But nobody would have taken a fixed price contract to build rockets in our version of Earth, actual U.S., circa 1990s, without a huge profit margin built into it because rocket manufacturers also have access to accountants and actuaries, etc., who can price out possible risks. It didn’t help that there really only was one or two companies willing to invest capital into doing so. Which precluded the possibility of selecting a lower bid.
And no one else in the U.S. wanted to invest capital to establish a third manufacturer for the reasons described above.
Which is why the Pentagon hasn’t moved entirely to fixed price contracts, because for many systems there’s literally no competition for their business, so it would probably increase the price over cost-plus contracts since corporations have to borrow at higher interest rates for debt then the government can.
But nobody would have taken a fixed price contract to build rockets in our version of Earth, actual U.S., circa 1990s, without a huge profit margin built into it because rocket manufacturers also have access to accountants and actuaries, etc., who can price out possible risks.
It’s okay to grant them a huge profit margin with priced-out risks. That way, if they manage to reduce their costs, they make a bigger profit.
it would probably increase the price over cost-plus contracts since corporations have to borrow at higher interest rates for debt then the government can.
The government essentially guaranteeing the loans of companies does reduce the interest rate on the debt, because it means that if the project fails the government pays for the losses.
It also means that the chance that the project succeeds at its initial price is less because the company has no incentive to stay within the budget.
Right, so the upfront sticker price of a fixed price contract to build rockets in the 90s would have been much higher then that of a cost-plus contract.
Maybe after you include the delays, overruns, etc., it would turn out to be a lower price. But NASA didn’t need the votes at some future date, they needed the votes at the time of approval, in order for the project to happen.
Thus it would never get past Congress unless somehow NASA could guarantee that the congressmen voting for it would still be in power to benefit from the possible future savings, which is impossible in a democracy.
The problem is a mix of economic illiteracy of congressmen and corruption.
If we would make more fixed-prize contracts you could start attacking politicians who make cost-plus contracts on the basis that they cost the tax-payer a lot of money. If you try to enforce a standard of “any politician who makes cost-plus contracts that then run above budget is to blame for that”, you could shift the system to be more productive.
You write newspaper articles that blame the responsible politicians. You say that their actions resulted in a lot of wasted money and talk about how they took campaign donations from interests that profit from the government being responsible for the losses instead of private industry.
Elon Musk pushed for more space contracts to go fixed-price. In both space and defense, you could research who’s responsible for moving things in the right direction and who blocked it and resulting in wasted money.
If someone at Vox would decide they want to do something good for the world they could do it.
I don’t see how this could overcome the counter-efforts of those who currently benefit from cost-plus contracts. They after all have a lot more to lose, individually, then a society of several hundred million, where the per person costs may be a couple hundred dollars total in any given year.
Getting enough votes and maintaining voting discipline to enforce any standard at all is incredibly tough in the U.S. elections systems.
If a project goes fails and you write about how John is responsible for wasting a lot of tax-payers money because John decided to to a cost-plus contract instead a fixed-price contract, it’s hard to argue that John isn’t blameworthy if you can’t say who’s supposed to get the blame.
Avoiding opportunities to get blamed is a very strong motivator for many politicians.
What it takes, is enough reform-minded journalists who are willing to consistently talk about it for 1-2 decades.
This would work if it was the only contentious topic at stake during an election. However in reality, given recent trends, there will likely be dozens of hot button topics at stake and only a few viable candidates, and virtually all other topics carry more emotional appeal, and more motivated voting blocs, then fixed-price contracting standards.
It seems exceedingly unlikely that this issue would get enough oxygen for it to be decisive in selecting any elected candidate.
NASA commissioned rockets under cost-plus contracts. Those contracts don’t produce incentives for the manufacturers of the rockets to cut costs.
If you want lower costs you need manufacturers to compete by making fixed-price bids.
But nobody would have taken a fixed price contract to build rockets in our version of Earth, actual U.S., circa 1990s, without a huge profit margin built into it because rocket manufacturers also have access to accountants and actuaries, etc., who can price out possible risks. It didn’t help that there really only was one or two companies willing to invest capital into doing so. Which precluded the possibility of selecting a lower bid.
And no one else in the U.S. wanted to invest capital to establish a third manufacturer for the reasons described above.
Which is why the Pentagon hasn’t moved entirely to fixed price contracts, because for many systems there’s literally no competition for their business, so it would probably increase the price over cost-plus contracts since corporations have to borrow at higher interest rates for debt then the government can.
It’s okay to grant them a huge profit margin with priced-out risks. That way, if they manage to reduce their costs, they make a bigger profit.
The government essentially guaranteeing the loans of companies does reduce the interest rate on the debt, because it means that if the project fails the government pays for the losses.
It also means that the chance that the project succeeds at its initial price is less because the company has no incentive to stay within the budget.
Right, so the upfront sticker price of a fixed price contract to build rockets in the 90s would have been much higher then that of a cost-plus contract.
Maybe after you include the delays, overruns, etc., it would turn out to be a lower price. But NASA didn’t need the votes at some future date, they needed the votes at the time of approval, in order for the project to happen.
Thus it would never get past Congress unless somehow NASA could guarantee that the congressmen voting for it would still be in power to benefit from the possible future savings, which is impossible in a democracy.
The problem is a mix of economic illiteracy of congressmen and corruption.
If we would make more fixed-prize contracts you could start attacking politicians who make cost-plus contracts on the basis that they cost the tax-payer a lot of money. If you try to enforce a standard of “any politician who makes cost-plus contracts that then run above budget is to blame for that”, you could shift the system to be more productive.
How would you envision the logistics of enforcing such a standard?
You write newspaper articles that blame the responsible politicians. You say that their actions resulted in a lot of wasted money and talk about how they took campaign donations from interests that profit from the government being responsible for the losses instead of private industry.
Elon Musk pushed for more space contracts to go fixed-price. In both space and defense, you could research who’s responsible for moving things in the right direction and who blocked it and resulting in wasted money.
If someone at Vox would decide they want to do something good for the world they could do it.
I don’t see how this could overcome the counter-efforts of those who currently benefit from cost-plus contracts. They after all have a lot more to lose, individually, then a society of several hundred million, where the per person costs may be a couple hundred dollars total in any given year.
Getting enough votes and maintaining voting discipline to enforce any standard at all is incredibly tough in the U.S. elections systems.
If a project goes fails and you write about how John is responsible for wasting a lot of tax-payers money because John decided to to a cost-plus contract instead a fixed-price contract, it’s hard to argue that John isn’t blameworthy if you can’t say who’s supposed to get the blame.
Avoiding opportunities to get blamed is a very strong motivator for many politicians.
What it takes, is enough reform-minded journalists who are willing to consistently talk about it for 1-2 decades.
This would work if it was the only contentious topic at stake during an election. However in reality, given recent trends, there will likely be dozens of hot button topics at stake and only a few viable candidates, and virtually all other topics carry more emotional appeal, and more motivated voting blocs, then fixed-price contracting standards.
It seems exceedingly unlikely that this issue would get enough oxygen for it to be decisive in selecting any elected candidate.