The cost of space: Navigating fixed-price bidding in the space and satellite sector

We explore this further below with a focus on public procurement, noting that many of these issues also arise in the private sector and there are similar strategies that can be adapted to address these in a private sector context. 

The challenge in space

Fixed-price contracts are commonly used in the public and private sectors globally, so why are they so polarising when it comes to the space and satellite sector? One of the key issues is the inherent uncertainty and risk that comes with space missions and related activities: the maturity of the technology involved is limited, the overall projects have long lead times, and the activities carry high risk at almost all stages of development. All these factors create an environment in which it may be difficult for companies to develop fixed pricing that will secure profit margins with some level of assurance. To put it briefly, “space is hard”, and it is difficult to build that into pricing schedules. However, there are some practical ways that bidders can try to address these issues either at the bidding / contract negotiation stage or more broadly in terms of engaging with relevant public bodies to work towards tailored procurement approaches that suit the particular mission and technology involved. 

Practical tips for navigating a fixed-price bid

Putting aside the debate of whether fixed-price contracts are appropriate for space and satellite related procurement, what practical options are available to bidders (and if successful, contractors) to mitigate as much of the risk associated with a fixed-price model as possible? 

1. Understand the procurement process: consider whether it allows for negotiation of the contract and / or scope. For example, in the EU there are specified routes to market when a contract falls within the scope of regulated procurement. Some of these routes allow for varying levels of negotiation, including: 
   
   • competitive procedure with negotiation;
   • competitive dialogue; and
   • innovation partnership.
   
   

   Where these processes are used, there may be opportunities and greater flexibility to mitigate risks associated with a fixed-price bid, through negotiating certain aspects of the contract and / or the scope of the procurement. On the other hand, a procurement process that does not permit any negotiations may be too risky of an opportunity. Therefore, the type of procurement process being utilised is always an important factor when considering whether to bid.

2. Consider whether a variant bid is possible: a variant bid is a response to a procurement in which the bidder proposes an innovative or alternative approach to meeting the buyer’s needs, including departing from the methodology or requirements laid out in the specification. For example, this may allow a bidder to amend the specification and tailor it to their particular satellite technology so that they can develop a fixed-price bid. Similarly, it may create the scope to submit a non-fixed price bid (e.g. propose a different pricing model). Whether a variant bid is permitted depends on the rules applying to the specific procurement process and this will vary case-by-case and based on the jurisdiction. A variant bid can be a complex process and requires a sophisticated procurement approach, so engagement with the buyer may be needed to ensure that they are open to variant bids and that the bid meets their overarching requirements. 
3. Emphasise relief event mechanisms: in circumstances where new technology is involved or where there is uncertainty in relation to the risks that may arise, heavier emphasis should be put on relief event mechanisms. These are mechanisms that allow the contractor to be excused from performance or potentially even breach of the contract in certain circumstances. This includes force majeure clauses but can also extend, for example, to identifying where there are dependencies on the customer or particular events occurring which may justify relief (e.g. delays in case of unforeseen issues with the technology or launch failures). 
4. Consider terms that allow flexibility in relation to time and cost: it may be possible to agree a regime that allows the contractor to flag up situations where they may be hitting delay or additional costs. This may allow scope for the relevant terms to be renegotiated or uplifted to accommodate the circumstances. Whether this is possible may depend on the particular procurement opportunity and the rules in that jurisdiction.

Overall, a key element for an effective fixed-price bid and subsequent contract is a good understanding of the procurement process that is being followed, early consideration of the commercial aspects and risks of the deal, followed by careful negotiation and drafting to address these as appropriate. 

Alternative options where a fixed-price isn’t possible 

In some cases, a fixed-price contract simply may not be the best vehicle for a project, or a company may not be able to develop fixed pricing with enough accuracy and therefore may choose to opt out of particular bidding opportunities. Potential bidders ruling themselves out of participating in tenders for these reasons may reduce access to innovative solutions and choice.

One of the mechanisms used by public bodies to support research and development is grant funding. In this case, the funding body may look to provide fixed funding amounts to successful applicants with the aim of raising the relevant technology to a higher readiness level following the support. The UK’s C-LEO program is an example of this kind of support and we have published a separate update on this here. 

Another important approach that we would like to explore in a bit more detail is pre-market engagement which may be useful in helping to develop a specification that is appropriate for a fixed-price but it is also one of the best tools available to engage with buyers (including public bodies) to tailor approaches to market so that they are aligned with industry’s expectations and capabilities. 

We highlight the following strategies to keep in mind in relation to pre-market engagement.

1. Proactive outreach: space and satellite companies may find it useful to initiate dialogue with relevant space agencies and public bodies well before formal procurement processes commence. By reaching out early, industry can express their capabilities, keep the public sector up to date with emerging and novel technology, understand the public sector’s needs and conversely share the needs of industry (including challenges and priorities that industry is facing). This proactive approach demonstrates commitment to positively shaping public procurement processes and can help to position a company as a valuable partner.
   
   
2. Participate in industry days and workshops: space agencies and public bodies often organise industry days, workshops, and conferences related to upcoming procurements. Additionally, expressions of interest or requests for information may be released in relation to specific upcoming or proposed opportunities which may allow for more tailored and focussed discussions. We recommend that interested companies keep an eye out for these updates and subscribe to relevant communication channels to stay across the latest opportunities.
   
   
3. Be mindful of fairness and transparency: a key risk of participating in pre-market engagement is unduly influencing the process or becoming conflicted from bidding for the procurement. We recommend that any involvement in advising or assisting with the preparation of a procurement is approached with caution. Participating in pre-market engagement in general does not necessarily result in exclusion from the actual procurement, but appropriate and robust safeguards may need to be put in place on the industry and buyer sides (e.g. information and ethical wall barriers, neutralising potential advantages by releasing relevant information to all bidders). Companies should also be mindful of protecting their IP during any engagement processes with public bodies, this is a key issue in relation to novel and innovative space technology.
   
   
4. Consider alternative models - some of the contractual models that have been successful or are being considered for space and satellite procurements include:

• cost-plus or cost-reimbursement contracts – in this model, the buyer pays the contractor costs for allowed expenses, plus an agreed percentage profit margin; and
• value-based or service-based pricing – this involves setting the price based on the perceived value of a product or services to the customer.

However, even where an alternative model is adopted initially, public bodies will often seek to move towards a fixed-price structure as particular technology matures, so this is important for companies to consider in their overall commercial strategy. 

Effective pre-market engagement benefits both industry and the public sector, leading to better outcomes for all stakeholders. Given the debate around fixed-price contracts for space procurement, we may see pre-market engagement being increasingly used to better tailor procurement models to cater to the unique environment of space development. 

Our international team has commercial and regulatory expertise in the space and satellite sector and can assist with the complex issues that may arise in the procurement lifecycle, as well as end-to-end legal, regulatory and advocacy support for space and satellite projects more broadly. We also monitor funding opportunities and related developments in the space sector and provide regular updates to interested contacts, please reach out if this is of interest.