Now it is time to discuss cost estimates. This can be dangerous because cost projections are notoriously inaccurate and depend on a set of assumptions that are seldom followed. In addition, inflation plays terrible tricks, particularly when you are trying to project ten to fifteen years or more into the future. However, it is important to understand the magnitude of the costs, what they include, and how they were developed so you can make your own judgment as to their validity. The estimates I will use are those developed during the DOE/NASA studies because they are the best estimates available. I will discuss how they will be affected by evolving technology and changes in the value of a dollar.

In the aerospace industry the estimators handle the effect of inflation by making their estimates in man-hours and material costs by choosing a specific year on which to base their analysis. They then use an inflation factor to project the costs to some year in the future. Most of the cost estimates made by the aerospace industry for their own programs during the early concept phases use cost estimating relationships (CERs). These take into account past programs of similar complexity and account for all the costs of errors and overruns of past programs that will probably happen again.

At this point you might ask, “If that is the case, why is there so much in the press about overruns on government contracts in the aerospace business?” In order to answer that question, it is important to understand how government contracts are awarded.

It is a long and involved process that starts with a perceived need that is either seen by a government organization, such as the Air Force, or an idea that is developed by a contractor to solve a need they think exists. In either case it is not long until a product concept is developed to potentially satisfy that need. Cost estimates are developed based on cost estimating relationships. Invariably the cost is considered too high by the government agency, so they tell the contractor to find ways to reduce the cost. By this time other contractors are aware of the potential product either by being informed by the government or through clever marketing investigation.

The next step in the process is now underway. It may involve contracted studies or company-funded studies. In either event the various contractors involved set about to reduce the cost. The first steps are usually legitimate. They attempt to improve the design to reduce cost. This can be done by reducing the size or by simplification of the design. Generally this is not enough to satisfy the government agency if it is a large program that must be sold to Congress as a line item in the budget. Government procuring agencies know that the lower the projected cost, the easier it is to sell as it moves up the bureaucratic leadership ladder on its way to Congress, so they send the contractors back to the drawing boards to find a lower cost number.

Now the government procurement game starts in earnest and what follows is a sad discourse on our government agencies, members of Congress, and participating contractors. There is nothing about what happens from this point on that can be considered legitimate or honorable. It is only “legal” because it is nearly impossible to prove conspiracy in what happens. The key players are very skilled at the game, while most of the minor participants are unaware of what is going on in the process.

Contractors reduce their program cost estimates in order to satisfy the demands of the procuring agencies even though by this time the contractors have already incorporated all the legitimate costs reductions. So now they must lie. Program managers can hardly tell their employees to lie about the estimated costs, for someone would certainly blow the whistle. So the easiest way to work around that problem is to establish a set of estimating ground rules that will result in a reduced number by not telling the whole truth. It is important to keep the number just low enough to sell the program, because it will be necessary to reduce it some more later, as you will see.

After the studies have defined the program and sold the government on its merit, it is time for the request for proposal (RFP) or request for quotation (RFQ) issued by the government procuring agency, which specifies the requirements for the item they want to buy. Included is all of the criteria that must be met by a successful bidder and how the proposal will be evaluated by the government to select a winner. In most cases, cost is at the top of the list of selection criteria. The contractors know from experience that they must submit the lowest bid to win, or at least low enough to make the final round in the selection process, where they will be given one more chance to make a best and final offer. They also know that the procuring agency needs a low bid so they can convince Congress to fund the program. They know that after a program is funded by Congress it is nearly always continued even when there are serious overruns. This sets the stage for what actually happens.

Both the procuring agency and the bidding contractors are playing the procurement game for high stakes. The objective of the game is to convince Congress to fund the program. The primary rule is to not reveal the truth about actual costs because the program could not be sold to Congress and the contractor would not win the competition. There is an unstated understanding between the government procuring agency and the contractors that they will be able to make up the difference between the proposal costs and real costs through change orders or renegotiation sometime after the contract award.

The next rule of the game is to make the bids look real enough not to raise any suspicion and, most important to the company managers, to stay out of trouble during audit. That is quite easy for those who know how to play the game of hiding real costs from the public, Congress, and auditors. Experienced people don’t use real CERs when it comes time to bid on government contracts. They would never win a competitive procurement by using real cost estimates, so most companies bid the cost for which they could do the contract if they did not make any mistakes. The estimate is often made by the bidding team following guidelines from management that tell them to include only the amount of time and materials absolutely essential to accomplish the job. This kind of estimate does not show the real impact on program costs due to error correction. Management then “scrubs” this already low estimate to an even lower level they hope will be enough to win. Their speech to the employees says, “I know it will be tough, but we can do it with hard work,” knowing full well that there is not a chance of doing it for the bid price. The important thing is to win the contract; dealing with the overrun will be next year’s problem, and the government will pay anyway, so why worry.

With this approach it is quite easy to make the bid one half to one third of what it will actually cost and still be able to defend it in an audit. This works because government procurement agencies are as anxious to hide the real costs as the contractors. Does this sound like the old shell game? It is, and guess who loses.

Unfortunately, there are very few development contracts performed without error, and the inevitable result is large overruns, for which the government (that is, the American taxpayer) pays. Since most development contracts are for the cost plus a fee it is not much of a risk for the contractor. The key risk is in the size of the fee as they are usually given incentives for various items including cost. However, this is usually circumvented by change orders that pad the contract size, so instead of losing fees, the fees are actually increased. This game of how to win government contracts actually results in programs costing much more than if the true costs were stated in the beginning. The combination of initial underfunding and attempts to cut corners results in an increase in the number of errors above what would normally happen if real costs were identified in the contract bids.

