4 ms·

Really? That sounds rather obvious and a bit too cheeky to me. To twist it the other way around: If cost run over in a government project, who else could you ho

by skore 15y ago

Really? That sounds rather obvious and a bit too cheeky to me. To twist it the other way around: If cost run over in a government project, who else could you hold responsible? Sure, it's not a great thing that this happens, but it seems like a douche point to make when the government simply has no other choice. Edit: Sorry, misread 'government contractors' as 'government agencies'. I was under the impression that he is talking about NASA.

excuse-me 15y ago
Even with commercial contracts a lot of government (and especially military) was done on cost+. However much we spent on a development the customer (taxpayer) would pay "+" an agreed margin.
maxerickson 15y ago
The quote is in direct reference to a contract that NASA (the government...) has with SpaceX. So apparently it is possible for the government to agree to contracts that do not leave the taxpayer holding the bag for overruns.
fr0sty 15y ago
>who else could you hold responsible? The contractor who underbid. If Roger's submits a bid for $1m to deliver 50k widgets he shouldn't be able to come back after the fact and demand $4m to complete the project because he underestimated his costs.
- natep 15y ago
  You gave a very simple example. Lets say the contract is to build widgets that frobulate. What if nobody has ever made widgets that frobulate? What if frobulating is poorly defined in the process, and what it means to frobulate changes over the course of the project? What if the government later decides they want widgets that barbulate in addition/instead? The contractor has to swallow all the extra costs, because they were foolish enough to sign a vague/wrong contract? I'm not asking this to suggest a particular answer, just wondering where this strategy takes us.
  - mcguire 15y ago
    Somewhere other than the place that has the incentive for the contractor to hire large numbers of marginal employees in order to increase the contract's profit. [Edit: total profit, not margin.]
wtvanhest 15y ago
If he can't do it for the price he says he can go to bankruptcy which would allow him to renegotiate contracts or eliminate unprofitable ones. This option is more appealing to nondiversified businesses. Lockheed really would be irresponsible to offer the same contract. Further lockheed isn't vertically integrated enough to control costs which Musk hints at but doesn't say outright. I don't think the old government contractor system made long term sense, but it was a great start to space exploration and money "wasted" looks more like invested to me.
mikeash 15y ago
The standard way these things are done is that company A contracts company B to deliver product X for $Y. If company B then spends $Z > $Y delivering product X, company B simply loses money.
pilom 15y ago
All Musk is saying is that they bid the project as a Firm Fixed Price (FFP) contract. Most contractors aren't willing to do that with untried technologies b/c of the possibilities of cost overruns. For instance when the government buys Humvees for the army they pay a Firm fixed amount per vehicle because the contractor knows exactly how much one should cost and charges more than that to the government. For a brand new stealth fighter though, there are a lot of unknowns and a lot of development to do before they can build the first plane. The contractor can say "We think we can do all the necessary research for this with 100 people over 3 years plus $2 billion in additional costs for materials and to contract out the construction of new factories etc. All that added up would be $5 billion (plus $100 million per additional month beyond 3 years) and we expect a 15% return in profit on this development." This is called a Cost plus Fixed Fee contract. If they were to bid it as a firm fixed price contract they would just say "we want $3 billion per plane for the rest of time" and the government would likely overpay comparatively. The government agrees to the cost plus fixed fee terms because the know it allows the contractors to price their offering lower if they don't have to take on the risk. So option 1: Government takes on risk of overruns but pays a lower price if on time and on budget. Option 2: Contractor takes on the risk and makes out like a bandit if they are on time and on budget.
- hef19898 15y ago
  Firm Fixed Price is what the EADS did with the A400M. When governments kicked in, dictating engine suppliers, changing specs to fit all militaries involved... well let's just say it did go well. Lesson to be learned: If you are in full ontrol of everything from scratch to delivery and have clear costumer specs you can do that. If you are a quasi state-run business with political obligations serving multiple customers with different requirements, you better don't.
- munin 15y ago
  orbital does space vehicle launches on FFP contracts ...

by skore 15y ago

excuse-me 15y ago

Even with commercial contracts a lot of government (and especially military) was done on cost+. However much we spent on a development the customer (taxpayer) would pay "+" an agreed margin.

maxerickson 15y ago

The quote is in direct reference to a contract that NASA (the government...) has with SpaceX. So apparently it is possible for the government to agree to contracts that do not leave the taxpayer holding the bag for overruns.

fr0sty 15y ago

>who else could you hold responsible? The contractor who underbid. If Roger's submits a bid for $1m to deliver 50k widgets he shouldn't be able to come back after the fact and demand $4m to complete the project because he underestimated his costs.

natep 15y ago
You gave a very simple example. Lets say the contract is to build widgets that frobulate. What if nobody has ever made widgets that frobulate? What if frobulating is poorly defined in the process, and what it means to frobulate changes over the course of the project? What if the government later decides they want widgets that barbulate in addition/instead? The contractor has to swallow all the extra costs, because they were foolish enough to sign a vague/wrong contract? I'm not asking this to suggest a particular answer, just wondering where this strategy takes us.
- mcguire 15y ago
  Somewhere other than the place that has the incentive for the contractor to hire large numbers of marginal employees in order to increase the contract's profit. [Edit: total profit, not margin.]

wtvanhest 15y ago

If he can't do it for the price he says he can go to bankruptcy which would allow him to renegotiate contracts or eliminate unprofitable ones. This option is more appealing to nondiversified businesses. Lockheed really would be irresponsible to offer the same contract. Further lockheed isn't vertically integrated enough to control costs which Musk hints at but doesn't say outright. I don't think the old government contractor system made long term sense, but it was a great start to space exploration and money "wasted" looks more like invested to me.

mikeash 15y ago

The standard way these things are done is that company A contracts company B to deliver product X for $Y. If company B then spends $Z > $Y delivering product X, company B simply loses money.

pilom 15y ago

All Musk is saying is that they bid the project as a Firm Fixed Price (FFP) contract. Most contractors aren't willing to do that with untried technologies b/c of the possibilities of cost overruns. For instance when the government buys Humvees for the army they pay a Firm fixed amount per vehicle because the contractor knows exactly how much one should cost and charges more than that to the government. For a brand new stealth fighter though, there are a lot of unknowns and a lot of development to do before they can build the first plane. The contractor can say "We think we can do all the necessary research for this with 100 people over 3 years plus $2 billion in additional costs for materials and to contract out the construction of new factories etc. All that added up would be $5 billion (plus $100 million per additional month beyond 3 years) and we expect a 15% return in profit on this development." This is called a Cost plus Fixed Fee contract. If they were to bid it as a firm fixed price contract they would just say "we want $3 billion per plane for the rest of time" and the government would likely overpay comparatively. The government agrees to the cost plus fixed fee terms because the know it allows the contractors to price their offering lower if they don't have to take on the risk. So option 1: Government takes on risk of overruns but pays a lower price if on time and on budget. Option 2: Contractor takes on the risk and makes out like a bandit if they are on time and on budget.

hef19898 15y ago
Firm Fixed Price is what the EADS did with the A400M. When governments kicked in, dictating engine suppliers, changing specs to fit all militaries involved... well let's just say it did go well. Lesson to be learned: If you are in full ontrol of everything from scratch to delivery and have clear costumer specs you can do that. If you are a quasi state-run business with political obligations serving multiple customers with different requirements, you better don't.
munin 15y ago
orbital does space vehicle launches on FFP contracts ...