[HN Gopher] Nelson testifies cost-plus contracts have been a "pl...
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Nelson testifies cost-plus contracts have been a "plague" on NASA
Author : aml183
Score : 113 points
Date : 2022-05-04 17:06 UTC (5 hours ago)
(HTM) web link (payloadspace.com)
(TXT) w3m dump (payloadspace.com)
| mulmen wrote:
| 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?
| vkou wrote:
| > Presumably the bidder eats the loss at first but what happens
| when they run out of appetite? Does the project just... end?
|
| That's why these contracts go to large companies, as opposed to
| small ones.
|
| If a small company loses interest in finishing a fixed-cost
| project, they might go bankrupt, and leave the government up
| crap creek without a paddle.
|
| If a big company loses interest, they'll keep struggling along,
| because they can get hit with the stick of 'you'll never get
| another contract from us ever again.'
| uberman wrote:
| Yes, the project just ends and it will end sooner than expected
| under fixed bidding as the government will almost certainly
| demand non-contracted changes mid-project that in my experience
| can have dramatic costs.
|
| Most government projects are structured and paid for in phases
| and there is no assurance that phase 2 starts at the end of
| phase 1. No approval to proceed means the project just "ends
| when it ends".
| stonemetal12 wrote:
| They get a bad CPAR (Contractor Performance Assessment Rating)
| and are banned from government contracting in the future.
| bryanlarsen wrote:
| Yes. https://spaceflightnow.com/2020/01/22/boeing-withdraws-
| from-...
| badwolf wrote:
| More current fixed-price example, also from boeing:
| https://www.cnbc.com/2022/04/27/boeing-lost-billion-
| dollars-...
| timdiggerm wrote:
| You mean if they don't deliver the product after they signed a
| contract?
| quxpar wrote:
| Yes, and the government learns a lesson.
| smnrchrds wrote:
| I don't know what would happen initially, but eventually, the
| contractors wise up and start baking the risk of delays into
| their quotes.
| dr_orpheus wrote:
| Yes, this definitely happens and is why in some situations
| people think fixed price contracts can end up costing more.
|
| Contractors will be extreme sticklers about their
| requirements on a project. So that if anything starts look
| off-plan or may impact something like a schedule delay they
| will say "nope, that's outside of our scope of work we need
| an extension/additional funding".
| Goronmon wrote:
| _Contractors will be extreme sticklers about their
| requirements on a project. So that if anything starts look
| off-plan or may impact something like a schedule delay they
| will say "nope, that's outside of our scope of work we need
| an extension/additional funding". _
|
| Yup, change orders are how deal with these issues when it
| comes to fixed-costs contacts. For better or worse, its
| almost impossible for a project to be perfectly specced out
| ahead of time. And anything that even comes close to
| looking like it conflicts with the spec becomes a change
| order.
| sidewndr46 wrote:
| According to the article, this is how money is made on
| cost-plus contracts
|
| > About that "plague": NASA has traditionally procured
| technology from industry using cost-plus contracts, which
| allow contractors to charge the agency extra for
| extensions and changes to their plans.
|
| From my experience, the author of that article has no
| idea what they are talking about.
| dr_orpheus wrote:
| Theoretically the bidder eats the loss and assumes all of the
| risk in a fixed-price contract. Ending projects certainly is a
| possibility, but there are typically termination penalties
| within the contracts as well.
|
| If there is an unanticipated issue contractors will often try
| and get a contract modification because they consider it new
| scope of work or something like that.
| golem14 wrote:
| Here's how simple me thinks about it: Cost-plus is just a lazy
| version of fixed price, where instead of accountants looking at
| details before new funding is released, there's automatic
| approval of overruns.
| teruakohatu wrote:
| > there's automatic approval of overruns.
|
| That is not quite correct. Cost-plus specifies how charges
| are priced, it does not specify budgets.
|
| I could sell you pencils at cost-plus. How many pencils you
| buy is up to you, not I.
| fergbrain wrote:
| They eat the cost: https://simpleflying.com/boeing-ceo-air-
| force-1-deal-mistake...
| swarnie wrote:
| Cost plus is a fantastic way top do business.
|
| 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.
|
| Probably isn't as cool if the taxpayer is pick up the bill
| mind....
| Manuel_D wrote:
| 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 _too_ much off public money.
|
| 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.
| nynx wrote:
| There must be some way to structure contracts to allow for cost
| of developing new technologies yet incentivizes minimizing that
| cost.
| BurningFrog wrote:
| One simple way is to pay a fixed sum as profit, not a
| percentage of costs.
| chmod775 wrote:
| > There must be some way to structure contracts to allow for
| cost of developing new technologies
|
| Make companies evaluate and eat the risk by allowing them to
| set the fixed price...
