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October 5, 2010 / car.

Space projects contracts

When speaking about spacecraft manufacturing, the space sector usually works on an order basis. That is, even if you have a standard platform, you do not stock them ready for launch, but manufacture them on demand when a customer needs a new satellite (and usually, they may ask for some minor modifications to fit their requirements).

Space projects have been historically dominated by cost overruns, specially related to time overruns. If you ever try to buy a single electronic component for your spacecraft, and the manufacturer does not have it in stock (which is quite common), be ready to wait up to half a year for a quartz oscillator or FPGA, and some months for simpler components. And be ready to pay good money for them, but that is another story…

In the negotiation phase, you shall be able to estimate your hourly cost (with indirect costs) accurately, and be ready to consider the extra costs related to the possible time overrun. If you overestimate this time, you will lose the contract, but if you underestimate it  you will lose money! (and a lot!). Also, do not forget to consider the operation costs for a system. A good rule-of-thumb is the 1:3:6 rule for complex system cost, where 10 percent of the total cost is for design, 30 percent for building it and 60 percent for operation!! Be careful, as the operation costs are usually underestimated and can cause big financial troubles.

Also, when negotiating with your customer it is very important to choose the contract type. Traditionally, space projects were made on a cost plus scheme, where the final price for the customer was the contractor cost plus a fixed percentage. Of course, this led to inefficiencies because the contractor had no financial incentives to finish the work on time and the projects where endless and very expensive.

On the other hand, a firm fixed price contract has high incentives for the contractor to finish on time, as the sooner in finishes (and the lower its internal costs) the higher the benefit. The market is now moving to FFP contracts, with OHB (DE) winning some big contracts lately due to their high efficiency and agressive pricing strategies (Galileo!!).

Between them, there is a wide range of weird contract types to choose, each one trading risk from the customer to the contractor:

Different contract types for space projects

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