In the early 2000s, NASA knew that the Space Shuttle’s days were numbered. Without the Shuttle, the only way to resupply the International Space Station was to use foreign vehicles like the Russian Soyuz spacecraft, and the U.S. didn’t want to have to rely on foreign governments for much. The agency did what it often does: in February 2004, it awarded a contract to an American aerospace company to develop a product it needed — in this case, a new launch system to take cargo to the ISS.
The awardee was a company called Kistler Aerospace, run by former NASA engineers. Kistler had been developing a rocket called the K-1 since 1994, partially funded by another contract the company had with NASA since 2001. The company had filed for bankruptcy protection in 2003, so the $227-million award in 2004 — small in comparison to the $196 billion (inflation-adjusted) NASA spent on the Shuttle program — was a major boon to Kistler.
There was only one problem. The month after the contract was announced, it was protested by a tiny, barely known company called Space Exploration Technologies Corporation — SpaceX for short. The 2004 Kistler contract was awarded non-competitively. As founder Elon Musk put it in his April 1, 2004 update to investors, “Giving a quarter billion dollars to a company like Kistler, which declared bankruptcy last year and has not managed to build a complete prototype in eleven years of operation, without even holding a competition sends a very negative signal to the marketplace.” SpaceX asked the GAO to rule on the validity of such a sole-source, non-competed contract. GAO sided with SpaceX and the Kistler contract was withdrawn in July 2004.
NASA was forced back to the drawing board. It needed a way to resupply the ISS. It didn’t have tens of billions of dollars to spend, so it had to leverage the commercial space industry instead of giving a lucrative cost-plus contract to a traditional contractor. And it needed a fair process to award development funds. What it came up with was called Commercial Orbital Transportation Services — COTS. COTS selected private space companies to develop and demonstrate new capabilities to resupply the ISS, with funding based on the achievement of business and technical milestones.
Finding hungry partners and using a milestone-based payment schedule turned out to be a winning combination.
What made COTS different
When an agency does a normal procurement, it has to abide by the Federal Acquisition Regulations (FARs), which are codified at Title 48 of the Code of Federal Regulations. These regulations specify types of acceptable contracts as well as specific clauses that must be included in procurement contracts. For a complex product like a launch capability, the FAR system is premised on traditional styles of procurement, in which an agency like NASA would set out specific requirements for the system it wants to acquire. Because the agency is ordering a bespoke product that the contractor likely has no independent use for, the agency would pay all of the development costs plus an added fee, and own the resulting system design.
Legally, COTS was not a procurement, and that’s what made the program possible. Since its re-founding as a space agency in 1958, NASA has had “other transactions” authority that allows it to engage in partnerships that are not contracts (subject to the FARs) or cooperative agreements (subject to the Chiles Act). NASA uses Space Act Agreements to institute these “other transactions.”
The Department of Defense and a handful of other agencies also have limited other transactions authority, although the scope of authority differs by agency. In any case, no agency is supposed to use these authorities when a simple procurement would do. After all, the ability to call anything an “other transaction” would side-step the oversight provided by the FARs. NASA had to be legally careful to structure COTS as an other transaction — for example, it used the awkward phrase “Announcement for Proposals” instead of the customary “Request for Proposal” when soliciting bids.
In addition to this legal distinction, COTS differs from traditional procurements in other ways. First, each of the companies selected was expected to pay part of its own development costs. This ensured that the companies were building something useful they could go on to commercialize — they would not have agreed to share costs to build something they knew was inefficient.
Second, the use of fixed-price, milestone-based payments limited the amount of oversight necessary to ensure success. It allowed NASA to turn over development entirely to the companies, knowing that it was only on the hook for payments when the programs successfully met pre-defined milestone criteria.
Third, NASA didn’t dictate the vehicle’s requirements. They evaluated the proposals based on the goal of providing reliable cargo service to the ISS, but they didn’t specify the technical means that participants could use to achieve that goal.
These three elements — shared development costs, milestone-based fixed-price payments, and goal-driven evaluation — were all geared toward reducing the amount of oversight NASA had to exercise. It allowed the companies to move at their own natural speed, not waiting for NASA to approve specific elements. It didn’t allow NASA to come back with updated requirements — something cost-plus contractors are happy to accept because it lets them raise their costs. The result: fast-moving startups working with NASA without losing their edge.
