Boeing can't profit from fixed-price contracts.

Boeing's spaceflight division finds it challenging to make profits under fixed-price contracts, a shift from their traditional model that could impact the future of commercial space travel.

Boeing, one of the largest and oldest aerospace manufacturers, finds itself in an uncomfortable situation. The company's long-established culture of cost-plus contracts for spaceflight activities is struggling to fit into the new norms that favors fixed-price contracts.

Under the cost-plus contractual agreements, Boeing could easily add a specific percentage of their costs to the price of the product or service they were delivering. This model allowed them to accommodate and absorb overruns comfortably without making any losses. However, under the fixed-price agreement, the price for any service or product provided by Boeing is predetermined, and any additional costs from overruns have to be borne by the company.

Google workers usually work over 8 hours daily, says internal memo.
Related Article

By adopting a fixed price, NASA caps its own financial exposure and reduces taxpayer risk. In case of overruns or schedule delays, the pressure is placed on the contractor, not NASA, to get the job done without additional payment requests from the agency. However, for Boeing, this is a dramatic shift, given their history with cost-plus contracts.

Boeing can

Facing this new reality, Boeing has claimed that fixed-price contracts are a challenge for the company. Their newly designed spacecraft, CST-100 Starliner, came into being under such agreements, and financial overruns are evident. Ultimately, this has led Boeing to declare that they are not currently making money in human spaceflight.

Turning around the situation is increasingly becoming a must for Boeing. Their emerging competitors in the spaceflight market, SpaceX and Blue Origin, have made strides under the fixed-price contracts.

Fixed-price contracts are, after all, not a new phenomenon to space exploration. For example, SpaceX's venture into space started with NASA's Commercial Orbital Transportation Services (COTS) contract. This fixed amount contract, unlike the cost-plus model, pushed SpaceX to minimize costs and maximize productivity to deliver on time.

Despite being a new player and facing skepticism, SpaceX successfully delivered the contracted services under the COTS agreement. They did not just prove the viability of fixed-price contracts in spaceflight but also showcased the potentials of commercial space travel.

Another contender under this new model is Jeff Bezos's Blue Origin. The company is also under a firm-fixed-price contract with NASA for their lunar lander project. This further validates that fixed-price contracts are now the industry norm, and Boeing has to adapt to survive.

Cybertruck from Tesla might face rust issues.
Related Article

Notably, the struggle is not entirely about the financial aspect – it also involves cultural changes within Boeing.

Boeing's long history in defense and space has always been heavily reliant on cost-plus contracts. They ensured not only profits but also stability in operations. Any unexpected costs or overruns were accommodated by the financial buffer the model provided, leading to an overall lax attitude towards cost controls.

However, this culture of cost insulation is not compatible with fixed-price spaceflight contracts. The new model requires efficiency, cost-effectiveness, and strict risk management. It's hence a cultural shift that Boeing finds challenging to adapt to.

As such, this struggle with fixed-price contracts is a wake-up call for Boeing. To thrive in this new environment, they need to adapt their corporate culture to become more cost-conscious and risk-averse.

With Boeing's public acknowledgment of this problem, what might be the implications for commercial space travel?

If Boeing pulls away from fixed-price contracts, it could lead to fewer competitors and less innovation in the sector. The company has a rich history in space exploration; it is the prime contractor for the International Space Station (ISS). Their experience and expertise are valuable to the field.

The challenge, however, is finding the right balance. While they retain their history and expertise, Boeing must also adopt new practices to stay afloat. With their competitors thriving under the fixed-price model, Boeing might have little choice but to forge forward through this significant transition.

It is not yet clear what path Boeing will take. However, their public concern in this matter reflects the fundamental changes that the spaceflight industry is undergoing. Fixed-price contracting might be the new reality Boeing and others have to deal with if they want to stay competitive.

Ultimately, Boeing's struggle symbolizes a significant shift in the aerospace industry. Into a new era where cost-effectiveness and efficiency take the front seat, and large corporations must adapt or risk falling behind.