Section 1.9 - Economics

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Economics is an important factor in most engineering projects, including space projects. Among its other uses, money is a measure of value to the end users of a project, and a measure of the resources a project will consume. If there is too little of the former in relation to the latter, the project may never happen. Resources include human labor, physical resources, and intangibles such as rights to use something. We include project organization under economics because the resources to run the organization that designs and builds a project is usually a major part of total required resources.

Project Organization[edit]

An organization capable of designing and building complex space projects is usually itself a complex entity. Therefore systems engineering methods can be applied to the design of the organization, as well as to the space hardware they produce. This is not often done for several reasons. Organizations often have a history and existing structures and methods in place for how they operate. Those may have developed before they started on space projects, and even before the systems engineering method existed. If existing organizations and methods have worked well enough, the need to optimize or update them may not be felt. People are often resistant to change, especially when that change involves re-designing or eliminating their own job. Some people are attracted to the power or money that comes from a position within an organization, and thus oppose any change that would displace them from that position. Many people in a high position believe they know better how to organize and run things. This results partly from the well known psychological cognitive bias of Illusory Superiority, where people in general misjudge their ability relative to others. It also partly is due to the belief that reaching a high position by itself demonstrates superior knowledge and ability. This is a fallacy because organizations in general are capable of doing things no single individual can do, like design an entire airplane or computer operating system. Therefore as a whole they should be more capable of designing the organization itself than any single individual within it.

Organization as a System[edit]

The organization which carries out a project may be considered a system where inputs like staff time, office buildings, and factory buildings are converted into outputs like launch vehicles and spacecraft. By comparing the outputs to the inputs, you can decide if a given project is worth doing. The internal functions and flows within the organization determine the relationship of inputs to outputs, and thus are subject to analysis and optimization. Since money is often used as a common measure to compare disparate resource and output types, economic theory and methods are important in organization decisions. Money should not be the sole measure of how an organization operates, though, and a proper weighting of other measures should be established as part of an organization's design.

Management is traditionally placed on top of an organization structure, but that is a matter of history, not necessity. They combined several functions such as planning, decision making, and communication in a pre-electronic era. Modern electronic systems allow everyone on a project to have immediate access to all project information, so the need for top-down hierarchies is reduced. Some kind of organization structure is still needed, but pure autocracy is not the only kind of structure that can be used. A rational structure can be developed from considering the various functions and tasks to be done. These functions include:

  • Obtain human and material resources
  • Arbitrate decisions
  • Interact with outside world
  • Planning and scheduling

Project Funding[edit]

Large projects require a source of funds in order to pay for work and material resources used. The sources can be divided into three main sectors - government, business, and social - which relate to major parts of economies in general. The categories are not entirely separate. Governments often hire business to execute parts of projects, and business uses government-owned launch sites, and partnerships between sectors are common. The differences involve sources of funds and objectives, but not as much the technical issues. A rocket engine works the same way no matter who pays for it. What kind of rocket engine gets built, however, may depend on available funds and who is the source.

Government Funding[edit]

Governments were the first large sources of funds for space projects. They obtain their funds through taxation or appropriation, and decide how to apply the funds to projects by political processes. This is normally via a process of annual budgets, where space projects are part of more general government funding. In theory the projects are carried out for the public good, but in practice other factors enter into the decision-making. Typically space projects are carried out with a mixture of internal government staff and facilities, and external procurement.

Business Funding[edit]

Businesses normally operate to generate profits for their owners. Early space projects were high risk, and so were mostly carried out by governments. Businesses were hired to carry out parts of these projects because of special skills or production capacity the government did not have. Since government guaranteed payment, this lowered the risk and businesses were willing to participate. Communications emerged as a profitable space business because information has no rest mass, and so the high cost of space transport did not affect that business as much. Other space businesses are expected to grow as transport costs come down. Businesses obtain their funds from original investors, retained previous profits, and borrowing on the open market.

Social Funding[edit]

Social funding comprises non-profit foundations, research organizations, private donations, and volunteer efforts. Large terrestrial telescopes are an example of projects funded by a mixture of social and other sources.

Financial Analysis[edit]

Since money is a major factor in many large projects, various tools and methods are used in Financial Analysis, the process of looking at the money components of a project to get a better understanding of it. Financial estimates are developed before money is actually required to determine if a project is worth starting, and how much funding will be required. They are maintained during a project to compare progress to estimates, in order see if additional funds are needed or if there is surplus to apply elsewhere.

Life Cycle Cost Analysis[edit]

This is an economic method that accounts for all costs of a project, from initial concept to final disposal. It parallels the general Systems Engineering method of considering the entire life cycle of a project from start to finish, but focuses on the financial aspects. We will start with some basic financial concepts:

Time Value of Money: - Human life is finite. Therefore the amount of time you can use resources, or their equivalent in money, is shorter at a future date than it is in the present. Changes between now and a future date may affect the desirability of any given item. For example, a VHS tape that may have been desirable at one time has become less so due to changes in technology. Inflation can affect the future value of money itself. For these reasons, humans attach greater value to something now than in the future. The measure of how much more value the present has over the future is the Interest Rate. This is the percentage increase per time, usually years, needed to equate a future value to a present one. In other words, how much larger a future value do you demand to delay a present use? Reversing the time order, a future value is reduced by a percentage per time, called the Discount Rate, to equate it to the present.

Costs and benefits of a space project may extend for a number of years, and costs generally happen before benefits. Therefore both are equated to Present Value by applying the discount rate. Which discount rate to use depends on who is providing funding. A government generally has a lower one than a business because they have a longer time horizon to get benefits.

Financial Estimating[edit]

Future costs and benefits are not known exactly, especially when a project includes developing new technology. Since these predictions are often key in deciding if a project happens at all, or which design options are used, it is very important that they have as sound a basis as possible. Therefore various estimating methods have been developed to predict the financial flows for a project. They vary in detail and accuracy based on stage of the project. Regardless of which method is used, some margin or range should be included in any estimate to allow for errors in estimating, or unanticipated costs. Methods include:

  • Historical Costs - This is based on similar past projects, and uses units like number of person-hours, drawings, or lines of software. These are multiplied by historical rates for the given parameter.
  • Parametric Estimates - These are formulas for an entire finished item using multiple parameters such as mass and stress level, and factors such as "simple design" or "complex design" to modify the basic values.
  • Bottom-Up Estimates - This approach makes estimates for individual parts of a project at a detailed level, then summing them to get the total cost.
  • Supplier Quotes - A supplier or sub-contractor who makes a definite quote on part of a project replaces an estimate with a specific number.

Large projects typically have many cost components, and use specialists for cost estimating and tracking, with tools like spreadsheets to integrate the data into useful summaries.

NASA has a Cost Estimating Handbook developed internally for space projects. The International Society of Parametric Analysts has a Handbook for more general projects.

Make or Buy Analysis[edit]