Whatever happened to competition in space agency procurement? The case of NASA

Journal of Applied Economics

The generic nature and uncertainties of most major government-led space
programs, as in other high technology industries, give rise to the formation of
incomplete contracts within the industry. Thus, program-specific costs that imply
a long term relationship between the supplier and the agency are often necessary,
and it is costly (and of uncertain benefit) to include uncertainty clauses in contracts.
There are three main contract categories used by NASA: Fixed-price contacts,
cost-reimbursement contracts and incentive contracts.

Fixed price contracts (FP) are of two types: Firm-fixed price contracts and fixed
price contracts with economic adjustment. As stated earlier, fixed price contracts
are in the government interest, provided there is competition in their awarding and
there are no major uncertainties associated with the program/components. Cost
reimbursement (CR) contracts employed by NASA are of two main types: Cost
plus fixed fee (CPFF) and cost plus award fee (CPAF). Other types, such as cost
plus percentage profit are excluded because they give strong incentives to the
industry to inflate costs. CPAF contracts are classified as such by NASA since
1983; prior to this date the relevant contracts were placed under the “Incentive-
contract” classification.⁴

Finally, incentive contracts (INC) can be used with regards to cost, or
performance incentives, and provide a mix between the extremes of cost-but-no -
rent minimization of FP contracts and rent-but-no-cost minimization of CR contracts
(see Zervos 2001).

Figure 3 presents data of NASA contract types as a percentage of the total
from 1983 to 2004. It is clear from Figure 3 that cost-reimbursement contracts
(CPAF plus CPFF) constitute the largest share of the total since 1983. On this
basis, profit minimization, or regulation of profits are seen as major priorities in
NASA’s behavior in awarding contracts to the industry over time. However, Figure
3 also indicates a decline of cost plus contracts as a percentage of the total since
1990, to be matched by a respective increase in incentive contracts (“mirror image”).
This pattern could signal a more rent-favoring approach by NASA from the mid-
1990s. Such an approach resulted in 2000 in a contract distribution similar to the
mid-1980s (with CPAF below the 50% mark and INC around the 30% mark). The

⁴ Prior to 1983, NASA classification of contract types did not contain cost-plus-award-fee
(CPAF) contracts, but only firm-fixed-price (FFP), incentive (INC) and cost-plus-fixed-fee
(CPFF). Therefore, for reasons of compatibility the sample of the time series examination of
contract distribution is set from 1983 to 2003. Furthermore, given that the relative distribution
of contracts is important and to avoid unnecessary price effects the values of the contract-
types time series are presented as a percentage of the total value of NASA awards.

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