|
| > yet incentivizes minimizing that cost.
|
| ... where they are bidding on the contract against other
| companies.
|
| This only works if you have a market with multiple players,
| which is possibly the main reason NASA is more heavily
| leaning towards fixed-price contracts now.
| bluGill wrote:
| R&D is about managing risk. You can have more micro-managers
| to ensure that costs are minimized, but the cost of all that
| management can be more than the abuse of cost-plus (not to
| mention people hate being micro-manged)
|
| The only good answer I've heard is for the agency to have
| enough technical experts that they can spot bad things.
| However that means the government needs to develop technical
| experts.
| kitsunesoba wrote:
| > The only good answer I've heard is for the agency to have
| enough technical experts that they can spot bad things.
| However that means the government needs to develop
| technical experts.
|
| It's probably beneficial for the contracted company to have
| technically inclined individuals in leadership too, ranging
| all the way from the lowest levels up through CEO.
| Engineering-minded management is much more likely to spot
| potential troublemakers and risks for runaway costs in the
| planning phases where someone with a background in
| management or finance is more likely to fudge things and
| say "yes we can do this at X unrealistic low cost" just to
| win a bid. They're also less likely to make bad calls on
| how to fix budget problems that crop up midway through the
| contract.
| dr_orpheus wrote:
| There are Fixed Price Incentive (FPI) contracts that try to
| address this. Instead of a single price for the contract as
| in an Firm Fixed Price (FFP) there is a "target" price at
| which the contractor will get some level of profit. Above
| that you set a cap on the total cost of a project that you
| are willing to pay, but the profit of the company goes down
| as you approach the cost cap. So contractors still have the
| incentive to minimize cost because if they get cost below the
| "target" price the contractor still gets that as profit.
|
| However, people aren't usually a fan of them because it
| requires all of the overhead/audits of a cost-plus contract
| which typically minimizes how cost effective they can
| actually be at getting below the target price.
|
| There are also some development-type projects where the
| government will fund a project, but still require some amount
| of funds (like 25%) to come from the contractor. But this is
| really early development type stuff. Basically it is a way to
| influence where a company is spending their R&D money. Its
| not really for any operational systems.
| Manuel_D wrote:
| Ditch cost plus contracts and use taxes to curb companies
| that are just profiting off rent-seeking behavior (like
| sitting on patents). This was done during WWII, marginal tax
| rates were set to 100% to discourage war profiteering.
| Companies would still have an incentive to cut costs, to
| increase profits. But they'd then be incentivized to reinvest
| those profits because otherwise those profits would be
| greatly taxed. Granted, how you'd effectively target these
| taxes outside of unusual circumstances like a world war might
| be too complicated to be feasible.
| treeman79 wrote:
| This is also the source of the weird health insurance is
| provided by companies came from. Paying for peoples medical
| care became an alternative way to compensate people more to
| avoid absurd taxes. Medical care used to be a lot cheaper
| so it wasn't a big expense.
| treeman79 wrote:
| This is also where free markets shine. If someone is making
| absurd profits building in-efficient widgets. It won't be that
| long before other people get the idea to make that same widget
| for less or better quality or both.
|
| But first company will then go out of business or become
| efficient.
|
| Survival of the fittest evolution style for business.
| WheatM wrote:
| x86_64Ubuntu wrote:
| This assumes that there are no intellectual property
| encumberances held by the old company, and that the barrier
| to entry isn't terribly high. And no one with a budget and a
| deadline is going to wait for one company to go out of
| business so they can get it cheaper.
| ipaddr wrote:
| The first company has first movers advantage which lets them
| signs exclusive deals and builds a regulatory moat plus gains
| brand awareness.
|
| The new company may be cheaper or have better quality but
| that isn't an automatic win. The second company needs more
| money or an event to superseed the first story.
| fatbird wrote:
| You're leaving out a significant factor in cost-plus contracts
| in their favour: the buyer pays the actual cost, not the cost-
| plus-contingency that's built into fixed price contracts. It
| may not work out that way for the reasons you mention, but the
| problem of baking in risk costs to fixed priced bids returns.
| And in observing "how does the contractor increase profits",
| another issue with fixed price bids is that it encourages
| corner-cutting internally: anywhere the contractor can save
| money, it goes into their pocket, which can mean a lot of
| tissue-thin requirements fulfillment that goes wrong later.
| Symmetry wrote:
| In theory the regulating agency overseeing the cost plus
| contract is supposed to scrutinize the expenses of the overseen
| entity to prevent this. In practice just form a matter of
| program complexity this is hard to do. When you bring in
| politics it gets even worse, "You don't want to endanger our
| pilots by giving them any less than the most gold plated
| fighter jets, do you?" argue the defense lobbyists.
