Project contracts are categorized into three groups: fixed price, cost reimbursable, and time and materials contracts. These groups have different contract types connected to several subcategories. Fixed price contract types include firm fixed price (FFP), fixed price plus incentive fee (FPIF), fixed price determinable (FPR), and fixed price plus economic price adjustment (FPEPA) (Dixit, 2020). Cost reimbursable contract types include cost plus fixed fee (CPFF), cost no fee (CNF), cost-plus incentive fee (CPIF), cost plus a percentage of the cost (CPPC), and cost-plus award fee (CAF). The best procurement contracts for SpaceX to procure raw materials are FFP and CPIF for lower costs and higher quality.
FFP is a lump sum type of contract, which does not allow price change. The buyer prepares a statement of works and requires contractors to submit their price quotes (Dixit, 2020). It is the most expensive contract in terms of the bid price because the buyer does not take any risks for the project scope or costs. The terms of reference must be clear and include well-defined boundaries for both parties (Dixit, 2020). FFP is most suitable for projects that do not change during their implementation.
CPFF contracts reimburse the contractor’s expenditure and add a profit in terms of a fixed fee. Buyers will usually select the lowest total bid from among contractors’ quotes. However, the actual cost might change due to changes in the contractor’s actual spending. CPFF contracts are most useful in projects whose budget cannot be projected with certainty, such as design projects (Dixit, 2020). In such projects, the final costs cannot be determined, and the buyer has to prepare for increased spending. Unlike CPFF, CNF only includes the reimbursement value at the beginning of the contract without any cost-sharing details between the contractor and the buyer (Dixit, 2020). CPIF consists of a third aspect of the CPFF contract terms, a reward tied to the fixed fee for achieving established targets (Dixit, 2020). It includes both a bonus and a penalty to increase or reduce the fixed fee, making it variable. Most targets are tied to costs and performance to minimize total project costs.
SpaceX outsources only raw materials for its design and manufacturing processes. These materials include titanium, cryogenic liquid oxygen, stainless steel, and rocket-grade kerosene (RP-1). Therefore, it rarely outsources design work and uses FFP for its procurement contracts. SpaceX accepts the lowest bids from qualifying contractors who accept its reference terms. Nevertheless, SpaceX can benefit from using the CPIF contract type whenever it outsources design projects. The bonus or penalty for contractors will increase performance and lower costs for SpaceX.
SpaceX relies heavily on technology and will include sophisticated digital tools in its cost management process. Such tools are project management software, three-point estimates, and parametric estimation (Christine, 2020). Project management software helps with planning, tracking progress and costs, scheduling, project budgeting, resource allocation, and cost estimations. Since procurement requires accurate cost estimates, the organization will use three-point and parametric estimation to develop project cost projections. The three-point estimation method uses the equation to estimate total project costs (Christine, 2020). Co stands for optimistic costs, Cm for the most likely costs, and Cp for pessimistic costs (Christine, 2020). SpaceX will also rely on its experience, expert judgment, and highly engaged workforce to manage expenses. Since the company uses FFP contracts, it would be beneficial to use reserve analysis and cost of quality estimation tools to allocate contingency reserves and quality control costs, respectively.
In conclusion, SpaceX can use both FFP and CPIF procurements to ensure high-quality materials and reduce contracting costs. While FFP protects the buyer from any risks, it might lower the quality of the materials. On the other hand, CPIF is the best contract for quality but may increase contract costs. Therefore, the organization will benefit from using the two types for various materials and contracts.
Christine, S. (2020). Top 10 tools and techniques to estimate project cost. Tutorials Point.
Dixit, V. (2020). Risk assessment of different sourcing contract scenarios in project procurement. International Journal of Construction Management, 1-13.