Defence and space economics: contracts, backlog and reuse
Work out who carries a cost overrun, how many years of work a backlog covers, what a higher spending target adds, and why a reusable rocket cuts the cost per kilogram.
Industry brief, with a one-minute summary: Defence and spaceFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- Defence profit comes from winning long programmes, pricing the risk correctly and delivering on time; the margin is steady but rarely huge.
- With record backlogs, the question for many defence suppliers since 2024 has been how fast they can produce, not whether they will sell.
- A rocket used to be thrown away after one flight, so every launch paid for a whole new rocket.
Key idea
Defence profit comes from winning long programmes, pricing the risk correctly and delivering on time; the margin is steady but rarely huge. In space launch, the big idea is reuse: a rocket stage that flies many times spreads its cost over many launches.
| Company | Sales | Margin | Backlog |
|---|---|---|---|
| Rheinmetall (Germany) | About EUR 5.2 billion in the first half, up 39 percent | Operating margin about 15 percent | About EUR 80.5 billion, including expected call-offs from framework agreements |
| BAE Systems (UK) | About GBP 15.8 billion in the first half, up 9 percent | Underlying EBIT about GBP 1.7 billion, roughly 11 percent of sales | About GBP 84 billion, a record |
| Lockheed Martin (US) | About USD 20.1 billion in the second quarter alone | Net earnings about USD 1.8 billion in the quarter, roughly 9 percent of sales | About USD 230 billion, a record |
So-what
Margins of roughly 9 to 15 percent are typical of large defence contractors. The backlogs are several times a year's sales, which is why these companies can plan factories years ahead, and why a slow ramp-up, not a lack of orders, is now their main risk.
Worked case
Fixed price or cost-plus for an armoured vehicle programme in Poland
The prompt
A European defence company is negotiating a programme to build armoured vehicles for Poland and reports in EUR. It estimates the programme will cost EUR 400 million. The ministry offers two contracts: a fixed price of EUR 440 million, or cost-plus with a fixed fee of 7 percent of the estimated cost. The company thinks there is a real chance that costs run 15 percent over the estimate, because some suppliers are new. What profit does each contract give if costs are on estimate and if they overrun, and what does the ministry pay under cost-plus with the overrun? (Figures are illustrative.)
The structure
- Profit = what the company is paid minus what it costs
- Fixed price: profit = price minus actual cost
- Cost-plus: profit = the fee; the government pays actual cost plus the fee
- Compare both in the base case and the overrun case
Working it through
1. Fixed price, on estimate
EUR 440 million minus EUR 400 million of cost.
Fixed-price profit on estimate (EUR millions):440 - 400 = 402. Cost with a 15 percent overrun
EUR 400 million times 1.15.
Cost after the overrun (EUR millions):400 × 1.15 = 4603. Fixed price, with the overrun
The price stays at EUR 440 million, so the company loses money.
Fixed-price profit after the overrun (EUR millions):440 - 400 × 1.15 = -204. Cost-plus fee
7 percent of the EUR 400 million estimate, the same whatever happens to cost.
Cost-plus fee (EUR millions):400 × 0.07 = 285. What the ministry pays under cost-plus with the overrun
Actual cost of EUR 460 million plus the EUR 28 million fee.
Ministry's bill under cost-plus with the overrun (EUR millions):400 × 1.15 + 28 = 488
The recommendation
The company should prefer cost-plus, or ask for an incentive contract, unless it can lock in its supplier prices, because a fixed price earns EUR 40 million on estimate but loses EUR 20 million if costs overrun by 15 percent. First, the cost-plus fee of EUR 28 million is lower than the fixed-price profit on estimate, but it is safe. Second, the ministry faces the mirror image: under cost-plus it would pay EUR 488 million if costs overrun, against EUR 440 million fixed, so it will push for a fixed price or a shared incentive. The risk is that insisting on cost-plus loses the competition to a rival willing to accept a fixed price. As a next step, get firm quotes from the new suppliers and propose an incentive contract that shares any overrun.
Risks: A rival may accept a fixed price and win; Inflation in steel, energy and wages can push costs above the estimate even without mistakes; Late delivery can bring penalties on top of the cost overrun.
Rheinmetall reported a backlog of about EUR 80.5 billion at the end of June 2026 and expects 2026 sales of EUR 13.7 billion to EUR 14.2 billion. Using the middle of that range, how many years of sales does the backlog cover? Round to one decimal place.