|
| The worst example I can think of would probably be the nuclear
| industry where operators providing grid power on cost plus
| contracts teamed up with environmentalists after Three Mile
| Island to get laws passed insisting that nuclear power had to
| be as safe as possible regardless of cost, which turned into
| essentially a license to print money.
| ClumsyPilot wrote:
| > In theory the regulating agency overseeing the cost plus
| contract is supposed to scrutinize the expenses of the
| overseen entity to prevent this
|
| The entire point of getting the private sector is that their
| insentive should be to do it in the most efficient manner
| possible, and noone has to manage them - the inefficient ones
| just die out.
|
| The second-best approach is to have the government manage the
| whole thing, where they have no real incentive to be
| efficient.
|
| But what we have here is employing the private sector and
| incentivising them to be as inefficient as possible, and the
| government must still hire an army of accountants and experts
| to keep them in check. it's combines the worst aspects of
| both!
| krapht wrote:
| For what it's worth, while on any single contract you might
| get bad behavior from a contractor, their reputation will
| matter when they go for a recompete or bid on a new
| contract vehicle.
|
| Not all contracts are automatically won by the lowest-cost
| bidder. Yes, it allows corruption on the part of the person
| doing the hiring, but it's better than the alternative.
| astrange wrote:
| In California, Tutor Perini seems to be famous for
| winning government construction contracts despite
| constant failures and unexpected price increases, because
| the law does require lowest bidder and doesn't allow
| ignoring low bids from known liars.
| themitigating wrote:
| The government would have no reason to rip itself off as
| well unless there's corruption but that should be
| investigated.
| krapht wrote:
| You must be somebody who's never had to remove an
| underperforming colleague on a public project.
|
| What happens is that they get promoted to another team,
| or put on a project that has absolutely no future, and
| everyone knows it.
|
| Why is it difficult to remove people? Because in the old
| days, newly elected executives would clear out the civil
| service and hire or contract with people that supported
| their election campaign.
| abathur wrote:
| They wouldn't have a reason rip themselves off, but the
| decision-makers may not be well-incentivized to control
| cost (or might be incentivized to make "safe" choices
| over "smart" ones).
|
| I have wondered if we could ~endow government agencies in
| a way that would let them fail, and do the same to spin
| up ~internal competitors when we feel like turning up
| competition/innovation.
|
| But it's not something I have gamed out enough steps to
| feel confident about...
| colordrops wrote:
| > Cost plus contracts are well intentioned
|
| Are they though? If a casual layman internet reader can see the
| problem and see that they always get taken advantage of for
| profit, couldn't also the NASA officials and contractors
| signing these contracts? They know exactly what they are doing.
|
| SpaceX signed non-cost plus contracts and delivered far more
| quickly and cheaply than the rest.
| travisporter wrote:
| The problem is Congress tells NASA do this with this money
| this way. NASA has little flexibility. Recently with the CLPS
| program NASA flexed it's muscle and it's paying off so far.
| lumost wrote:
| In R&D, incentivizing a private enterprise to spend _more_
| could be beneficial. Assuming the client (NASA) has some
| oversight this leads to more engineering freedom and an
| exploration of a larger design space, whereas fixed cost would
| incentivize racing towards the best solution as fast as
| possible.
|
| Depending on program goals, both approaches have their place.
| However for projects like Artemis which tried to minimize R&D
| cost and save time through component re-use, the latter
| approach would clearly be better.
| dr_orpheus wrote:
| Yes, the theory of cost-plus contracts is good. It is a way of
| saying "this is a new piece of technology with ill defined
| requirements and we need help developing it along the way."
| Theoretically, it allows for changes and adaptations in
| developments of technology. This is all in theory though and
| what proponents of cost-plus would say. It does suffer from
| some of the issues you have mentioned above. I think there is a
| time and a place for cost-plus but there is definitely move
| towards more fixed price contracts in civil and defense.
|
| Becoming somewhat more common now is a hybrid approach of cost-
| plus/fixed. Contracts for development phases up to a certain
| milestone are set up as a cost plus contract and then
| production comes under a fixed price contract.
| tomatotomato37 wrote:
| I wonder if some of the risks of cost-plus could be mitigated
| by associating it with industry average running costs rather
| than a per-project basis. So contractors would get a yearly
| payment with as long as they are making progress on a
| project, but any changes to the project are 1-to-1 with
| additional costs so there would be no benefit to either
| aggressive cost cutting or sandbagging expenses. Maybe also
| make it so profit would be rewarded at project completion in
| proportion to the running costs of however long the project
| took to prevent pointlessly lagging or rushing projects. Of
| course there would also have to be bullshit like opportunity
| cost compensation and shit because these companies are so
| profit-driven as to crash a project meant for the public good
| if it means more profit from interest on a 0.5% bank account
| klodolph wrote:
| Cost-plus is _supposed_ to be primarily for research and
| development, where the costs are highly variable to begin
| with.
