Elon Musk knows what’s ailing NASA—costly contracting

"As soon as you don’t have any competition, the sense of urgency goes away."

The seas were calm in early December 2010 when a spacecraft fell out of the sky, deployed its parachutes, and splashed into the Pacific Ocean. No American spacecraft had returned this way to Earth in 35 years, not since the splashdown of the final Apollo mission. The Dragon bobbing in the blue water didn’t carry any astronauts, just a whimsical payload of Le Brouère cheese. But it had made history all the same, as no private company had ever launched a spacecraft into orbit and safely returned it to Earth.

Just two years earlier, Elon Musk’s SpaceX had been left for dead. Like so many other new space ventures that had come before, it had made big promises but delivered few payoffs. Bankruptcy would certainly have swallowed SpaceX had NASA not thrown Musk a $1.6 billion lifeline two days before Christmas in 2008—a contract for a dozen cargo delivery flights to the International Space Station.

For some critics, SpaceX seemed just another company standing in line for a government handout. NASA didn’t see it this way. In the months after the Dragon’s historic flight, NASA studied the cost of developing the Falcon 9 rocket, SpaceX's booster with nine engines that had lifted the Dragon spacecraft into orbit. The analysis concluded that had NASA developed the rocket through its traditional means, it would have cost taxpayers about $4 billion.

Instead of doing that, however, NASA simply asked SpaceX for a service—cargo delivery to the space station—and left the details to the company. And so Musk and his small workforce, with a Silicon Valley mindset that pushed employees hard, set about delivering. The analysis found that SpaceX spent just $443 million to develop the Falcon 9 rocket—a little more than a tenth of what NASA would have expended for a comparable rocket.

Dragon’s flight in 2010, therefore, not only gave America its first splashdown in more than three decades, it offered a potent argument for a new way of doing business in space. The world of federal contracting practices may seem arcane, but today as NASA and the US Air Force confront the need to modernize their spaceflight capabilities, it is becoming increasingly important to understand how agencies award contracts and measure results.

At the heart of this issue lies a tussle between traditional aerospace companies and their penchant for cost-plus contracts and a desire by new space firms such as SpaceX for fixed-price awards. This debate seems likely to become a key flashpoint in the emergent space policy of the Trump administration as it decides over the coming months what it wants to do in space and which companies will help achieve those ambitions.

As is his wont, Elon Musk has chosen not to stand on the sidelines. This past weekend, in fact, he doused what had been a smoldering debate with gasoline.

Costly contracts

It began with a seemingly innocuous question. On Saturday, during a meeting of the National Governors Association, Arkansas’ Asa Hutchinson asked Musk about NASA. The agency seemed to be “floundering,” Hutchinson noted, and he wanted Musk’s advice for getting it back on track.

Musk replied that he loved NASA, and he commended its recent successes in astrophysics and planetary exploration. But to really energize the public about the space agency, Musk said, it must get humans more involved in exploration. He suggested setting a “serious goal” for NASA, such as building a lunar base and sending people to Mars and providing the resources to accomplish this. He didn’t argue that NASA needed more money, but rather, it must change the way it awards contracts.

“We’ve got to change the way contracting is done,” Musk told the governors. “You can’t do these cost-plus, sole-source contracts because then the incentive structure is all messed up. As soon as you don’t have any competition, the sense of urgency goes away. And as soon as you make something a cost-plus contract, you’re incenting the contractor to maximize the cost of the program, because they get a percentage.”

https://youtu.be/uRgzd-nHcxU

In essence, a cost-plus contract requires a particular contractor to develop a piece of space hardware. Then such an arrangement pays all of the contractor’s costs plus a fee, typically about 10 percent. For example, with NASA’s Space Launch System rocket, Boeing is responsible for the central core stage, Orbital ATK has the side-mounted solid rocket boosters, and Aerojet Rocketdyne the main engines. The contractor gets paid regardless of success. For programs difficult to cancel—and Congress has regularly asserted its support for the SLS rocket—delays just mean more funding.

“So, they never want that gravy train to end,” Musk explained. “They become cost maximizers. And then you have good people engaged in cost maximization, because you just gave them an incentive to do that and told them they’ll get punished if they don’t."

The Orion example

This seems to be what has happened with the Orion spacecraft, NASA’s much-touted capsule that is intended to fly astronauts into orbit around the Moon. Funded by way of a cost-plus contract, Orion has already had a staggeringly long development life cycle, and it remains at least six years away from launching with humans. Musk would argue that this is not the fault of the engineers at NASA or Lockheed, rather blame falls with the managers who set the terms of the contract.