A European country has a GDP of EUR 3,000 billion and spends 2 percent of it on defence. If it moves to the NATO core target of 3.5 percent of GDP, how much more does it spend each year, in EUR billions? (Figures are illustrative; GDP is held flat.)
Why reusable rockets changed launch
A rocket used to be thrown away after one flight, so every launch paid for a whole new rocket. The first stage (the large lower part with most of the engines) is the most expensive piece. If it lands and flies again, its cost is shared across many launches, and each flight only pays for checks and repairs, fuel, a new upper stage and launch operations. Reuse costs some payload, because fuel must be kept for landing. SpaceX has flown one Falcon 9 first stage 37 times (Spaceflight Now, August 2026).
Worked case
Cost per kilogram: an expendable rocket versus a reusable one
The prompt
A launch company compares two versions of its rocket and reports in USD. Expendable: a first stage costing USD 40 million, an upper stage costing USD 10 million, and USD 10 million for the nose cone, fuel and launch operations; it carries 20,000 kg. Reusable: the first stage costs USD 50 million to build (it needs landing legs and more engineering) and flies 20 times, each flight needs USD 1.5 million of recovery and refurbishment, the upper stage and the other costs are the same, and it carries 15,000 kg because it keeps fuel for landing. What is the cost per launch and per kilogram of each, and how many flights must the reusable stage make to beat the expendable one per kilogram? (Figures are illustrative.)
The structure
- Cost per kg = cost per launch / payload
- Expendable: every part is new each time
- Reusable: first stage cost / number of flights + refurbishment + upper stage + operations
- Break-even flights: when the reusable cost per kg equals the expendable one
Working it through
1. Expendable cost per launch
USD 40 million plus 10 plus 10, in USD millions.
Expendable cost per launch (USD millions):40 + 10 + 10 = 602. Expendable cost per kg
USD 60 million divided by 20,000 kg.
Expendable cost per kg (USD):60,000,000 ÷ 20,000 = 3,0003. Reusable cost per launch
First stage share of 50 divided by 20, plus 1.5 of refurbishment, plus 10 for the upper stage and 10 of other costs.
Reusable cost per launch (USD millions):50 ÷ 20 + 1.5 + 10 + 10 = 244. Reusable cost per kg
USD 24 million divided by 15,000 kg.
Reusable cost per kg (USD):24,000,000 ÷ 15,000 = 1,6005. Flights needed to break even
To match USD 3,000 per kg on 15,000 kg, a launch may cost up to USD 45 million. Take away the 21.5 million of costs paid every flight, which leaves 23.5 million for the first stage share: 50 divided by 23.5 is about 2.1, so the third flight already beats the expendable rocket.
Flights at which reuse breaks even:50 ÷ (3,000 × 15,000 ÷ 1,000,000 - 1.5 - 10 - 10) = 2.13
The recommendation
The company should build the reusable version if it has enough launches to fly each first stage many times, because on these numbers the cost per kilogram falls from about USD 3,000 to about USD 1,600, almost half. First, reuse spreads a USD 50 million stage over 20 flights, so it adds only USD 2.5 million per launch. Second, reuse pays for itself from about the third flight, so the real question is demand: a stage that flies twice a year gains little. The risk is that refurbishment costs more than planned or that a lost stage wipes out the saving. As a next step, check how many launches a year the company can sell, including its own satellites.
Risks: A failed landing loses the stage and its future flights; Refurbishment may cost more and take longer than planned; Without enough demand, stages sit idle and the saving shrinks.
With record backlogs, the question for many defence suppliers since 2024 has been how fast they can produce, not whether they will sell. Ramp-up depends on the slowest input: explosives and propellants, specialist steel, chips, test ranges, and skilled workers. In a capacity case, map the supply chain for the single slowest part before building a new final assembly line.
Why can a reusable rocket have a lower cost per kilogram even though it carries less?
Sources for this lesson (6)
- Rheinmetall: half-yearly financial report H1 2026 (August 2026, official)
- Lockheed Martin: second quarter 2026 financial results (July 2026, official)
- BAE Systems: 2026 half year results (July 2026, official announcement)
- NATO: The Hague Summit Declaration, 25 June 2025 (official text)
- Spaceflight Now: Falcon 9 booster B1067 lands after a record 37th flight (August 2026)
- Recognized public explanations of case-interview concepts and frameworks
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