| gabereiser wrote:
| This has been my experience as well through contracts with the
| government.
|
| To further this, there is also no incentive and funds to
| modernize an already existing product. If it was written in
| Java 6 using J2EE, it's going to continue to be that until it
| dies.
|
| Folks I worked with also didn't care to up skill or learn new
| ways of doing things because the incentive wasn't there. Their
| cost was fixed, their price was fixed, their profit was fixed.
| They will do the bare minimum to satisfy the contract.
| ChrisLomont wrote:
| >It's disincentivizing cost reductions and incentivizing cost
| increases.
|
| Competetive bids drive costrs down. The alternative to cost
| plus is? Not having fixed profit margins, in which case there
| is still incentives to increase costs.
|
| In both cases the limit to costing is competition and the
| contracting side.
|
| Another way to think of it is cost plus lowers costs by
| lowering risk. If the company were on the hook for uncertainty
| (which is the case on ANY project), then they would have to
| price that into the original proposal, as would their
| competitors, ensuring more costs to cover the risk.
|
| By lowering risk to companies, it provides another avenue to
| lower costs. This happens in lots of markets - look at cost
| margins where there is volatility versus margins where there is
| predictability.
| downut wrote:
| Wait till you find out about Red and Blue teams submitting
| bids from the same corporation. I sure loved being a small
| part of that.
| edmundsauto wrote:
| This only works if the bids represent the same work, at the
| same quality, on the same delivery schedule, with the same
| feedback pathways and the same risk mitigations.
|
| In other words, it is the "spherical cow" of contracting.
| ChrisLomont wrote:
| >This only works if the bids represent the same work, at
| the same quality, on the same delivery schedule, with the
| same feedback pathways and the same risk mitigations.
|
| Why would this possibly be true? Two groups can bid on the
| same project with different tradeoffs. Projects are
| complex, and there are zillions of tradeoffs to make a
| competitive bid. The group offering the project then
| evaluates the bids, often with multiple rounds of feedback.
|
| And generally then these projects initially got to several
| competitors, with fewer getting follow-on work, causing
| them all to try really hard to deliver good work.
|
| Future projects are always worth more than current
| projects, so only an idiot does bad or over-cost work
| often. Such groups eventually don't get more work.
|
| I've worked on such bids for decades. Multiple groups bid,
| with a statement of work. The other side evaluates the
| bids. Cost plus simply allows groups, when bidding to not
| have to use larger multipliers to mitigate risk, since some
| of the risk goes to the offeror.
|
| If you were running a company, and you had two ways to bid
| a contract, firm fixed price vs cost plus, which do you
| think provides less risk to you?
|
| And how does a company account for risk?
|
| Higher prices, end of story. This is simple economics.
|
| It's why less risk results in smaller margins throughout
| pretty much all industries. It allows stable planning.
| ClumsyPilot wrote:
| "And how does a company account for risk?
|
| Higher prices, end of story. This is simple economics."
|
| The job of the company is to manage risk of the project
| they are delivering, and let the ones that do it well
| win. What the hell is the point of private sector if the
| taxpayer pics up the tab every time something goes wrong?
|
| I don't know what bids you dealt with, the ones I did
| looked nothing klike what you describe. For any non-
| mundane work, that's not like, paving a street, you low-
| ball the bid, deliver the bare minimum the paperwork
| allows and then keep milking the government for
| improvements because what you've delivered is not good
| enough.
|
| If the bid is about new technology, the tradeoffs cannot
| be understood by non-experts, and are difficult to
| pinpoint even for experts. The expertiese required to
| access how good is the bid is the same as the expertiese
| needed to design the system -> if you have that
| expertiese on hand, you would not need to outsource the
| design.
|
| The process is insanely time intensive, expensive, and
| difficult to navigate. Not because government is
| inefficient, but because taht's the nature of new
| technology.
|
| > Future projects are always worth more than current
| projects, so only an idiot does bad or over-cost work
| often. Such groups eventually don't get more work.
|
| In UK Capita get work again and again despite fucking it
| up all the time
| zbrozek wrote:
| Cost plus isn't used just at NASA. It's even more evil in
| other arenas, like electricity in California. Our regulators
| allow for a fixed profit margin for opex and a higher fixed
| profit margin for capex. This has the twin effects of running
| things to failure (and igniting the state) in order to avoid
| opex and instead claim capex, and also motivating as-high-as-
| possible costs for everything. No competitive bids are
| possible.