In the aftermath of President George W. Bush’s decision to return humans to the Moon in 2004, NASA initiated a program called Constellation, and the organization began preliminary designs for a capsule that could take humans into deep space. After working with two contractor teams in 2005—Northrop Grumman and Boeing, and Lockheed Martin—NASA selected Lockheed in 2006 to proceed with development of the large spacecraft.

This original contract called for Lockheed to complete development and testing of Orion by 2013, with the first crewed launch occurring by 2014. For this work, NASA would pay Lockheed Martin a total of $3.9 billion. These terms seem quaint today.

The 2014 deadline has, of course, come and gone. The best estimate for the first crewed launch of Orion is now some time around 2023, and that assumes an uncrewed launch (which has already been delayed twice) finally occurs in 2019 and that both the rocket and spacecraft perform well. If the 2023 date holds, the first crewed flight of Orion will miss its original date by nine years, but it’s difficult to imagine this will trouble Lockheed too much. The company will have enjoyed a 17-year development contract for the capsule. (To put this into context, a mere dozen years passed between the Soviet launch of Sputnik 1 and the Apollo 11 landing on the Moon.)

All of these delays, compounded by multiple changed orders from NASA, have significantly increased the cost of Orion. Through this year, NASA will have spent about $13.9 billion on the Orion program. And with a yearly expenditure of $1.3 billion, it seems likely to have expended almost $22 billion by the time of the first crewed flight. Since about half of that money is passed through to the prime contractor, Lockheed’s original $3.9 billion contract will likely nearly triple in value.

Economics 101

During his remarks Saturday, Musk said NASA could avoid unnecessary delays and costs by transitioning to a system of competitive awards for fixed-price contracts, in which companies are only paid when they meet “milestones” such as completing a flight test or satisfying NASA about the safety performance of a vehicle. Additionally, he said, at least two entities should compete during the development process.

As an example, he cited the commercial crew program, in which SpaceX and Boeing have both received NASA grants to design and build transportation systems to the International Space Station. Each company is dedicated to winning the race to the launch pad in Florida next year. “That’s a forcing function to get things done,” he said. “I can’t tell you how important that contracting structure is. That is night and day.”

With a fixed-price contract, a bidder is expected to contribute funds to a project, because while the space hardware provides a government service, it is also expected to find a commercial market. In return, government oversight is less intrusive, freeing the contractor to make more commercially savvy decisions. The Falcon 9 rocket developed as part of the commercial cargo program offers the most clear example of this, because in addition to flying supplies to the station, it has allowed SpaceX to begin to assume a dominant position in the global market for satellite launches.

Fixed price contracts also address another factor that leads to bloated contracts, Musk said. As part of the commercial crew program, NASA and its contractors negotiate “requirements” for everything from loss-of-crew probabilities, to the design of control panels, to paint colors. In a fixed-price contract, if SpaceX finds a requirement to be unnecessary and can convince the government, it saves the company money. Under a cost-plus contract, there is no incentive for the contractor to do this. Higher costs and delays just mean the government contract runs longer and pays higher fees.

“That’s Economics 101,” Musk said. “The government will come up with some set of requirements, and 90 percent of them could make a lot of sense, and 10 percent are cockamamie that double the price of the project. But those 10 percent of cockamamie requirements in a cost-plus contract? The contractor will always say yes.”

A defense of cost-plus

So what is the argument in favor of cost-plus contracting? In 2014, I interviewed a former senior NASA official “on background.” He was intimately familiar with space policy, including NASA’s budgeting and contracting procedures, and remains a high-profile figure within the aerospace community. He agreed to speak candidly in return for anonymity, and one of the topics we discussed concerned cost-plus contracts.

“The reason why government procurement is so complicated is that we try to award contracts as best we can, fairly and equitably,” he said. “The second thing is, if taxpayer funds are being expended, we ensure that government officials can oversee how those funds are spent.”

Effectively then, based upon a complicated set of federal procurement rules, NASA establishes specifications for each aspect of space hardware, and it then has detailed oversight to ensure that those specs are met by the contractor. Though cumbersome, this process ensures that taxpayers are not forced to take possession of a substandard item. This source acknowledged that following this procurement process can easily triple the price of something NASA might buy directly from industry through a fixed-price contract.

