SDA Director Tournear Addresses Concerns About Fixed-Price Contracts
Despite concerns from some in industry that bidding on fixed-price contracts can be too risky for them in terms of generating a profit, the head of the Space Development Agency (SDA) said on Tuesday he is sticking with this business model.
Derek Tournear posted on LinkedIn that following recent media reports about industry concerns related to the fixed-price model, he reached out to company executives to learn if they would still bid on SDA’s satellite competitions and the answer was yes.
SDA has been competing billions of dollars’ worth of missile tracking and related communications satellites that it is fielding within its Proliferated Warfighter Space Architecture. These competitions have resulted in wins for well known primes such as Lockheed Martin, L3Harris Technologies, Northrop Grumman, and RTX, but also new entrants such as York Space Systems, Rocket Lab, and Sierra Space.
Unlike traditional fixed-price contracts that often require risky development work, low-rate production runs that may result in profit losses, and aggressive bidding, SDA’s business model offers the agency and the greater contractor community more flexibility over time, Tournear suggested.
The agency’s motto is Semper citius, always faster, which Tournear said “means we focus on schedule above all else.”
First, he said, SDA is seeking mature technology that goes from contract win to orbit in about 30 months.
“Now, there are downsides to this for on-ramping new technology, which must be addressed elsewhere,” he wrote. “But this certainly incentivizes the company to choose a low-risk technical approach.”
Second, given the two-and-a-half to three years from award to orbit for each contract tranche, vendors are not locked into a lengthy development and production run, which gives predictability and safeguards from inflation, he said.
Finally, he said, every new capability is competed and has been demonstrated “over three tranches now,” with each one resulting in “new vendors added to the SDA ecosystem.” He also highlighted that “in some instances, incumbents didn’t make the current bid.”
Northrop Grumman Chairwoman, President and CEO Kathy Warden last week said her company had bid a “fair and reasonable” price on one of SDA’s recent satellite competitions but the agency discontinued negotiations with the company. Warden said that the company will remain disciplined with its risk and reward provide when pursuing fixed-price contracts.
Northrop Grumman announced a $1.2 billion after-tax charge on the first five low-rate initial production lots for the Air Force’s B-21 stealth bomber, a contract that it was locked into prior to COVID-19 impacts and inflationary pressures.
Jim Taiclet, Lockheed Martin’s chief, said last week during his company’s year-end earnings call that Lockheed Martin has no must win programs and that it will only bid on work that offers a balanced price to risk profile. He did say that the Defense Department has created situations where companies feel they must win a long-term contract and therefore bid aggressively.
Tournear acknowledged that SDA’s success also depends on the success of industry but that the frequent competitions and limited production runs that allow for new technologies to spiral in with each successive tranche, are central to maintaining a healthy marketplace and achieving success for the agency.