WASHINGTON — In a departure from recent guidance, the Space Force will use cost-plus contracts for its high-priority strategic communications satellite program.
Space Force acquisition executive Frank Calvelli said Feb. 23 that the service has decided to not use fixed-price contracts for the Evolved Strategic Satellite Communications System (ESS), a critical component of the U.S. military’s nuclear command, control, and communications (NC3) network that provides nuclear-survivable communications.
Calvelli has previously indicated a preference for fixed-price contracts as a means to control costs and incentivize efficiency in satellite procurements. However, he said that an exception will be made for the ESS program.
Boeing and Northrop Grumman were selected in 2020 to build ESS satellite prototypes but Calvelli suggested that these designs are not mature enough to transition to fixed-price production.
“It’s not as far along as I would like for us to probably use fixed price,” Calvelli said at an event hosted by the Center for Strategic and International Studies.
The ESS program is estimated to be worth $8 billion. These new satellites are intended to augment and eventually replace the Advanced Extremely High Frequency (AEHF) network of nuclear-hardened satellites made by Lockheed Martin.
Draft solicitation in the works
Calvelli said the Space Systems Command is still working on a draft solicitation for ESS proposals, expected to be released this year.
He said he had expected the ESS payload designs to be more mature by now and nearing the prototyping stage. ESS was one of the programs selected for rapid-prototyping under a Pentagon initiative known as “middle tier acquisition”
“But it seems like we spent a lot of time in MTA just doing tech risk reduction or technology maturity,” said Calvelli. “Had we built a real payload or actually built the prototype, then maybe we could actually go off and do something fixed-price.”
Under cost-plus or cost-reimbursement contracts, the government pays contractors for allowed expenses, plus an agreed upon profit margin. In fixed-price agreements, the contractor is paid a negotiated amount regardless of expenses incurred.
Cost-plus contracts are used in higher risk projects where technical requirements are uncertain or unknown and the work involves “non-recurring engineering.” These are upfront costs associated with the design and development of a new product.
“Given the amount of NRE that still has to go into the ESS program, and feedback I’ve gotten from industry, we are probably looking more towards the traditional cost-plus model for something like that,” Calvelli said.
The use of cost-plus versus fixed-price contracts has been a contentious issue recently, with some defense companies experiencing significant losses on fixed-price contracts. Executives from major defense contractors, including Boeing, Northrop Grumman and Lockheed Martin, have warned that they would be reluctant to bid on some fixed-price programs due to the financial risk.
Calvelli has said the preference is to use fixed-price vehicles once new systems are proven but ESS does not meet that threshold so the development will move forward with the government absorbing the inherent risks.
No excuses for late deliveries
Calvelli during his talk at CSIS also said he plans to crack down on program delays, especially those blamed on supply chain woes or pandemic impacts.
“There’s two phrases I absolutely hate: ‘covid caused me to be delayed, and ‘supply chain caused me delays,’” he said.
No more excuses, Calvelli insisted. With the pandemic long over, the industry must have contingency plans to deliver on time, he added.
“We know about challenges in the supply chain. This is not new on the space side of the house with small components. It just means we have to be smarter in terms of our companies ordering stuff earlier,” said Calvelli.
“Covid has been over for a couple years now guys, so that’s not excusable, but companies still use it, and they still use the supply chain excuse,” he said.
The covid excuse is heard less from smaller space companies in the commercial sector that have recovered from pandemic-related supply problems. “I see it more fundamentally in our bigger primes that whine about supply chain,” said Calvelli. “And I think they are the ones that have the resources and the assets to actually do something about it, and actually be smarter.”
Calvelli offered a blunt warning. “It all comes down to just planning early. Buy your parts early, get your orders in, be organized, be effective,” he said. “I can’t stand when they come in with supply chain excuses for why they can’t meet their schedule.”