| jiggawatts wrote:
| The same madness happens here in Australia too. Just
| recently I did an IT project for a local electric utility
| company and they were blowing $200K on firewalls for a
| system used by 10 people. Similarly they "upgraded" a
| perfectly good 10 Gbps fixed line to 200 Gbps for the same
| group of users. They can utilise maybe 1 Gbps on a busy
| day.
|
| They also get a fixed profit ratio relative to capex. So
| they burn giant piles of money to get their percentage from
| the government...
| LegitShady wrote:
| >The alternative to cost plus is?
|
| Contracts where the contracting party agrees to a % of
| responsibility. When the project runs over the profit is
| reduced by the overrun * the percent responsibility.
|
| Lets say the agreement has 25 million in profit and 40%
| responsibility. If the project runs over by $2m, the
| contractor eats $2m * .4 = $800k reduction in profit so now
| it's $24.2m.
|
| Then they're actually incentivized to not have overruns.
| ChrisLomont wrote:
| >Contracts where the contracting party agrees to a % of
| responsibility.
|
| Except no big agency does this because it's a legal
| nightmare. The others (cost plus and firm fixed) are well
| explored.
|
| >Then they're actually incentivized to not have overruns.
|
| Everyone has incentives not to overrun - it means you're
| less likely to get future work, and future work is worth
| much more than overrunning current work.
| LegitShady wrote:
| >Except no big agency does this because it's a legal
| nightmare.
|
| agencies are starting to do it more and more often. It
| won't get explored if people are scared, but it will get
| explored if people actually want to fix the problems with
| procurement overruns.
|
| >Everyone has incentives not to overrun
|
| in cost plus your overrun often directly leads to you
| making more money. So no, not exactly.
|
| >it means you're less likely to get future work, and
| future work is worth much more than overrunning current
| work.
|
| Maybe, maybe not. Lots of things have few competitive
| bidders, or bidders who bid knowing they're going to make
| overruns and claims to make the contract profitable when
| their bid never was. it's often called 'buying the job'
| in other industries.
| efsavage wrote:
| A better way to align incentives would be to have the bids
| specify fixed profits and a value engineering process. You bid
| $10m + $1m profit. The project baloons to a $20m project, you
| still make $1m. The project meets it's goals with a $5m budget,
| you get $1m and a percentage of the shortfall. It can still be
| gamed, but to a much lesser degree.
|
| I worked on a 9-figure construction project and there were two
| full-time engineers specifically tasked with looking for ways
| to _reduce_ the cost of the project, because it was essentially
| free money for the contractor. These two people generated
| millions in profit for the company.
|
| https://www.fhwa.dot.gov/construction/cqit/vecp.cfm
| bryanrasmussen wrote:
| Good, but often people reduce costs by using lower quality
| supplies so that isn't necessarily foolproof either.
| Closi wrote:
| All these approaches have plusses and minuses and their own
| risks. The risks with the approach you have described are
| that:
|
| a) Unless very carefully managed, you can end up with
| contractors being incentivised to cut corners (i.e. We make
| more money if we buy the cheapest doors possible, regardless
| of if they only last a few weeks).
|
| b) If contractors have fixed profits at their bid-price, they
| will have zero incentive to accept any change requests
| (unless they come with additional margin, in which case,
| overspends will magically turn into change requests).
| airstrike wrote:
| If those doors are still built-to-spec, then shouldn't you
| be fine?
| Retric wrote:
| There are a lot of games you can play to make say rent look
| like a cost on a contract while another entity makes a profit
| from that rent. Worse you still have incentives to offload
| costs onto a contract. For example someone finishes an
| unrelated contract your might as well move them to a profit +
| contract rather than benching them or immediately laying them
| off.
|
| In the end markets simply aren't efficient without pricing
| information. If you can't get someone to bid a fixed price
| you might as well keep in in house.
| krapht wrote:
| Those games you play are a lot easier to deal with
| oversight-wise. I disagree with your conclusion. You're
| assuming in-house doesn't have the same perverse
| incentives. Also, pricing information can be impossible to
| discover. You often hear on HN how nobody can realistically
| estimate large software programs. Under that regime, what
| good is a firm fixed price contract? What'll happen is that
| the company, once it goes over-budget, will stop work
| and/or go bankrupt depending on the legal contract it
| signed. Then the client has no choice but to add more money
| into the pot - which suddenly sounds like a cost+ contract.
| Retric wrote:
| I have worked on plenty of fixed price software projects.
| The simple reality is when you fix costs quality becomes
| the flexible metric, but meeting the minimum project
| goals becomes really important. However, considering how
| many software projects fail reaching the agreed upon
| minimum at the agreed upon price is vastly better than
| what generally happens.
