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Space Station: Cost Control Problems Are Worsening (Letter Report, 09/16/97, GAO/NSIAD-97-213)

Pursuant to a congressional request, GAO provided information on the
International Space Station (ISS), which is being developed by the
United States and others, focusing on: (1) the Russian's performance
problems and the National Aeronautics and Space Administration's (NASA)
reaction to them, including the additional cost and cost risk assumed by
NASA; (2) cost and schedule experience under the prime contract; and (3)
the status of and outlook for the program's financial reserves. GAO also
identified actions taken by NASA to keep the space station program's
funding within certain limits through the completion of the station's
assembly.
GAO noted that: (1) in May 1997, NASA revised the space station assembly
sequence and schedule to accommodate delays in the production and
delivery of the Service Module; (2) this revision occurred after more
than a year of speculation regarding Russia's ability to fund its space
station manufacturing commitments; (3) to help mitigate the adverse
effects of the Russians' performance problems and address the
possibility that such problems would continue, NASA developed and began
implementing step 1 of a three-step contingency plan; (4) NASA has
budgeted an additional $300 million from other NASA activities for the
space station program to cover the hardware cost under step 1; (5) NASA
will also incur other costs under step 1 that have not yet been
estimated; (6) significant additional cost growth could occur in the
station program if NASA has to implement steps 2 and 3 of its
contingency plan; (7) the cost and schedule performance of the station's
prime contractor has continued to steadily worsen; (8) from April 1996
to July 1997, the contract's cost overrun quadrupled to $355 million,
and the estimated cost to get the contract back on schedule increased by
more than 50 percent to $135 million; (9) so far, NASA and prime
contractor efforts have not stopped or significantly reversed the
continuing deterioration; (10) the station program's financial reserves
have also significantly deteriorated, principally because of program
uncertainties and cost overruns; (11) the near-term reserve posture is
in particular jeopardy, and the program may require additional funding
over and above the remaining reserves before the completion of station
assembly; (12) to date, NASA has taken a series of actions to keep the
program from exceeding its funding limitations and financial reserves;
(13) NASA is accounting for these actions in ways that enable it to
report its continuing compliance with the funding limitations; (14)
however, to show continuing compliance in some cases, NASA has had to
redefine the portion of the program subject to the funding limitations;
(15) thus, the value of the current limitations as a funding control
mechanism is questionable; (16) since GAO's June 1997 testimony, further
cost and schedule problems have materialized and NASA has acknowledged
that the potential for cost growth in the program has increased; and
(17) GAO believes the program has reached the point where the Congress
may wish to review the entire program.
--------------------------- Indexing Terms -----------------------------
 REPORTNUM:  NSIAD-97-213
     TITLE:  Space Station: Cost Control Problems Are Worsening
      DATE:  09/16/97
   SUBJECT:  Prime contractors
             Aerospace research
             Future budget projections
             International cooperation
             Research and development costs
             Cost analysis
             Budgetary reserves
             International relations
             Cost overruns
             Space exploration
IDENTIFIER:  NASA International Space Station Alpha Program
             Russia
             Soyuz Spacecraft
             Canada
             Brazil
             Japan
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Cover
================================================================ COVER
Report to Congressional Requesters
September 1997
SPACE STATION - COST CONTROL
PROBLEMS ARE WORSENING
GAO/NSIAD-97-213
Space Station
(707239)
Abbreviations
=============================================================== ABBREV
  DCMC - Defense Contract Management Command
  ESA - European Space Agency
  ISS - International Space Station
  NASA - National Aeronautics and Space Administration
Letter
=============================================================== LETTER
B-276834
September 16, 1997
The Honorable Dale Bumpers
United States Senate
The Honorable John Dingell
House of Representatives
As you requested, we have updated certain aspects of our July 1996
report on the International Space Station (ISS), which is being
developed by the United States and others.\1 Specifically, this
report addresses the Russians' performance problems and the National
Aeronautics and Space Administration's (NASA) reaction to them,
including the additional cost and cost risk assumed by NASA; cost and
schedule experience under the prime contract; and the status of and
outlook for the program's financial reserves.  You also asked us to
identify actions taken by NASA to keep the space station program's
funding within certain limits through the completion of the station's
assembly. 
