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.

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NASA

NASA

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Blue Origin

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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.”

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."