Fixed-Price Contracts Not Always a Good Deal for Taxpayers, Says Executive

4/17/2012
By Stew Magnuson
COLORADO SPRINGS, Colo. — Fixed-price contracts are not a panacea for reducing the prices military contractors charge for their goods, the president of rocket engine manufacturer Pratt & Whitney Rocketdyne said April 16.
Cost-plus contracts, in which vendors can charge the government extra to reimburse them when programs have unforeseen expenses or delays, have been blamed for  overruns on military hardware acquisitions for years. Lately, fixed-price contracts have been the trend. The contractor sticks to a set price, which works as long as the customer doesn't delay the program by changing requirements or drawing it out by years because it can't get the necessary funding.
But fixed-price contracts aren't going to save taxpayers money when the contractors have to take on financial risk, Jim Maser, president of Rocketdyne told reporters here on the sidelines of the Space Symposium. That fixed-price bid will simply swell if the company can't reliably predict its expenses over the lifetime of the contract, he said. It may end up being more than a cost-plus contract.
"The point out of this is that we are happy to bid fixed price. We'll end up making more money, but I think it is going to cost the customer more," he said. "We have explained that to them in as many different ways that we can."
This is particularly true for complex technologies purchased in low volumes such as rocket engines, he said. A case in point are the engines that the Air Force and National Reconnaissance Office will need in the future. United Launch Alliance, which acquires the Rocketdyne engines for its launch vehicles, and the two agencies are currently all trying to figure out how much it will need to spend in the later part of the decade.
The fly in the ointment for Rocketdyne is the pad at the Stennis Space Center in Mississippi where the rockets must be tested. NASA refuses to set the cost for using the facility. Rocketdyne has pretty good ideas of how much labor, manufacturing and materials will cost, but it has no idea how much it will have to pay to test fire the engines. It will therefore pass on this risk to ULA, and ultimately the taxpayers, with a higher price.
There is a third way, Maser said. A so-called "hybrid contract" lies somewhere in between fixed-price and cost-plus contracts. In this case, line items in the document spell out how each task will be charged. The riskier work would be cost plus, and the predictable ones would be fixed.
"We think in this extremely low volume environment, and with highly variable parts of the contract, that the hybrid model would be a better deal," Maser said.
Rocketdyne has already used this method once supplying rocket motors to Lockheed Martin, the prime contractor for the Terminal High Altitude Area Defense anti-ballistic missile program.
Meanwhile, the company has already taken measures to adjust to the austere defense budget environment and the end of the space shuttle program, Maser said. By 2013, it will cut in half the square footage it needs to build rockets at its two main manufacturing facilities in Florida and California from 2.1 million to a little more than 1 million. This was made possible by streamlining manufacturing processes, he said. There was a corresponding cut to Rocketdyne's work force from 3,400 to 2,400. The "lion's share" of layoffs has been completed, but there may still be more to come, he added.     
Read the National Defense Magazine blog for more reports from the Space Symposium in Colorado Springs, Colo.

Topics: Business Trends, Doing Business with the Government, Space

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