How COTS turned out
The initial funding for COTS was $500 million, of which NASA reserved $15 million for administrative expenses. The agency solicited proposals from the commercial space industry, and selected six semifinalists in May 2006. In August, it announced the two Phase I winners. One was Rocketplane Kistler (RpK), the successor company of Kistler Aerospace after an acquisition by Rocketplane Limited, which was still developing the K-1. RpK was awarded a $207 million deal. The other winner was SpaceX, which was awarded the remaining $278 million. It was developing the Falcon 9 rocket and the Dragon capsule.
RpK only ended up receiving $32.1 million of its potential $207-million award, for it failed to achieve its milestones. NASA terminated its contract in October 2007. It’s worth dwelling on this fact. Imagine what would have happened if SpaceX hadn’t protested Kistler’s 2004 contract with NASA. Kistler would have proceeded with its original $227-million award, likely with the same underperformance it demonstrated under COTS. Without the milestone-based exit valve, NASA would have continued to pay out funds for a project whose schedule kept slipping. After the $227 million had been spent, NASA might have felt it had no choice but to continue throwing good money after bad.
With the majority of the money allocated to RpK still available to NASA after the contract termination, NASA offered a second round of funding. In this second round, it awarded $170 million to Orbital Sciences Corporation for the development of its Antares rocket and Cygnus spacecraft.
Both SpaceX and Orbital Sciences completed their projects and received the full awards they were offered. NASA added more milestones (and more funding) near the end of the programs to pay for a demonstration of cargo delivery to the ISS. In total, the funding for the program was $800 million. For this sum, tiny by the agency’s usual standards for launch vehicles, NASA got access to two separate options for cargo delivery to the ISS from U.S. soil. By comparison, NASA’s conventionally procured Space Launch System, currently in development, has cost the agency $20 billion already and has not yet flown. In addition to providing NASA with a cargo option, SpaceX went on to make the first stage of the Falcon 9 reusable, igniting the commercial space revolution and making it the most successful commercial rocket of all time.
NASA thought COTS was such an enormous success that it commissioned the Johnson Space Center History Office to document the program in a report based on hundreds of hours of interviews. The agency successfully used the same playbook in 2011 for the Commercial Crew Program, which led to the development of capsules now delivering astronauts, not just cargo, to the International Space Station.
Lessons for procurement policy
Procurement is hard, especially for an entity like the U.S. government. The government is so big that no one person can have eyes on all acquisitions. The dollar amounts are massive. There have to be rules to prevent graft and abuse and to protect the taxpayer from liability. Even so, it’s clear the system is deeply flawed. We often spend hundreds of billions of dollars on programs that don’t deliver the value originally promised. The total cost of the Space Shuttle program was $221 billion (in 2012 dollars), and 40% of the vehicles were lost in fatal accidents.
Outside of space, sometimes the numbers are even worse. In 2017, the Pentagon estimated the total acquisition cost for the F-35 was over $400 billion, around twice its original expected cost, not including the additional trillion dollars it would need for long-term operations and support. Worse yet, former John McCain staffer Christian Brose argues persuasively in his book The Kill Chain that large military platforms like the F-35 and the Ford-class carrier are nearly useless against our top strategic rival, China.
A COTS-style contract is not a panacea, but the program demonstrates an alternative approach to procurement that has considerable strengths. In particular, it lets feisty newcomers like SpaceX contribute to government programs while still moving at the speed of startups, not the speed of government. If SpaceX had instead signed on to a cost-plus program to develop a NASA-owned vehicle to deliver cargo to the ISS, the company would have faced the same incentive every other contractor does — to slow down — and might have lost its soul.
If we want effective government procurement, we should explore ways to make COTS-style programs a legal option for every federal agency. What if the Department of Energy could do a COTS for nuclear innovation? Or advanced geothermal? Or enhanced weathering? What if the Pentagon could work with startups to develop low-cost attritable unmanned fighter aircraft? Or if the Department of Transportation could pioneer new high-speed travel modes? The whole government could benefit from the ability to leverage startups to achieve its goals.