|
| As to failing to finish a project the wonders of fixed
| price contracting is you can pay at completion of some
| milestone. Of course that means people need to pad the
| price even more ahead of time to assume that risk, but
| price becomes a really useful signal.
| photochemsyn wrote:
| One of the areas where this seems to have happened is at the
| NSA, which usually keeps its contracts very secret, but due to
| William Binney's whistleblowing, it was revealed that the
| inexpensive solution (ThinThread) was passed over in favor of
| the expensive solution (TrailBlazer).
|
| https://whistleblower.org/whistleblower-profiles/thinthread-...
|
| Part of the problem here is that the government actors
| selecting the contracts also want more money flowing through
| their agency, and they seem to get kickbacks in the form of
| 'retirement positions' with the very private contractors
| they're directing contracts to.
| avalys wrote:
| This is why it's ridiculous that the US Affordable Care Act
| (Obamacare) "caps" profit for health insurers as a fraction of
| premiums collected. It provides a direct incentive for them to
| increase healthcare costs, absolutely the opposite of what
| government policy should be doing.
| dbg31415 wrote:
| For those of us who embrace agile methodologies... there is
| always benefit to cost plus contracts.
|
| Clients never have all the requirements up-front, and even if
| they did requirements tend to shift as we plan, design, build,
| test...
|
| It's also nice to not have to go through a lengthy contract
| negotiation for change orders.
|
| 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.
| [deleted]
| newaccount2021 wrote:
| simulate-me wrote:
| 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.
| aurizon wrote:
| 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...
| https://en.wikipedia.org/wiki/For_Want_of_a_Nail 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.
| ineedasername wrote:
| Fixed price allows less flexibility if "gotchas" are found during
| development, which they almost always are.
|
| 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.
|
| 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.
| bluGill wrote:
| 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.
|
| 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)
|
| 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?).
|
| 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.
| dotnet00 wrote:
| But isn't accounting for risks and having contingencies to
| minimize their impact part of good engineering practice? Eg.
| when designing a new rocket, you know that the engines might
| have issues causing delays, you can't predict exactly what
| issues but you can estimate how much extra money and time you
| could lose there.
|
| For instance, as part of their filing for the HLS competition,
| SpaceX supposedly had around ~400 pages just discussing
| cryogenic propellant storage and transfer, along with the
| associated risks and how they would mitigate them.
|
| It's also a bit of a stretch to say NASA isn't taking on risk
| in fixed price, as they're still paying large sums of money for
| each agreed upon milestone. The point is that the risk needs to
| be shared. Cost+ takes away pretty much all of the risk for the
| company, taking away their incentive to do their best
| (especially considering that until SpaceX came around and blew
| the doors open for smaller companies, there were only a handful
| of competitors who were all basically the same culture wise).
| lamontcg wrote:
| Strict fixed-pricing seems like a recipe for something like
| JWST to fail miserably in the future.
|
| For an expensive one-off like that there needs to be wiggle
| room to deal with design uncertainties and the unknown-
| unknowns.
|
| Fixed price might be more reasonable for smaller less expensive
| missions where the uncertainties are less and the tolerance for
| failure is higher.
| trothamel wrote:
| SpaceX did bid fixed-price for HLS, the moon lander they're
| working on. That project will required developing refueling
| from an on-orbit propellant depot to succeed.
|
| The thing with SLS is it was supposed to be low-risk, based on
| Space Shuttle heritage - it doesn't do much that's new. Despite
| that, it's on a cost plus contract that's ballooned.
| nickff wrote:
| Nobody in their right minds would have touched SLS with a
| fixed-price contract; NASA is too involved in the design,
| construction, and testing.
| masklinn wrote:
| > The thing with SLS is it was supposed to be low-risk, based
| on Space Shuttle heritage - it doesn't do much that's new.
|
| HLV would have been a low-risk launcher based on the shuttle.
| SLSs is a new launcher build from recycled parts.
| sidewndr46 wrote:
| Not just heritage, the SLS is basically what you get if you
| move the Space Shuttle engines onto the propellant tank and
| remove the orbiter vehicle. Then discard the reusability
| requirement and you've got SLS.
|
| In the process of this, everything is being modernized. This
| is where all the cost comes from.
| bluGill wrote:
| SpaceX only did that is they wanted to do it anyway, so they
| were willing for the risk
| Closi wrote:
| The counter-problem is that a cost-plus contract works the
| opposite way - you are incentivised to account for none of the
| risks in your initial bid to make your quote competitive, and
| the sales strategy is to 'land and expand' (i.e. get the
| initial contract and then expand it's value - sales teams will
| openly talk about land and expand behind closed doors).
|
| In practice this means that the quotes you get back are much
| harder to assess from a commercial perspective, as you are
| trying to weed out which companies are underquoting.