--------------------
\1 Space Station:  Cost Control Difficulties Continue
(GAO/NSIAD-96-135, July 17, 1996). 
   BACKGROUND
------------------------------------------------------------ Letter :1
NASA and its international partners--Japan, Canada, the European
Space Agency (ESA), and Russia--are building the ISS as a permanently
orbiting laboratory to conduct materials and life sciences research
under nearly weightless conditions.  Each partner is providing
station hardware and crew members and is expected to share operating
costs and use of the station.  The NASA Space Station Program Manager
is responsible for the cost, schedule, and technical performance of
the total program.  The Boeing Corporation, the station's prime
contractor, is responsible for ISS integration and assembly.  As of
June 30, 1997, the prime contractor reported that over 200,000 pounds
of its station hardware was being built or had been completed. 
According to NASA, by the end of fiscal year 1998, hardware for the
first six flights will be at Kennedy Space Center for launch
processing. 
In our July 1996 report and subsequent testimony,\2 we noted that the
cost and schedule performance of the space station's prime contractor
had deteriorated and that the station's near-term funding included
only limited financial reserves.\3 We also identified an emerging
risk to the program:  the indications of problems in the Russian
government's ability to meet its commitment to furnish a Service
Module providing ISS power, control, and habitation capability. 
For several years, the space station program has been subject to a
$2.1 billion annual funding limitation and a $17.4 billion overall
funding limitation through the completion of assembly, which until
recently had been scheduled for June 2002.  According to NASA, these
funding limitations, or caps, came out of the 1993 station redesign. 
Previous redesigns had been largely financially driven and the caps
were intended to stabilize the design and ensure that it could be
pursued.  However, the caps are not legislatively mandated, although
references to them in congressional proceedings and reports indicate
that NASA was expected to build the space station within these
limits.\4 When the caps were first imposed, the program had about $3
billion in financial reserves. 
In our July 1996 report, we concluded that, if program costs
continued to increase, threats to financial reserves worsened, and
the Russian government failed to meet its commitment in a timely
manner, NASA would either have to exceed its funding limitation or
defer or rephase activities, which could delay the space station's
schedule and would likely increase its overall cost.  In June 1997
testimony, we said that, if further cost and schedule problems
materialized, a congressional review of the program would be needed
to determine the future scope and cost level for a station program
that merits continued U.S.  government support.\5 Over the past
several months, NASA has acknowledged that the potential for cost
growth in the program has increased. 
--------------------
\2 Space Station:  Cost Control Difficulties Continue
(GAO/T-NSIAD-96-210, July 24, 1996). 
\3 Financial reserves are used to fund unexpected contingencies, such
as cost growth, schedule delays, or changes in project objectives or
scope. 
\4 These limitations apply only to the station budget line providing
funds to support development, utilization, and operation activities. 
This budget line does not cover all station and station-related
requirements, including NASA personnel and personnel-related
activities, space shuttle launch support, and shuttle performance
improvements needed to meet station requirements. 
\5 Space Station:  Cost Control Problems Continue to Worsen
(GAO/T-NSIAD-97-177, June 18, 1997). 
   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
In May 1997, NASA revised the space station assembly sequence and
schedule to accommodate delays in the production and delivery of the
Service Module.  This revision occurred after more than a year of
speculation regarding Russia's ability to fund its space station
manufacturing commitments.  To help mitigate the adverse effects of
the Russian's performance problems and address the possibility that
such problems would continue, NASA developed and began implementing
step 1 of a 3-step contingency plan.  NASA has budgeted an additional
$300 million from other NASA activities for the space station program
to cover the hardware costs under step 1.  NASA will also incur other
costs under step 1 that have not yet been estimated.  Significant
additional cost growth could occur in the station program if NASA has
to implement
steps 2 and 3 of its contingency plan. 
