Op-Ed: Contracts are Tools; Not One Size Fits All

Procurement and acquisition is one of the most important aspects of any space program or project. It’s not glamorous or dramatic, it doesn’t reveal new secrets or transform our understanding of the cosmos, it is simply the paperwork to get hardware eventually in the hands of the mission execution teams. It is, however, responsible for setting the framework for project development. The management structure, funding type, performance incentives, power hierarchy, insight levels, and so on are all determined by the contract and all can have enormous impacts on the eventual cost and delivery schedule of a project and its operational safety, flexibility, and reliability. The job of procurement officials is to choose a contract type and properly configure it to minimize cost and development time while ensuring sufficient oversight to ensure requirements are fully met. This sounds easy but is very difficult when a project is in its very early stages, as what may work for one project and contractor may not work for another combination. While it is convenient to imagine that there is a magic contract that will solve all our problems through private sector efficiency, that is not the nature of major NASA projects. Multibillion-dollar megaprojects are all different and all require different tools and approaches to complete. In the end, the idea of an easy solution only serves to waste valuable time and money and risk both carefully cultivated institutional knowledge and even geopolitical standing. Think of the classic piece of advice: “Use the right tool for the job.” Contracts are tools, and an attractive hammer does not make all problems nails.

The types of contracts available to NASA (or any US Government agency) are listed in the FAR, or Federal Acquisition Regulations. While there are many available, three varieties comprise the overwhelming majority of contracts issued by NASA: Firm Fixed-Price (FFP), Cost-Plus-Award-Fee (CPAF), and Cost-Plus-Incentive-Fee. As we will soon see, each has their own intended use cases, benefits, and drawbacks.

In recent times Fixed Price contracts have become the most popular. They provide the contractor with a single unalterable (outside of specific incentives) price to complete the contract. Any profit or loss will be fully theirs with no bailouts. This places virtually all of the financial risk upon the company, and by extension much of the technical and managerial responsibility. This is the major benefit to the government, which avoids spending money and manpower on more rigorous oversight or covering contractor overruns. If the contractor runs into difficulties, however, the government runs the risk of the schedule being significantly extended, the project being rushed or corners cut, or even receiving nothing at all due to bankruptcy. To minimize the chances of these potential risks, FAR Part 16 defines specific guidelines for when fixed price contracts should be used. These were recently summarized by the NASA Office of the Inspector General in a report on the Commercial Lunar Payload Services Initiative:

• Requirements are well defined
• Contractors are experienced in the work they are being asked to do
• Market conditions are stable
• Technical risk is low
• Financial risk is insignificant

If requirements are poorly defined, contractors are inexperienced, or markets are volatile, contractors will have a hard time determining an accurate and safe cost quote for the project and thus will either pad the cost to compensate or simply refuse to bid. If technical and/or financial risk is high, padding or bid refusals may also happen, in addition to the risk of major delays, corner cutting, and bankruptcy. Once development is complete, however, fixed-price becomes a much lower risk cost-cutting tool. With the system established and costs known, a fair and realistic price can be agreed to to encourage economies of scale or increased efficiencies to maximize the profit out of the known amount.

One of the most obvious ways for Fixed-Price to go wrong is lack of clarity or certainty of requirements. If NASA does not know exactly what it wants, the contractor cannot easily estimate the exact cost or schedule, and assumptions are often proven wrong as the true needs, wants, and difficulties become apparent. This can take years and millions of dollars to fully realize, at which point it is far too late to correct and overruns must be simply coped with. Commercial Lunar Landers are a good example of this playing out right now.

Commercial Lunar Payload Services (CLPS) was originally envisioned as a series of small landers to demonstrate new technologies and fly small science instruments to the lunar surface for relatively cheap. This would be supplanted by likely government-led midsize landers for more complex, expensive, and critical investigations or missions such as delivering the VIPER rover. The technology investments would then feed into development of the Human Landing System to eventually return humans to the lunar surface.

As time went on, HLS was separated from the smaller landers to become a monolithic standalone award and the midsize landers were folded into CLPS’s mandate after contracts had been awarded. Because of their fixed-price nature, no additional insight, mission assurance, or flexibility could be added to the procurement model to account for the much more valuable and expensive payloads that would now be relying on CLPS to arrive at the moon. If additional testing or insight would be required, costs could begin to drastically spiral, as they did for VIPER’s delivery. Additionally, virtually no CLPS contractors had launched a spacecraft before, let alone landed on the moon, so success is far from guaranteed on initial missions. This is palatable for small technology demonstrations and small experiments, but not as much for flagship rovers and critical Artemis demos.

In addition to the inadequate requirements and inexperienced contractors, there are also significant financial risks. Most CLPS contractors are dedicated almost solely to that business, so investor-spooking failures and overextension on the very small CLPS task orders can easily place them in dire straits. I-SPACE, a Japanese company that has won CLPS task orders, saw a severe drop in stock price after the failure of its HAKUTO-R M1 lander. Masten Space Systems, renowned for their suborbital rocket test platform Xodiac, went bankrupt due to their CLPS order and were purchased by Astrobotic, another CLPS vendor.

Another critical program using Firm-Fixed-Price contracts is xEVAS, or Exploration EVA Services. Two contractors, Axiom Space and Collins Aerospace, were selected to compete against each other for both LEO and Lunar Surface suit orders. Despite having team members with decades of suit experience and having worked extensively with NASA’s current space suits themselves, Collins withdrew from xEVAS in June 2024 due to schedule slippages and cost overruns making it no longer worth it to continue. This has left the burden of both the Lunar and eventually the LEO suits on the shoulders of the much less experienced Axiom Space, which itself has an uncertain financial future.

