Elon Musk knows what's ailing NASAcostly contracting

Enlarge/ SpaceX's Falcon 9 rocket launches the EchoStar 23 satellite in March, 2017.
SpaceX

The seas were calm in early December 2010 when a spacecraft fell out of the sky, deployed its parachutes, and splashed down in 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.

Maye Musk and Elon Musk attend the 2017 Vanity Fair Oscar Party in Beverly Hills. This gallery showcases some of the players in the debate over cost-plus versus fixed-price contracts.
Taylor Hill/Getty Images
Vice President Mike Pence, center, will oversee all space decisions made by the Trump administration.
NASA
Robert Lightfoot, center, is acting administrator of NASA. He is largely a defender of the cost-plus model.
NASA
Scott Pace, right, is the new executive director of the National Space Council. He is seen largely as supportive of cost-plus contracts.
George Washington University
Although he initiated commercial cargo programs for NASA, the agency's former administrator Mike Griffin has defended cost-plus contracts for deep space.
NASA
Former NASA Deputy Administrator Lori Garver, left, sought to broaden NASA's use of fixed-price contracts in 2009 and 2010.
NASA
Kennedy Space Center Director Robert Cabana (far Left) Johnson Space Center Director Ellen Ochoa, Marshal Space Flight Center Director Todd May, and Orion Program Manager Mark Kirasich watch the NASA Super Bowl Virtual Reality ride in Houston in 2017. Their centers all benefit from cost-plus contracts.
NASA
Alabama Senator Richard Shelby, center, is a staunch supporter of NASA's use of fixed-price contracts.
Richard Shelby
Jeff Bezos, of Blue Origin, supports the use of fixed price contracts for lunar exploration.
Blue Origin
Dennis Muilenburg, chief executive of Boeing, enjoys both cost-plus and fixed-price contracts from NASA.
NASA
Marillyn A. Hewson, chairwoman, president, and chief executive officer of Lockheed Martin, looks on as Mike Pence holds a model of the Orion spacecraft. Lockheed has benefited greatly from cost-plus contracts.
Red Huber/Orlando Sentinel/TNS via Getty Images
Tory Bruno (L), CEO of United Launch Alliance, with Jeff Bezos at a news conference in 2014. Bruno's company is trying to convert from the world of cost-plus contracts to fixed-price contracts as it competes with SpaceX.
Win McNamee/Getty Images

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.”

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Elon Musk at the National Governors Association.

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."

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