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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 proj

by gpm 5y 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 5y 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.
- gpm 5y ago
  You don't get to change the deliverables of cost plus contracts without re-negotiation either. That's not the risk that is being avoided here, the risk is that the company is going to decide to ask for more money for the same service they initially promised. For example with Boeing's recent starliner tests, they would be asking for more money to fly the orbital flight test that they initially promised, because they fucked it up the first time.
NovemberWhiskey 5y 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.
- bluGill 5y ago
  You can get insurance on anything you want. However the more unknowns there are, the more they will charge. You can get fire insurance that will cover even if you burn your house down - but it will cost you (not having insurance and burning your house down might cost $.01 more than buying insurance)
- gpm 5y ago
  You can negotiate insurance for just about anything (there are sometimes laws against things like taking out life insurance policies against a third party, but none that would apply here). No doubt the insurance company would insist on various forms of audits, similar to what the government insists of for cost plus contracts today. Probably the most successful contractors wouldn't pay an insurance company for this, because it's a stupid model for contracts that wastes resources, but it wastes no more resources than having the government play the role of the insurance company.
  - teruakohatu 5y ago
    I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. Any insurance would be expensive, and would be a cost passed to the government, as any other project related costs are. The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. The government would end up paying for all the policies plus the insurance company profit margin. The only winner here is the insurance company, maybe the contractors. The government will be slightly worse off.
    - gpm 5y ago
      > I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. An insurance provider is a party taking financial risk if something goes bad for someone else. In the cost plus contracting model, the government is taking the financial risk if the project goes poorly for the contractor, that is the government is providing insurance. > The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. Of course, there is no free money here. However the government can correctly evaluate the costs of the different proposals under a fixed cost contract model, whereas they are not capable of correctly evaluating the cost of the insurance that they add on top in a cost plus model, because they aren't set up to correctly price the insurance they are selling. This means that in the fixed price model, they can get a much better approximation of the cost in the value/cost equation they are trying to maximize when evaluating bids, and it means that contractors are motivated to provide options that maximize the same, instead of being motivated to provide options that maximize the difference between how the government miss-prices the insurance, and the actual value of the insurance. In the end everyone ends up better off, because there is less waste.

by gpm 5y ago

teruakohatu 5y 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.

gpm 5y ago
You don't get to change the deliverables of cost plus contracts without re-negotiation either. That's not the risk that is being avoided here, the risk is that the company is going to decide to ask for more money for the same service they initially promised. For example with Boeing's recent starliner tests, they would be asking for more money to fly the orbital flight test that they initially promised, because they fucked it up the first time.

NovemberWhiskey 5y 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.

bluGill 5y ago
You can get insurance on anything you want. However the more unknowns there are, the more they will charge. You can get fire insurance that will cover even if you burn your house down - but it will cost you (not having insurance and burning your house down might cost $.01 more than buying insurance)
gpm 5y ago
You can negotiate insurance for just about anything (there are sometimes laws against things like taking out life insurance policies against a third party, but none that would apply here). No doubt the insurance company would insist on various forms of audits, similar to what the government insists of for cost plus contracts today. Probably the most successful contractors wouldn't pay an insurance company for this, because it's a stupid model for contracts that wastes resources, but it wastes no more resources than having the government play the role of the insurance company.
- teruakohatu 5y ago
  I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. Any insurance would be expensive, and would be a cost passed to the government, as any other project related costs are. The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. The government would end up paying for all the policies plus the insurance company profit margin. The only winner here is the insurance company, maybe the contractors. The government will be slightly worse off.
  - gpm 5y ago
    > I think you need to articulate why you think the govt. is forced into this insurer role. They are no different to any large private buyer. An insurance provider is a party taking financial risk if something goes bad for someone else. In the cost plus contracting model, the government is taking the financial risk if the project goes poorly for the contractor, that is the government is providing insurance. > The insurance provider spreads risks across policies but since all these policies would probably be for government contracts, the costs would all be passed on to government. Of course, there is no free money here. However the government can correctly evaluate the costs of the different proposals under a fixed cost contract model, whereas they are not capable of correctly evaluating the cost of the insurance that they add on top in a cost plus model, because they aren't set up to correctly price the insurance they are selling. This means that in the fixed price model, they can get a much better approximation of the cost in the value/cost equation they are trying to maximize when evaluating bids, and it means that contractors are motivated to provide options that maximize the same, instead of being motivated to provide options that maximize the difference between how the government miss-prices the insurance, and the actual value of the insurance. In the end everyone ends up better off, because there is less waste.