Bad contracts are costing the US over $100 billion per year in waste

A 2011 NASA analysis showed that developing the Spacex Falcon rocket would have cost $4 billion in a cost plus contract versus the $443 million that Spacex actually spent.

Musk said NASA [and it would also apply to other government contracts] could avoid unnecessary delays and costs by transitioning to a system of competitive awards for fixed-price contracts, in which companies are only paid when they meet “milestones” such as completing a flight test or satisfying NASA about the safety performance of a vehicle. Additionally, he said, at least two entities should compete during the development process.

Musk talked about the commercial crew program. SpaceX and Boeing both received NASA grants to design and build transportation systems to the International Space Station. Each company is dedicated to winning the race to the launch pad in Florida next year.

“That’s a forcing function to get things done,” he said. “I can’t tell you how important that contracting structure is. That is night and day.”

With a fixed-price contract, a bidder is expected to contribute funds to a project, because while the space hardware provides a government service, it is also expected to find a commercial market. In return, government oversight is less intrusive, freeing the contractor to make more commercially savvy decisions. The Falcon 9 rocket developed as part of the commercial cargo program offers the most clear example of this, because in addition to flying supplies to the station, it has allowed SpaceX to begin to assume a dominant position in the global market for satellite launches.

Competition Trends in government contracts

20% of US government civilian contracts are single source.
44% of US government military contracts are single source.
35% of all US government contracts are single source.
The federal government spent approximately $2.5 trillion in contract obligations between FY 2011 and FY 2015. $875 billion of those contracts over five years were single source. About $175 billion per year are single source contracts.

Typically, acquiring goods and services on a competitive rather than sole source basis helps ensure low-cost driven and high-quality awards for the government. In FY 2015, almost 65% of government-wide spending was awarded in a competitive manner, marking a slight increase since FY 2011.

In addition to this, the below graph also represents the competitive rate trends in the Defense and Civilian markets during the FY 2011 and FY 2015 time frame:

From FY 2011 to FY 2015, federal agencies used firm-fixed price contract types for more than 60% of total contract obligations in each year. The second largest contract types, cost-reimbursement, time and materials (T&M) and labor hour (LH) contracts, accounted for 37% of contract obligations across the government during the five year period. These other cost type contracts are considered high risk by OMB due to the lack of incentive to control costs by contractors. Drilling down into the types of markets, Defense did a better job of awarding firm-fixed price contracts in FY 2015 with 67% of obligations under the fixed price contract type. Meanwhile, Civilian awarded 56% of total obligations on firm-fixed price contracts. Interestingly enough, the civilian agencies that obligated more than 70% of FY 2015 obligations on other cost type contracts include Energy, NSF, USAID and NASA.

From a noncompetitive perspective, the use of cost-reimbursement, T and M and LH contracts waivered at 11 and 12 percent of total government contract obligations between FY 2011 and FY 2015.

Excuse for cost plus and single source contracts

In 2014, Ars Technica interviewed a former senior NASA official “on background”

The source acknowledged that following [complicated bureaucratic oversite] procurement process can easily triple the price of something NASA might buy directly from industry through a fixed-price contract.

“That price is the price Americans, through their Congress, have chosen to pay in order to have a fair, transparent, fully accountable process,” he said. “Most of federal procurement law is designed to protect the American taxpayers from the downside. If you ask me whether the government should streamline these rules, I would say yes.

The public is given bureaucracy to provide a lot of documentation about waste and getting ripped off.

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