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 <i>too</i> much off public money.<p>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.
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.<p>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)<p>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?).<p>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.
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.
Fixed price contracts are also similarly abused.<p><a href="https://spacenews.com/nasa-inspector-general-criticizes-additional-boeing-commercial-crew-payments/" rel="nofollow">https://spacenews.com/nasa-inspector-general-criticizes-addi...</a>
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... <a href="https://en.wikipedia.org/wiki/For_Want_of_a_Nail" rel="nofollow">https://en.wikipedia.org/wiki/For_Want_of_a_Nail</a>
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.
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.
For those of us who embrace agile methodologies... there is always benefit to cost plus contracts.<p>Clients never have all the requirements up-front, and even if they did requirements tend to shift as we plan, design, build, test...<p>It's also nice to not have to go through a lengthy contract negotiation for change orders.<p>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.
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?
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.<p>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.
Cost plus is a fantastic way top do business.<p>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.<p>Probably isn't as cool if the taxpayer is pick up the bill mind....
Fixed price allows less flexibility if "gotchas" are found during development, which they almost always are.<p>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.<p>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.
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).
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.