|
| Also cost plus contracts almost always end up being cost 'plus
| plus' if you dig enough under the covers in my experiences in
| procurement/contract management (there are always hidden fees
| and profit lines, and too many opportunities for conflicts of
| interest or to charge more to the open book), so even a low %
| can just mean more 'hidden' profits. You could write a book on
| all the ways to extract additional profit from an open book
| contract.
|
| IMO the best model isn't an either/or approach, it's a mix of
| models where the right model is used at the right time
| (including open book, fixed price, rate cards, hybrid contracts
| e.t.c.) where the contracts are adequately sized & scoped (i.e.
| several small fixed price contracts with set deliverables which
| have value on their own rather than one huge contract with one
| massive deliverable at the end).
| uberman wrote:
| This 100% and it is not just super risky things like "exploring
| space".
|
| If you have ever PIed on a government contract you will know
| that the program manager will almost certainly deviate from
| what is in the contract. They will call unbudgeted out of town
| meetings, ask for unbudgeted reporting, demand unbudgeted
| changes to the deliverables.
|
| As a contractor working with the government, "cost plus" is the
| only sane option. The program manager is not going to have the
| bandwidth to renegotiate (and bid out?) in the almost certain
| event of a change in scope.
|
| The alternative to "cost plus" is defensive billing where the
| contractor attempts to devine and account for extra non-
| contracted work. That lead us in the past to $1000 hammers and
| no-one liked that either.
| Aperocky wrote:
| > stick with the opportunity rover design they could have
| thousands on the surface of mars
|
| Now that's something I'm not against.
| gpm wrote:
| NASA doesn't need to be in the business of managing that risk
| and the abuse that comes with it. NASA can pay a fixed cost
| equal to the expected cost of the project, and the contractor
| can buy insurance if they want insurance against cost overruns.
|
| Insurance companies are in a much better place to price this
| insurance than NASA, because they have the correct financial
| incentive to do so well, and no political incentives to do so
| poorly.
| NovemberWhiskey wrote:
| > _Insurance companies are in a much better place to price
| this insurance than NASA_
|
| Is that really a thing? The risks of adverse selection and
| moral hazards would seem insurmountable.
| bluGill wrote:
| You can get insurance on anything you want. However the
| more unknowns there are, the more they will charge. You can
| get fire insurance that will cover even if you burn your
| house down - but it will cost you (not having insurance and
| burning your house down might cost $.01 more than buying
| insurance)
| gpm wrote:
| You can negotiate insurance for just about anything (there
| are sometimes laws against things like taking out life
| insurance policies against a third party, but none that
| would apply here). No doubt the insurance company would
| insist on various forms of audits, similar to what the
| government insists of for cost plus contracts today.
| Probably the most successful contractors wouldn't pay an
| insurance company for this, because it's a stupid model for
| contracts that wastes resources, but it wastes no more
| resources than having the government play the role of the
| insurance company.
| teruakohatu wrote:
| I think you need to articulate why you think the govt. is
| forced into this insurer role. They are no different to
| any large private buyer.
|
| Any insurance would be expensive, and would be a cost
| passed to the government, as any other project related
| costs are. The insurance provider spreads risks across
| policies but since all these policies would probably be
| for government contracts, the costs would all be passed
| on to government. The government would end up paying for
| all the policies plus the insurance company profit
| margin.
|
| The only winner here is the insurance company, maybe the
| contractors. The government will be slightly worse off.
| bluGill wrote:
| They don't have to, but someone will be the insurance
| provider and the government will pay for it. The
| government by playing insurance has better options to cut
| a project if things are getting to expensive, but this
| requires some willingness to cut project scope which they
| might not be willing for (and a contract that allows such
| a thing).
| gpm wrote:
| > I think you need to articulate why you think the govt.
| is forced into this insurer role. They are no different
| to any large private buyer.
|
| An insurance provider is a party taking financial risk if
| something goes bad for someone else. In the cost plus
| contracting model, the government is taking the financial
| risk if the project goes poorly for the contractor, that
| is the government is providing insurance.
|
| > The insurance provider spreads risks across policies
| but since all these policies would probably be for
| government contracts, the costs would all be passed on to
| government.
|
| Of course, there is no free money here. However the
| government can correctly evaluate the costs of the
| different proposals under a fixed cost contract model,
| whereas they are not capable of correctly evaluating the
| cost of the insurance that they add on top in a cost plus
| model, because they aren't set up to correctly price the
| insurance they are selling. This means that in the fixed
| price model, they can get a much better approximation of
| the cost in the value/cost equation they are trying to
| maximize when evaluating bids, and it means that
| contractors are motivated to provide options that
| maximize the same, instead of being motivated to provide
| options that maximize the difference between how the
| government miss-prices the insurance, and the actual
| value of the insurance. In the end everyone ends up
| better off, because there is less waste.
