An Interesting Discussion About the Fixed-Price Contracts Issue

We recently published a story about the Department of Defense taking steps to significantly reduce overall costs by converting three of its costliest Air Force satellite programs into fixed-price contracts. Our piece sparked an interesting conversation on the networking platform LinkedIn as to whether such contracts really lead to long-term savings for the government customer.

One member of the “Earth Observation Network” group on LinkedIn suggested that fixed-price contracts would not necessarily save the government money.  In fact, this writer argued, such contracts will likely provide room for additional expenses due to ‘change orders,’ which fill requirement gaps that were missed in the original procurement process. To counter this problem, he talked about a contracting approach where government initiates procurements based on certain quality and performance metrics. Contractors would get paid when they hit these metrics through Service-Level Agreements (SLAs).  What these SLAs would do is shift the investment burden to the private sector. 

I agree that fixed-price contracts will only provide a certain amount of savings for the government because they are not always ‘fixed.’  Buying on a “fixed price” basis requires a disciplined process for determining requirements along with the understanding that changes should not be made after the contract is awarded. but rather saved for  contracts on future, more advanced satellites. This is imperative as the schedule for building a new satellite is now 24-30 months, while adding change orders during the process has been shown to extend the build time to 5-6 years.

However, I disagree with this reader’s assessment of SLAs being the answer. The real savings will emerge when there is more flexibility in the government’s ability to purchase commercial SATCOM.

Many important features required by the government, such as specialized payloads, unique frequency bands, and heavy security features, will most likely never be offered as a stand-alone service, which reinforces the need for industry to be able to invest in innovations with confidence.

Along those lines, moving to the proposed service-based model assumes that the commercial market will develop and offer those innovations on their own dime. In today’s budgetary climate, contractors can no longer move forward with significant investments on their own, unless backed by a solid contract.

We have seen this many times before and a key example is the GeoEye merger with DigitalGlobe. GeoEye took on significant financial investments under the assumption that the EnhancedView contract from the National Geospatial-Intelligence Agency (NGA) would be a thriving opportunity for at least 10 years. When this contract was reduced, GeoEye was forced to merge with its biggest competitor.

The key is to have some acquisition flexibility where the commercial industry can still invest, and have the confidence that the government will pay when the capability is delivered.  It goes without saying that true savings happens when the government receives customized capabilities using commercial procurement and industry best practices, such as the value proposition of hosted payloads.   

Another challenge is that this only addresses space assets, which are only about a third of the cost issue for major government space programs.  Ground systems and the customized software and support functions that go along with them, are the larger share of the issue.   

Clearly, today’s budgetary climate is precarious for both industry and government. The core missions are not changing and we all will be required to deliver more for less. Through SATCOM Frontier and other channels, IGC is participating in discussions on how best to serve the government customer.

I welcome more thoughtful discussions on this important topic.

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