“That price is the price Americans, through their Congress, have chosen to pay in order to have a fair, transparent, fully accountable process,” he said. “Most of federal procurement law is designed to protect the American taxpayers from the downside. If you ask me whether the government should streamline these rules, I would say yes. But because that statement is true, it does not follow that NASA should hand $6 billion over to SpaceX and tell them to call us when they’re done.”

The backstory

In 2009, the White House sought to push NASA more aggressively toward fixed-price contracting. Seizing upon the nascent success of the commercial cargo program, begun by former NASA Administrator Mike Griffin, President Obama sought to extend similar contracts to vendors to provide crew services.

Alongside the White House, the Office of Management and Budget, the Office of Science Technology and Policy, and a few civil servants supported the idea, recalled Lori Garver, then deputy administrator of NASA and the key White House appointee at the agency.

But many more lined up against the plan, Garver said. The plan’s critics included NASA Administrator Charles Bolden, Bill Gerstenmaier (the agency’s chief of human spaceflight), the field center directors, the Aerospace Safety Advisory Panel, most of the established aerospace industry, and therefore most of Capitol Hill.

“We had the president,” Garver recalled in an interview with Ars. “But as President Trump is finding out now, it’s hard to make a lot of difference when you’re on your own.”

By 2011, the pro-commercial crew forces struck a deal with Senator Kay Bailey Hutchison, of Texas, and Bill Nelson, of Florida. The White House would support the Space Launch System and Orion spacecraft in return for Congressional support for commercial crew. But no one had really discussed funding amounts, so in the early years of the programs, Congress would typically remove about $500 million from the White House budget request for commercial crew and divert it to the SLS and Orion budgets.

Later during the 2016 and 2017 budget cycles, the commercial crew program finally began to see full funding from Congress. Garver attributed this to the success of the regular commercial cargo missions to the station—seeing is believing—as well as a wider realization of the savings that fixed-price contracts could offer NASA. Both Bolden and Gerstenmaier had come around.

Deep space?

NASA and, however begrudgingly, Congress now seem willing to cede spacecraft operations in low Earth orbit to SpaceX, Boeing, and other companies working on fixed-price contracts. However, the battle continues over deep space exploration.

Before he left NASA in January, Bolden said he was “not a fan” of commercial companies building heavy lift rockets capable of deep space exploration. Gerstenmaier has been more open to consideration, even floating the idea of transitioning Orion from a cost-plus to fixed-price contract. But for now, Congress strongly supports continued funding of lucrative cost-plus contracts for SLS and Orion.

Could the election of Donald Trump spark additional change? This may explain Musk’s recent public discussion of NASA contracting to the governors. Moreover, Musk's remarks this weekend followed a formal request by SpaceX for Congress to consider fixed-price contracts for deep space exploration.

This came last Thursday during a hearing before the US Senate's Subcommittee on Space, Science, and Competitiveness. While testifying, SpaceX Senior Vice President for Global Business and Government Affairs Tim Hughes said, "The principles applied in past programs for low Earth orbit capability can and should be applied to deep space exploration.” Hughes suggested NASA consider awarding competitive, fixed-price awards for lunar landings, Mars cargo deliveries, and more. (Competitions at which, of course, SpaceX is well placed to excel).

SpaceX seems to have identified this moment to have this public discussion after Trump reconstituted the National Space Council and installed Scott Pace as its new executive director. Already, Musk has met and shared his views with key White House officials, including advisors Stephen Bannon and Jared Kushner and Vice President Mike Pence.

Musk has a persuasive argument. His commercial cargo contract from nearly a decade ago has saved NASA money. In turn, the American-made Falcon 9 rocket made possible by that contract has allowed SpaceX to reclaim commercial launches from Russian, Chinese, and European competitors, bringing jobs back to the United States. The Falcon 9 rocket has also significantly reduced launch costs for US military missions and reduced dependence on Russian rocket engines.

Nevertheless, many of the forces that opposed fixed-price contracts in 2009 and 2010, particularly among the big aerospace lobby, remain entrenched in Washington, DC. The defenders of cost-plus contracts still hold most of the power—they hold the influence over those in power, too.

Asa Hutchinson, at least, seemed convinced about the need for change. After Musk had finished his answer Saturday, the Arkansas governor smiled and nodded his approval. Then, he added, “There could be a future for you in government contracting at the state level.” Musk, one surmises, has larger aspirations.