The Economics of NASA Mission Cost Reserves
Increases in NASA mission costs are well-noted but not well-understood, and there is little evidence that they are decreasing in frequency or amount over time. The need to control spending has led to analysis of the causes and magnitude of historical mission overruns, and many program control efforts are being implemented to attempt to prevent or mitigate the problem (NPR 7120). However, cost overruns have not abated, and while some direct causes of increased spending may be obvious (requirements creep, launch delays, directed changes, etc.), the underlying impetus to spend past the original budget may be more subtle. Gaining better insight into the causes of cost overruns will help NASA and its contracting organizations to avoid .them. This paper hypothesizes that one cause of NASA mission cost overruns is that the availability of reserves gives project team members an incentive to make decisions and behave in ways that increase costs. We theorize that the presence of reserves is a contributing factor to cost overruns because it causes organizations to use their funds less efficiently or to control spending less effectively. We draw a comparison to the insurance industry concept of moral hazard, the phenomenon that the presence of insurance causes insureds to have more frequent and higher insurance losses, and we attempt to apply actuarial techniques to quantifY the increase in the expected cost of a mission due to the availability of reserves. We create a theoretical model of reserve spending motivation by defining a variable ReserveSpending as a function of total reserves. This function has a positive slope; for every dollar of reserves available, there is a positive probability of spending it. Finally, the function should be concave down; the probability of spending each incremental dollar of reserves decreases progressively. We test the model against available NASA CADRe data by examining missions with reserve dollars initially available and testing whether they are more likely to spend those dollars, and whether larger levels of reserves lead to higher cost overruns. Finally, we address the question of how to prevent reserves from increasing mission spending without increasing cost risk to projects budgeted without any reserves. Is there a "sweet spot"? How can we derive the maximum benefit associated with risk reduction from reserves while minimizing the effects of reserve spending motivation?