The cost and schedule performance of the station's prime contractor
has continued to steadily worsen.  From April 1996 to July 1997, the
contract's cost overrun quadrupled to $355 million, and the estimated
cost to get the contract back on schedule increased by more than 50
percent to $135 million.  So far, NASA and prime contractor efforts
have not stopped or significantly reversed the continuing
deterioration.  The station program's financial reserves have also
significantly deteriorated, principally because of program
uncertainties and cost overruns.  The near-term reserve posture is in
particular jeopardy, and the program may require additional funding
over and above the remaining reserves before the completion of
station assembly. 
To date, NASA has taken a series of actions to keep the program from
exceeding its funding limitations and financial reserves.  NASA is
accounting for these actions in ways that enable it to report its
continuing compliance with the funding limitations.  However, to show
continuing compliance in some cases, NASA has had to redefine the
portion of the program subject to the funding limitations.  Thus, the
value of the current limitations as a funding control mechanism is
questionable. 
Since our June 1997 testimony, further cost and schedule problems
have materialized and NASA has acknowledged that the potential for
cost growth in the program has increased.  More complete estimates of
the cost and schedule impacts of ongoing and planned changes to the
program are scheduled to be available later this year.  This
information is expected to provide a more complete and current
picture of the cost and schedule status of the program and clarify
some of the major future cost risk it faces.  We believe the program
has reached the point where the Congress may wish to review the
entire program.  Such a review should focus on obtaining
congressional and administration agreement on the future scope and
cost level for a station program that merits continued U.S. 
government support.  In view of the expected availability of revised
cost estimates, the first opportunity for such a review would be in
conjunction with NASA's fiscal year 1999 budget request. 
   RUSSIAN PERFORMANCE PROBLEMS
   CAUSE ADDITIONAL NASA ACTIVITY
------------------------------------------------------------ Letter :3
As a partner, Russia committed to making a variety of contributions
to the ISS.  These contributions include (1) the Service Module to
provide crew habitation during assembly; (2) the Science Power
Platform to help maintain the station's orientation; (3) launch
services to reboost and resupply the station, including the provision
of propellant; and (4) Soyuz spacecraft to provide crew return
capability during station assembly.\6
In late 1995, NASA became concerned about Russia's ability to provide
steady and adequate funding for its commitments.  According to the
NASA Administrator and station program officials, the Russian
government said repeatedly that the problem would be resolved,
despite mounting evidence to the contrary.  Finally, in the fall of
1996, Russia formally notified NASA that funding difficulties would
delay the completion of the Service Module, which is a critical
component for early assembly.  Subsequently, NASA designed a
three-step recovery plan.  Step 1 focuses on adjusting the station
schedule for an 8-month delay in the availability of the Service
Module and developing temporary essential capabilities for the
station in case the Service Module is further delayed by up to 1
year.  Major activities in this phase include delaying the launch of
station components that are to precede the Service Module into orbit
and building an Interim Control Module to temporarily replace the
Service Module's propulsion capability.  Step 1 is underway; the new
or modified hardware being developed will be completed even if Russia
maintains the Service Module's revised schedule and delivers it on
time.  NASA officials told us that Russia has resumed its financial
commitment, the Service Module assembly has restarted, and
significant progress is being made. 
Step 2 is NASA's contingency plan for dealing with any additional
delays or the Russian government's failure to eventually deliver the
Service Module.  This phase could result in permanently replacing the
Service Module's power, control, and habitation capabilities.  NASA
will decide later this fall on whether to begin step 2.  Under step 3
of NASA's plan, the United States and other international partners
would have to pick up the remaining responsibilities the Russian
government would have had, such as station resupply and reboost
missions and crew rescue during assembly.  A decision on step 3 is
planned for sometime next year, at the earliest. 
In addition to their effects on space station development activities,
these recovery plan steps place additional requirements on the space
shuttle program.  Under the plan, the space shuttle may be needed to
launch and deliver the Interim Control Module and perform station
resupply missions now expected to be done by Russia.  Although the
full impact of the recovery plan on the space shuttle program is not
yet known, the plan has already resulted in the addition of two
shuttle flights during the station's assembly. 
--------------------
\6 Russia is also receiving funds under contract to build the
U.S.-owned Functional Cargo Block to provide the ISS' initial
guidance and navigational control capability. 
