The high cost of ordinary launch vehicles, the higher cost of the space shuttle, and the success of SpaceX can all be explained by institutional causes.
Some of the institutional causes of high cost for ordinary launch vehicles were mentioned above, including military heritage, need for high reliability, and a non-industrial culture. The fundamental cause of the past high commercial launch cost seems to be lack of competition. The US launch industry has been a monopoly, the United Launch Alliance (ULA), and its main customer has been the US government, NASA and the military, which need high reliability and had little incentive to exert cost pressure. The ULA lost most of the commercial market to Russia and Arianespace which are also heavily subsidized by their governments. (Zimmerman, 2012) The space shuttle had unique NASA cost drivers. About one-fourth of the shuttle operational costs went for “the general area of NASA center and program support, maintenance of capability, and product improvement.” “Another major cost driver in Shuttle is launch operations costs. The fact that 10,000 contractors and 1,000 civil service are needed … is indicative of the lack of operational simplicity. This marching army plus mission operations and crew operations personnel make up one third of the overall shuttle operations costs. The low Shuttle flight rate not only makes for inefficient use of personnel and facilities, it distorts the cost per flight calculations because of high fixed costs.” (Rutledge, 93-4063) SpaceX has low costs largely because it is vertically integrated, with largely in-house development of the components of its rockets. It carries out all phases of the product lifecycle, including design, engineering, manufacturing, software, integration, testing, launch, and operations. Most activities have been in a single large facility. The competing ULA is a systems integrator and launch operator with hundreds of subcontractors that have dozens of facilities spread all over the country, which is a political necessity for a government funded jobs program. SpaceX designs for simplicity, for instance the Falcon 9 uses 9 identical engines. The Falcon Heavy effectively uses three Falcon 9’s. Another key factor in SpaceX’s low costs is its young, highly motivated workforce of top graduates willing to work significant unpaid overtime. SpaceX uses state of the art automated manufacturing equipment “previously unheard of in the space industry, where hand assembly of components is still the norm.” (Greg, 2015) In 2010, NASA compared SpaceX’s cost to develop the Falcon 9 to the cost NASA’s models predicted using the traditional cost-plus-fee method. Using the NASA-AF Cost Model (NAFCOM), NASA estimated that it would have cost NASA $1,383 million to develop these systems using traditional contracting. The estimated SpaceX cost was $443 million, a 68% reduction from the traditional approach. SpaceX attributed their cost efficiencies to a few key factors:
1. Smaller workforce 2. Use of in-house development 3. Fewer management layers and less infrastructure 4. Commercial development culture The cost of Design, Development, Test and Evaluation (DDT&E) depends primarily on the size of the workforce needed. SpaceX estimates that subcontracting one dollar’s worth of in-house work would cost three to five dollars due to subcontractor overhead and profit. The commercial development approach includes a firm fixed price versus cost plus, no oversight, fixed requirements, disciplined systems engineering, and fixed funding instead of annual budgeting. (NASA, 2011) Perhaps the the key determinant of SpaceX’s lower cost was that modern management allowed a highly effective engineering effort. “SpaceX’s approach to rocket design, which stems from one core principle: Simplicity enables both reliability and low cost.” All the Falcon 9 engines are identical where other rockets use two or three to gain performance at higher cost. The Falcon 9 avionics and controls are triple-redundant. Elon Musk, SpaceX’s CEO, is also chief engineer and he claims. “I know my rocket inside out and backward.” The frequent management -engineering conflict of goals and communications gap seem eliminated. SpaceX’s organizational style is Silicon Valley, not NASA. “(T)he buzzwords of the business culture—lean manufacturing, vertical integration, flat International Conference on Environmental Systems management—are real and fundamental.

… This really is the greatest innovation of SpaceX: It’s bringing the standard practices of every other industry to space.” (Chaikin, 2012)