Houston, We Have a Problem
By Joe Andersen; Photo Credit: Joe Skipper/Reuters
On September 16th, 2014, NASA announced that Boeing was awarded a $4.2 Billion fixed-price contract. The contract was awarded to develop the Starliner spacecraft, eventually transport U.S. crews to and from the International Space, and end reliance on Russian launch services.[1] In the Source Selection Statement, NASA gave Boeing the highest Mission Suitability Score and Confidence Rating of all offerors, expressing its trust in Boeing to fulfill the contract.[2]
The original contract required Boeing to fully develop Starliner no later than 2017.[3] However over seven years later, Starliner still has not been certified for regular, crewed missions to the space station. The capstone of Starliner’s development delays was the Crew Flight Test which launched on June 5th, 2024, and left two NASA astronauts stranded on the International Space Station as Starliner was deemed unfit to handle the return flight to Earth.[4] This disaster resulted in Starliner returning to earth without any astronauts aboard and forced NASA to return the astronauts on SpaceX’s spacecraft.
Boeing’s contract is fixed price, meaning that the $4.2 billion award is not subject to any adjustment. This means that Boeing bears most of the risk as they must control costs or won’t be able to turn a profit.[5] Boeing’s latest 10-Q states that it lost $250M on Starliner this quarter, bringing the program’s losses to nearly $1.9B.[6] These losses are only likely to increase if NASA requires Starliner to perform another crew flight test before certification.
Starliner is Boeing’s latest debacle in a series of headlines that includes union strikes, airplane crashes, a DOJ plea deal that made it a felon, the death of two whistleblowers, and an eminent downgrade to junk bond status. Kelly Ortberg, who was named CEO this past August, is reportedly considering the sale of Boeing’s space business in an effort to tackle the company’s enormous financial challenges.[7] This begs the question: What is going to happen with the Starliner contract?
Even with the consent of the government, the transfer of federal procurement contracts is impermissible unless it meets one of the FAR’s exceptions.[8] This protects the policy interest that procurement contracts should not be awarded without full and open competition among all offerors. Due to this regulation, it is likely impermissible for Boeing to sell just its space business, novate the contract to the buyer, and rid itself of its contractual obligations. Attempts to spinoff just the business would likely run afoul of the regulation’s purpose, as “a partial sale puts the government at risk of being stuck with a contractor that lacks the capabilities that were the basis of the government’s award.”[9] Perhaps even more importantly, it is not a given that Boeing would be able to find a buyer. Starliner was developed for ISS crewed missions and there is no other clear path to profitability. NASA is likely to deorbit the ISS in 2031 and most commercial destinations for a Starliner-type spacecraft remain in the concept stage.[10]
Alternatively, if Boeing cannot find a buyer and is unable to fulfill its contractual obligations, NASA may terminate the contract for default. A contractor who is terminated for default is not entitled to anticipated but unearned profit on unperformed work.[11] Moreover, the government is entitled to the repayment of advance and progress payments and may transfer title and require delivery of completed supplies and manufacturing materials.[12] This would be disastrous for Boeing as it will limit its ability to obtain future procurement contracts and would make them liable for any excess costs of re-procurement. Per the contract, re-procurement costs could reach up to 200 million dollars.[13]
NASA also has the option to terminate the contract for convenience which would allow the parties to end the contract amicably and avoid the litigation process of a default termination. Although this would be extremely beneficial for Boeing, it would pass many costs of the failed contract onto NASA, which makes it more likely that the government will pursue a termination for default.
As Boeing’s financial troubles continue to worsen it appears increasingly likely that the bloated and delayed Starliner program will be shut down. If Boeing is unable to sell the program and is unable to find the cash to fund Starliner through the certification process, a termination for default would only pile onto its broader finance issues. Boeing must make a decision soon as Starliner’s window for profitability continues to shrink every day. More and more missions are awarded to SpaceX’s dragon spacecraft, and with the ISS decommissioning in seven years, Starliner certification makes less and less sense.
Joe Andersen is a 2L at Vanderbilt Law School. He plans on doing transactional work after law school.
[1] Stephanie Schierholz & Stephanie Martin, NASA Chooses American Companies to Transport U.S. Astronauts to International Space Station, NASA (Sept. 16, 2014), https://www.nasa.gov/news-release/nasa-chooses-american-companies-to-transport-u-s-astronauts-to-international-space-station/.
[2] William G. Gerstenmaier, Source Selection Statement for CCtCAP, NASA (Sept 15, 2014), https://www.nasa.gov/wp-content/uploads/2019/08/CCtCap-Source-Selection-Statement-5083.pdf?emrc=8a4806.
[3] Id.
[4] Gary Daines, FAQ: NASA’s Boeing Crew Flight Test Return Status, NASA (Aug. 20, 2024), https://www.nasa.gov/missions/station/commercial-crew/starliner-faq/.
[5] James F. Nagle, Contracting with the Federal Government, GPSolo, JULY/AUGUST 2000, at 42.
[6] The Boeing Co., Quarterly Report (Form 10-Q) (Oct. 23, 2024).
[7] Sharon Terlep & Micah Maidenberg, Boeing Explores Sale of Space Business, The Wall Street Journal (Oct. 25, 2024), https://www.wsj.com/science/space-astronomy/boeing-explores-sale-of-space-business-fa7fa3a9.
[8] 48 C.F.R. § 42.1204.
[9] William A. Roberts, III & Kay Tatum, The Novation of Government Contracts and the Unreliable and Unpredictable “Operation of Law” Exception, 50 The Procurement Law. 1, 1 (2014).
[10] See Low Earth Orbit Destinations, Blue Origin, https://www.blueorigin.com/destinations (last visited Nov. 4, 2024).
[11] 64 Am. Jur. 2d Public Works and Contracts § 117.
[12] See FAR 49.402-2 (2024).
[13] Gerstenmaier, supra note 2.