| NovemberWhiskey wrote:
| I should probably have been clearer. I understand you can
| insure all kinds of risks, and that you can ask an
| underwriter to insure against most anything. My question
| is more whether this is a well-formed insurance market
| where coverage is available under economically realistic
| terms.
| gpm wrote:
| I can't say that I'm aware of an active market for
| insurance similar to this, not that I would necessarily
| be aware of one.
|
| If one doesn't exist, that should just be a sign that the
| government really shouldn't be providing it either
| though, because it isn't profitable. The government isn't
| somehow better placed to insure R&D work (or whatever you
| want to call the work being discussed) than any other
| insurance company is.
| bluGill wrote:
| The government is better able to set a fixed budget
| though. R&D as in do X hours of work on FTL is much
| better than deliver FTL (I intentionally picked something
| impossible - though in a the world R&D should be about
| things you think are possible but are not sure of)
| gpm wrote:
| What you're describing isn't a cost plus contract, it's a
| fixed cost contract for a study (assuming cost/hour is
| fixed). These exist, they're frequently a good idea.
|
| Cost plus would be "deliver a FTL ship, we'll pay you X *
| costs, no it doesn't really matter if you go 10x over
| what you initially quoted us for the work and still don't
| have the thing". You can see why contractors under that
| model are willing to make unrealistic quotes and promises
| about FTL, or for a real world example why SLS is many
| years and many billions of dollars behind schedule.
| teruakohatu wrote:
| > NASA can pay a fixed cost equal to the expected cost of the
| project
|
| Sure they can, but when they decide to tweak the project the
| company can tell them "no, that sounds risky".
|
| So what will happen is the contract will end up stating
| something like all adjustments are priced at cost plus... and
| NASA is back at square one.
| gpm wrote:
| You don't get to change the deliverables of cost plus
| contracts without re-negotiation either. That's not the
| risk that is being avoided here, the risk is that the
| company is going to decide to ask for more money for the
| same service they initially promised.
|
| For example with Boeing's recent starliner tests, they
| would be asking for more money to fly the orbital flight
| test that they initially promised, because they fucked it
| up the first time.
| Symmetry wrote:
| 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.
|
| 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.
| bryanlarsen wrote:
| Fixed price contracts are also similarly abused.
|
| https://spacenews.com/nasa-inspector-general-criticizes-addi...
| Robotbeat wrote:
| But not as easily. Boeing has since had to eat the costs
| associated with an extra test flight.
| nickff wrote:
| Fixed price has cost NASA dearly in the past, because NASA
| often changes things after making a purchase decision. The
| 'change orders' are often where contractors make their real
| money.
| NovemberWhiskey wrote:
| Contractors may lose out on the initial fixed-price contract,
| but they'll make it up on change requests - for any kind of
| realistic scale, the customer never knows exactly what they
| want, there are always changes, and by that point it's
| largely unrealistic to shop those contracts elsewhere.
| Robotbeat wrote:
| Not in this case as commercial crew has two providers. So
| if Boeing doesn't do the work, they just won't be paid, and
| SpaceX will get more flights (and this is exactly what has
| happened). If this keeps going indefinitely, NASA will on-
| board a new partner besides Boeing, such as SNC's Dream
| Chaser (other potential options include Blue Origin, who
| eventually want to build an orbital crew vehicle, and even
| technically Lockheed Martin who own the plans to Orion and
| are allowed to bid it commercially).
| NovemberWhiskey wrote:
| I suppose it depends on the nature of the contract; for
| launch services I guess that makes sense; but for a
| development project, it's different - if you give
| Lockheed Martin the contract to build the Mars Ascent
| Vehicle, you're probably going to need to revise the
| requirements through the lifetime of the project, and
| it's not very credible to say "OK, Boeing's taking over
| from here" for the change requests.
| rozab wrote:
| Commercial Crew _is_ a development project, I don 't see
| what the difference is.
| Robotbeat wrote:
| Funny you say that because NASA is taking a very similar
| approach to the HLS lander for Artemis. They did start
| with just one provider (as Starship is the only one they
| could afford) but they're trying to include a second
| lander provider ASAP, partly by the insistence of
| Congress (who doesn't like that their typical defense
| contractor donors didn't get picked for the first HLS
| lander).
| rhacker wrote:
| 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).
| zardo wrote:
| > What's to stop you from immediately placing 9B of that in
| rich pockets
|
| The government accounting that goes along with the contract.
| They can waste money or do a bad job, but they can't just say
| they spent the money on executive bonuses.
| tomrod wrote:
| QA/acceptance requirements. But you are right that this game is
| hard to play.
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