How NASA Learned to Buy Services

How NASA shifted from building its own spacecraft to buying launch and crew services from private companies under fixed-price contracts, and the savings that followed.

For most of its history, NASA designed and owned its spacecraft, paying contractors for their costs plus a fee. From the late 2000s, it began buying services from private companies instead. This change in how government buys, or procures, has had major economic effects.

Cost-plus contracts

Under cost-plus contracts, the government pays a contractor’s costs plus an agreed profit. This reduces risk for contractors but gives them little incentive to cut costs, since higher costs can mean higher fees. Many large space programmes experienced major cost overruns.

Fixed-price service contracts

NASA’s Commercial Orbital Transportation Services programme, launched in 2006, and later Commercial Crew Program used fixed-price contracts. NASA agreed to pay set amounts for milestones and services, such as delivering cargo or astronauts to the International Space Station. Companies kept any savings but bore the risk of overruns. They could also sell services to other customers.

The results

SpaceX’s Dragon began delivering cargo to the ISS in 2012.
In May 2020, SpaceX’s Crew Dragon carried NASA astronauts to the ISS, the first crewed orbital launch from the United States since the Space Shuttle retired in 2011. Before that, NASA had paid Russia for seats on Soyuz spacecraft.
Analyses, including by NASA’s Inspector General, found the commercial approach cost substantially less per seat than the alternatives.

Boeing also received a Commercial Crew contract but faced delays and cost overruns that, under the fixed-price structure, it largely had to absorb.

Buying rides instead of cars

Imagine a city that needs to move workers. It could design, build and own its own buses, paying a manufacturer for whatever it costs. Or it could pay a transport company a fixed fare per rider and let the company run the service efficiently. NASA shifted from the first approach to the second for trips to the space station.

Lessons

The shift shows how procurement design shapes incentives. Governments still need cost-plus contracts for truly uncertain, first-of-a-kind projects, but fixed-price service contracts can work well when requirements are clear and competition exists.

Thinking private companies did it all alone

NASA funded development, shared expertise and provided an assured market. The commercial approach was a partnership in which government money and demand helped private firms succeed.

Key takeaways

Cost-plus contracts pay costs plus a fee, weakening incentives to control costs.
NASA shifted to fixed-price service contracts for cargo and crew transport.
SpaceX's Crew Dragon carried NASA astronauts to the ISS in 2020.
Procurement design shapes incentives, costs and innovation.