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.
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).
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.
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.
Only if you can do that. Most of the large projects the government does nobody else wants. There is no market for aircraft carriers other than the US government (even if there were not export laws), likewise most space exploration, nobody other than NASA is going to buy your mars rover.
Building roads and private parking lots have enough in common that I might risk some of my own money on a better way [do something with them] them because once I develop it I can recoup any losses selling to private parking lots. Most things the government does they have a monopoly on though, and thus once a contract is done there is no possibility to recoup any losses.
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.
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.
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.
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.
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.
> 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.
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).
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.
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.
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)
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.
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)
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).
What we could learn from that is a lot less than what we learned from all the other things we have done instead. Eventually you have seen that type of rock before and so all you know is there is a lot of it - which we already have reason to suspect.
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.