Contract Types and SpaceX: Comparison and Contrast of Contract Types

Subject: Logistics
Pages: 1
Words: 334
Reading time:
2 min
Study level: Bachelor

SpaceX is a private company that has challenged NASA’s domination in the U.S. aerospace industry. Aside from manufacturing activities, SpaceX acts as a provider of space transportation services for U.S. governmental agencies. Successful collaboration requires competing and meeting the authoritative buyers’ expectations, so firm-fixed-price (FFP) contracts remain the key pricing option relevant for SpaceX.

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In its collaboration with national agencies, SpaceX makes FFP contracts that are more applicable to it than other options due to the nature of aerospace security projects and related competition. Cost-plus-fixed-fee (CPFF) agreements are mainly applicable to experimental items with unclear specifications, whereas cost-no-fee (CNF) contracts are used when suppliers derive capitalizable research-related knowledge as a result of work (Johnson et al., 2019). Different from that, cost-plus-incentive-fee (CPIF) agreements are made to distribute financial risks between sellers and buyers (Johnson et al., 2019). FFP contracts are the only type that does not allow any changes to the set price (Johnson et al., 2019). Being attractive for buyers, such contracts are advantageous when the planned project has a detailed schedule and a well-defined scope, and the buyer makes an exclusive offer that encourages large-scale competition. These characteristics find manifestation in SpaceX’s largest agreements, including a $316 million FFP contract with Pentagon for conducting one mission to launch a national security satellite for the country’s intelligence authorities (Erwin, 2020). This contract is part of the five-year agreement based on FFP requirements.

Finally, from a strategic perspective, the importance of cost management (CM) cannot be overstated. Efforts made to plan an organization’s budget and keep spending patterns under control allow businesses to conduct a comprehensive analysis of diverse sources of financial gains and classify them properly. With this understanding, businesses become capable of distinguishing between core and secondary processes and operations and making resource allocation decisions that would result in strategic benefits and gains in the long term. Additionally, CM activities can support the timely identification of cost drivers to be addressed, which supports the development of strategic cost-reduction action plans and initiatives.

References

Erwin, S. (2020). Pentagon picks SpaceX and ULA to remain its primary launch providers. Space News.

Johnson, F., Leenders, M. R., & Flynn, A. E. (2019). Purchasing and supply management (16th ed.). McGraw-Hill.