In all these cases, FFP contracts were used far outside their intended use cases and the pitfalls were completely unmitigated. This broader trend has led several experienced contractors to announce that they would no longer pursue FFP development contracts. The National Academies also highlighted this in a recent report, stating: “[…] NASA should develop specific criteria for the use of fixed price, milestone-based purchase-of-service contracts that will avoid application of such contracts to critical early-stage activities that could jeopardize mission success and degrade NASA’s future technological capabilities.” 

NASA also frequently uses Cost-Plus contracts. They are a type of contract where the cost to the contractor is reimbursed either entirely or up to an adjustable cap, plus additional fees based on performance to motivate improvement. This results in, at worst, a break even for the contractor, with the fees providing the entirety of the potential profit. The Cost-Plus-Award-Fee model, used for SLS, Orion, and Mobile Launcher-2, adds periodic award fees based on contractor performance during the preceding periods. At the end of each period, a rating will be given and a fee amount will be determined based on the rating, as shown in the table below.

Unearned award fees do not roll over between periods, meaning poor performance at any stage of the contract will result in lower profits at the end. However, the fact that contractor performance is tied to the determinations made by relatively few officials results in the major cons of these contracts. The administrative burden is significantly higher than fixed-price contracts, and if it is poorly implemented or fees are poorly determined many of its advantages can fall away. This was the case for the Space Launch System Stages contract circa 2019, where the contracting officer consistently awarded ratings of “Very Good” regardless of performance. After this was fixed and more effort was put into administering the contract, Boeing’s performance significantly improved. Cost-Plus contracts do still suffer from problems of contractor underbidding and potential lack of experience, with contractors effectively guaranteed to not lose any money, but effective use of award fees can still be an effective motivation to improve. In severe cases, other means are available to remedy the problem.

Bechtel’s Mobile Launcher-2 contract is a showcase of both the downsides and benefits of cost-plus.  Bechtel both underbid and was inexperienced in the required design constraints, resulting in significant delays and cost increase. However, as reported by the NASA OIG, NASA responded by removing scope of work, relaxing what constraints they could, and withholding award fees. Performance subsequently improved and at time of writing the Mobile Launcher-2 is rapidly being erected.

NASA also uses Cost-Plus-Incentive-Fee (CPIF), where the fee is paid only at the end of the contract and is determined by a formula that takes in the actual cost and the targeted cost to determine the final payout. These are rarely used for development programs as a primary contract type, but the SLS and Orion contracts have CPIF options.

The ultimate problem when determining what type of contract to use is one of cost, both monetary and schedule-wise. Cost-Plus can allow for more efficient, responsive, and speedy development, but places far more burden on the government than the relatively hands-off Firm-Fixed-Price, an issue in today’s very constrained budget environment. At the same time, Cost-Plus is unnecessary for production and operations, becoming much less efficient than Fixed-Price when the costs and requirements are well-known. Over the past few years NASA has tried FFP contracts as a tool to attempt to force those efficiencies, but the use of FFP in the role Cost-Plus was intended to fill has resulted in many delays and difficulties, including some partial contract collapses due to withdrawals.

Perhaps the best model for how to integrate these approaches may be the Orion Production and Operations Contract^[c] (OPOC). Awarded by NASA in 2019, this contract is the mechanism for ordering Orion spacecraft for use beyond Artemis II. It allows for the purchase of at least 6 and up to 12 spacecraft in groups of 3 to allow for batch orders. The first six spacecraft (Artemis III through Artemis VIII) are under Cost-Plus-Incentive-Fee to allow for design and supply chain stabilization as the team and spacecraft gain experience. The “end of contract lump-sum” approach incentivizes lower costs much more directly than an Award-Fee contract while still allowing for significant flexibility. The final six spacecraft (Artemis IX through Artemis XIV) will be purchased under Firm-Fixed-Price orders, negotiated to have “significantly lower prices” using the experience of the first 8 builds. It is also reasonable to assume that any follow-on contacts would be FFP, perhaps with some Incentive-Fee elements if major upgrades are put in place.

Many development programs can follow this model of major development under Cost-Plus-Award-Fee, initial production and stabilization under Cost-Plus-Incentive-Fee, and long-term serial production and operations under Firm-Fixed-Price. This maximizes the usefulness of each contract type, focusing the additional oversight and control where it is needed and allowing it to give way to more aggressive cost efficiency as the system and requirements mature. This is, however, not a silver bullet. Special care must be taken to truly understand the needs of a project at that point in time to determine the best type of contract. Private industry can bring much to the table, but exploiting that needs the correct framework to mitigate the downsides of being a profit-seeking entity. Simply handing them requirements and billions of dollars (with milestones largely up to them) does the exact opposite. Given the large sums of money required for many NASA programs, mastering procurement and using the right tools for each job will be critical for controlling cost and schedule, and thus ensuring the programs remain affordable now and in the future.

Acronyms:

FFP – Firm-Fixed-Price

CPAF – Cost-Plus-Award-Fee

CPIF – Cost-Plus-Incentive-Fee

OPOC – Orion Production and Operations Contract

Edited by Scarlet Dominik, Beverly Casillas and Nik Alexander