Another influencing factor of contractor selection is the government’s desire to keep many companies in business in order to preserve a broad technology base in case of emergencies. This generally means that the government often awards contracts to the poorer performing contractors who cannot compete effectively in the commercial marketplace. This in turn often leads to even higher cost overruns.

The last major factor is political influence. Congressmen have now joined the game, and they play with their own set of rules. Since they control the purse strings, particularly committee chairmen, they are in a position to make sure that contracts are awarded to companies within their constituencies or to major political contributors. The procuring government agency knows about this rule and can prepare the way so that the desired contractor can win. “How can that happen in the bidding process?” you ask. Very simple. Write the RFP or RFQ with requirements biased toward a particular contractor. The loser here again is the public.

A prime example of this convoluted contracting process is the Space Shuttle. A senator from Utah was head of the Space Science Committee when the design concept was changed so that the Shuttle would use solid rocket boosters that could be manufactured by a contractor in Utah. This was not the best design, and seven dead astronauts are a testament to that fact.

This is not a new game. It is played all of the time. A classic example was the Air Force TFX procurement program many years ago. There were repeated rounds of competitions with changing requirements until finally they could select General Dynamics, a company with manufacturing facilities in Texas, a state with very powerful political leaders. The result? The F-111, which had many years of major problems, huge overruns, and in the end never really fulfilled the original requirements.

The situation is much different when a firm must compete in the commercial marketplace. There, everything has a fixed price, with an inflation escalator clause in some cases. Performance is guaranteed. If the company makes a large error in estimating costs or performance, they have to absorb the costs; if they cannot, they go into bankruptcy. There is normally no bailout from the government for huge cost overruns in the commercial world. An exception was the bailout by the government of Lockheed over the L-1011 losses and also the losses on the C-5A, which were incurred when the government attempted to make the purchase of that airplane closer to a commercial contract by forcing Lockheed to adhere to the original contract conditions. This bailout was made to keep Lockheed in business because they had so many critical military contracts.

Considering that the development of the first solar power satellite would possibly be a government-sponsored program, why would it be any different from other government programs? It wouldn’t be unless it was handled differently from a typical government procurement. Several steps could be taken to minimize the probability of it falling into the same warped pattern as normal government procurement. First, the objective would have to be clearly established and adequate funds committed so there would be no necessity to hide actual costs. This was done successfully on the Saturn/Apollo program. Second, the procurement process should be placed in the hands of a new government agency that would be established for this project only and would not yet have developed a deeply ingrained pattern of bureaucratic inertia in its people and policies. Third, fixed-price contracting should be used wherever possible, even during the development phase, with fixed-price follow-on production contracts being the carrot for the contractors to use honest estimates. Development costs should not be the primary evaluation criteria; instead, performance, procurement costs, maintenance costs, and operational costs should be the primary evaluation criteria.

In any event, when all the perturbations caused by government contracting practices are eliminated, the use of cost estimating relationships based on comparable technology of past programs and accounted for in man-hours are quite accurate for projecting the magnitude of large program costs, as long as the estimator knows the complexity of the program.

One thing that is unique to the estimates made for the cost of solar power satellite program development is the fact that it includes all costs necessary to bring the system into being and produce it as if everything had to be done for only that program. Let me explain what I mean. The cost estimates include the cost for assembly bases in space; the development of a new transportation system; the construction of a launch facility; the building of factories to manufacture solar cells, klystrons, and other high production components; and all the elements of the satellite and receiver. This is due to the fact that NASA and DOE had taken the approach on the solar power satellite program that all costs must be accounted for no matter how they are financed. This is not done for any other energy system. For example, the cost of building a new transportation system for coal, whether it be a slurry pipeline or new railroad, is never included as part of the cost of using coal as an energy source. Synthetic fuel costs were often stated as marginal cost, which means that it is assumed you do not have to count the capital cost of the facility and equipment to process the fuel.

The development costs that were estimated by the Boeing study team for NASA are similar to those developed by the other team, headed by Rockwell International. They are stated in 1979 dollars, which means that the labor and material costs are what were experienced in 1979. Included are research costs, costs of a major demonstration unit, the first full-sized satellite, and all the supporting facilities. The total is $116 billion. If the cost of the infrastructure that can be used for other applications is taken out, the remaining cost is $33 billion.

The development costs I have given are based on the ground rules and technology base of 1979. Today, even though inflation would indicate the cost should be doubled, in reality it will be dramatically reduced because much of the infrastructure development cost included in the original estimate has been developed for other reasons. The US Space Station and the terrestrial solar cell industry are but two examples. Huge savings will be achieved with the use of a ground-based prototype of the satellite power generation and energy transmission systems. As I will discuss in a later chapter this will save many tens of billions of dollars and will make it possible for the utility industry to fund the development of the power plant part of the system.

While we were studying solar power satellites, President Carter proposed spending $88 billion on synthetic fuel even though it was going to be more expensive than oil. However, with the breakdown of the oil cartel, this program was later abandoned. Eight billion was spent to build the 799-mile-long Alaska pipeline from the North Slope of Alaska to Valdez. That is $10 million per mile just to carry oil across one state. From 1983 to 1993, the US oil companies by themselves spent $192 billion on drilling and exploration for oil and gas—with a result of 30% dry holes.

When we consider how much money has been spent on other energy systems without significant benefits, the cost of investing in our future by developing a solar power satellite system does not seem to be so expensive, even if it costs as much as the original $116 billion estimate.