NASA selected Space Exploration Technologies, or SpaceX, and rival Rocketplane Kistler (RpK) to demonstrate their ability to loft cargo, and eventually crew members, into orbit, on missions to the International Space Station (ISS).

Each competing firm gets only the chance to demonstrate its ability to loft cargo into space. There is no guarantee for either firm of being awarded later contracts for actual missions, which might be worth a total $500 million over five years, according to NASA officials at a press briefing.

In the demonstration contracts, each firm would have to demonstrate various proficiencies, including a culminating test flight in 2008. Later, there would be actual mission flights. The demonstration contracts would be worth some $207 million to RpK, and more than $270 million for SpaceX.

These two firms were among six finalists in the competition, which originally attracted a score of rival firms vying to provide demonstrations of their ability to perform Commercial Orbital Transportation Services (COTS) for NASA.

NASA officials said losing firms shouldn’t feel themselves out of the running. Rather, they might have an opportunity to vie for work later. “We don’t consider any of these companies losers,” said Alan Lindenmoyer, NASA commercial crew/cargo project manager. “We are encouraging these other companies” to remain interested in competing for NASA contracts, he said.

While NASA itself long has performed the job of hauling fresh supplies up to the ISS, and hauling waste and unwanted items back from the space station, it makes sense to outsource the work to commercial firms if they can perform it at less cost and still provide safe, reliable and effective shipments, said Scott Horowitz, associate NASA administrator for the Exploration Systems Mission Directorate.

Such savings could free resources, such as personnel and funding, for other needed NASA work, he said in a news media briefing where he announced the two winners.

“This is a business,” and one where costs and efficiencies are valued, he indicated. In going to the private sector for these space transport services, NASA aims to create a new market, space agency officials explained.

The phase one demonstration contract, where SpaceX and RpK each will show its lift capabilities, will be followed by phase two, where NASA will award actual transport mission contracts, according to Horowitz.

Missions would include some where items being shipped to the ISS wouldn’t need pressurized environments, and other missions where cargoes would require pressurized, temperature-controlled environments. Then, later, there would be missions to carry crew members to the ISS.

Cost controls will be critical for SpaceX and RpK, because the initial demonstration contract that each will receive will be a fixed-price milestones contract, rather than a cost-plus contract where the government would pay for whatever costs each company incurred in the program.

The SpaceX proposal would involve a Falcon 9 two-stage launch vehicle providing the power to loft the payload, paired with either a Dragon Cargo capsule atop the rocket or a Dragon Crew capsule, depending on the mission. Costs would be contained by using simple components.

Meanwhile, RpK would use a K-1 lifter, with a first stage that would be reusable as a cost savings, able to perform the burn at launch and then, after separation, return to the launch point.

“This will be a very successful program,” Lindenmoyer said.

When the demonstration phase concludes and NASA moves to award contracts for actual missions, the work might be split between the two companies, if SpaceX offers a lower cost or better service for one type of mission, but RpK offers a better price or service on another type of transport, according to Horowitz. “There is no guarantee of a service contract based on this” demonstration contracting, he said.

If one company is superior in every area, it could wind up with all of the phase two work.

Regardless of which firms obtain it, the phase two work might involve perhaps six missions per year, Horowitz indicated.

The move to use commercial firms for routine cargo hauling to the space station signals an emerging dichotomy in the space transport area, where the glamorous long-range missions to the moon, Mars and beyond will be handled by NASA and a giant contractor making the Crew Exploration Vehicle, either Lockheed Martin Corp. [LMT], or a team of Northrop Grumman Corp. [NOC] and The Boeing Co. [BA]. The selection of either Lockheed or Northrop-Boeing is expected at the end of this month.

Each of the COTS program winning firms has a controversy in its past. RpK is coming out of bankruptcy, while SpaceX has had mission failure.

But Horowitz downplayed those factors.

Space travel is a risky business, and “we expect to see some failures along the way,” he said. This makes sense, since an attempt to achieve total perfection in a system before a launch will mean it never reaches that state, and it never begins a mission, he said.

In assessing SpaceX, “they’re responding very well” and learning from past problems, Horowitz said. As for RpK, “they have done a good job” of emerging from bankruptcy “very, very well,” he said.

Lindenmoyer noted that if a company were to be unable to continue in the program, NASA won’t be on the hook for work undone. “We’re only paying for performance,” he said.

Further, NASA isn’t alone in bankrolling the program, with each of the firms putting up some of its money. “You’d better have some skin in the game,” in order to enter the program, Horowitz said. While NASA didn’t set a minimum amount of money that a firm must contribute to the work, the capital investment must be “significant,” he said.