpar 4y ago
  Yes, and the government learns a lesson.
- cryptonector 4y 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_D 4y 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_orpheus 4y 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 4y 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
bryanlarsen 4y ago
Fixed price contracts are also similarly abused. https://spacenews.com/nasa-inspector-general-criticizes-additional-boeing-commercial-crew-payments/ https://spacenews.com/nasa-inspector-general-criticizes-addi...
- Robotbeat 4y ago
  But not as easily. Boeing has since had to eat the costs associated with an extra test flight.
  - nickff 4y 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.
  - NovemberWhiskey 4y 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.
    - Robotbeat 4y ago
      Not in this case as commercial crew has two providers. So if Boeing doesn’t do the work, they just won’t be paid, and SpaceX will get more flights (and this is exactly what has happened). If this keeps going indefinitely, NASA will on-board a new partner besides Boeing, such as SNC’s Dream Chaser (other potential options include Blue Origin, who eventually want to build an orbital crew vehicle, and even technically Lockheed Martin who own the plans to Orion and are allowed to bid it commercially).
      - NovemberWhiskey 4y ago
        I suppose it depends on the nature of the contract; for launch services I guess that makes sense; but for a development project, it's different - if you give Lockheed Martin the contract to build the Mars Ascent Vehicle, you're probably going to need to revise the requirements through the lifetime of the project, and it's not very credible to say "OK, Boeing's taking over from here" for the change requests.
newaccount2021 4y ago
bluGill 4y 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.
- gpm 4y 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.
  - teruakohatu 4y 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.
rhacker 4y 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 4y 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 4y ago
  QA/acceptance requirements. But you are right that this game is hard to play.
simulate-me 4y 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.
Symmetry 4y 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.
- cryptonector 4y 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 4y 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 4y 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 4y 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.
deleted 4y ago
[deleted]
aurizon 4y 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 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 4y 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 4y 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 4y ago
All of those billions in stock buybacks are coming home to roost.

193 points by aml183 4y 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 4y ago
You mean if they don't deliver the product after they signed a contract?
smnrchrds 4y 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_orpheus 4y 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".
  - Goronmon 4y ago
    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". Yup, change orders are how deal with these issues when it comes to fixed-costs contacts. For better or worse, its almost impossible for a project to be perfectly specced out ahead of time. And anything that even comes close to looking like it conflicts with the spec becomes a change order.
    - sidewndr46 4y ago
      According to the article, this is how money is made on cost-plus contracts > About that “plague”: NASA has traditionally procured technology from industry using cost-plus contracts, which allow contractors to charge the agency extra for extensions and changes to their plans. From my experience, the author of that article has no idea what they are talking about.
dr_orpheus 4y 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.
bryanlarsen 4y ago
Yes. https://spaceflightnow.com/2020/01/22/boeing-withdraws-from-darpa-spaceplane-program/ https://spaceflightnow.com/2020/01/22/boeing-withdraws-from-...
- badwolf 4y ago
  More current fixed-price example, also from boeing: https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-on-trump-air-force-one-plane-deal.html https://www.cnbc.com/2022/04/27/boeing-lost-billion-dollars-...
golem14 4y 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.
- teruakohatu 4y 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.
  - golem14 4y ago
    Sure, but these projects tend to be one-offs or at least small runs where the contract commits to say 10 SLS missions or something like that. Agreed that cost plus for something comparatively cheap like a new army rifle is probably different.
fergbrain 4y ago
They eat the cost: https://simpleflying.com/boeing-ceo-air-force-1-deal-mistake/ https://simpleflying.com/boeing-ceo-air-force-1-deal-mistake...
vkou 4y 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 4y 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.
uberman 4y 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 4y ago
They get a bad CPAR (Contractor Performance Assessment Rating) and are banned from government contracting in the future.
quxpar 4y ago
Yes, and the government learns a lesson.
cryptonector 4y 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_D 4y 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_orpheus 4y 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 4y 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

bryanlarsen 4y ago

Fixed price contracts are also similarly abused. https://spacenews.com/nasa-inspector-general-criticizes-additional-boeing-commercial-crew-payments/ https://spacenews.com/nasa-inspector-general-criticizes-addi...

Robotbeat 4y ago
But not as easily. Boeing has since had to eat the costs associated with an extra test flight.
- nickff 4y 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.
- NovemberWhiskey 4y 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.
  - Robotbeat 4y ago
    Not in this case as commercial crew has two providers. So if Boeing doesn’t do the work, they just won’t be paid, and SpaceX will get more flights (and this is exactly what has happened). If this keeps going indefinitely, NASA will on-board a new partner besides Boeing, such as SNC’s Dream Chaser (other potential options include Blue Origin, who eventually want to build an orbital crew vehicle, and even technically Lockheed Martin who own the plans to Orion and are allowed to bid it commercially).
    - NovemberWhiskey 4y ago
      I suppose it depends on the nature of the contract; for launch services I guess that makes sense; but for a development project, it's different - if you give Lockheed Martin the contract to build the Mars Ascent Vehicle, you're probably going to need to revise the requirements through the lifetime of the project, and it's not very credible to say "OK, Boeing's taking over from here" for the change requests.

newaccount2021 4y ago

bluGill 4y 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.

gpm 4y 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.
- teruakohatu 4y 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.

rhacker 4y 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 4y 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 4y ago
QA/acceptance requirements. But you are right that this game is hard to play.

simulate-me 4y 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.

Symmetry 4y 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.

cryptonector 4y 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 4y 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 4y 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 4y 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.

deleted 4y ago

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aurizon 4y 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 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 4y 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 4y 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 4y ago

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