   PRIME CONTRACTOR'S COST AND
   SCHEDULE PERFORMANCE CONTINUES
   TO DETERIORATE
------------------------------------------------------------ Letter :4
The prime contractor's cost and schedule performance on the space
station, which showed signs of deterioration last year, has continued
to decline virtually unabated.  Since April 1996, the cost overrun
has quadrupled, and the schedule slippage has increased by more than
50 percent.  Figure 1 shows the cost and schedule variances from
January 1995 to July 1997.  Cost variances are the differences
between actual costs to complete specific work and the amounts
budgeted for that work.  Schedule variances are the dollar values of
the differences between the budgeted cost of work planned and work
completed.  Cost and schedule variances are not additive, but
negative schedule variances can become cost variances, since
additional work, in the form of overtime, is often required to get
back on schedule. 
   Figure 1:  Cost and Schedule
   Variances on the Space Station
   Prime Contract (Jan.  1995 to
   July 1997)
   (See figure in printed
   edition.)
Note:  The zero line represents meeting planned cost and schedule. 
Negative schedule variances are the estimated cost of work to get
back on schedule. 
Between January 1995 and July 1997, the prime contract moved from a
cost underrun of $27 million to a cost overrun of $355 million. 
During that same period, the schedule slippage increased from a value
of $43 million to $135 million.  So far, the prime contractor has not
been able to stop or significantly reverse the continuing decline. 
In July 1996, independent estimates of the space station's prime
contract cost overrun at completion ranged from $240 million to $372
million.  Since then, these estimates have steadily increased, and by
July 1997 they ranged from $514 million to $610 million.\7 According
to program officials, some financial reserves will be used to help
cover the currently projected overrun. 
Delays in releasing engineering drawings, late delivery of parts,
rework, subcontractor problems, and mistakes have contributed to cost
overruns.  NASA's concern about performance problems under the prime
contract is evidenced by its recent incentive and award fee actions. 
In March 1997, NASA directed Boeing to begin adjusting its biweekly
incentive fee accruals and billings based on a higher cost estimate
at completion than Boeing was officially reporting.  On the basis of
an internal review, Boeing subsequently increased its estimate of
cost overrun at completion from $278 million to $600 million.  The
increase in Boeing's estimate potentially reduces its incentive award
by about $48 million over the remainder of the contract period. 
Boeing was also eligible for an award fee of nearly $34 million for
the 6-month period ending in March 1997.  However, citing significant
problems in program planning, cost estimating, and hardware
manufacturing, NASA concluded that Boeing's performance did not
warrant an award fee.  NASA also directed Boeing to deduct almost $10
million from its next bill to refund the provisional award fee
already paid during the period.\8
Boeing is implementing a corrective action plan for each identified
weakness and has outlined a number of actions to improve the
performance of the entire contractor team, including changing
personnel, recruiting additional software engineers and managers, and
committing funds to construct a software integration test facility. 
Boeing also presented a cost control strategy to NASA in July 1997. 
According to NASA officials, the strategy includes organizational
streamlining and transferring some roles to NASA. 
Station officials assessed Boeing's efforts to improve its
performance as part of the midpoint review for the current evaluation
period.  They concluded that, while there was some improvement, it
was insufficient to permit resumption of provisional award fee
payments. 
--------------------
\7 Cost reports include internal and independent assessments of total
program cost variance at completion.  Methodologies include
statistical calculations and analyses using a software program
developed by the Department of Defense for analyzing
contractor-reported cost data.  Independent estimates are developed
by NASA and the Department of Defense's Defense Contract Management
Command (DCMC). 
\8 Under the terms of the contract, Boeing could receive a previously
denied award fee after NASA's final assessment at the end of the
contract. 
   FINANCIAL RESERVES ARE
   DWINDLING
------------------------------------------------------------ Letter :5
When NASA redesigned the space station in 1993 and brought Russia
into the program as a partner, the program had approximately $3
billion in financial reserves to cover development contingencies. 
Since then, the program reserves have been significantly depleted. 
In June 1997, the financial reserves available to the program were
down to about $2.2 billion.  NASA estimated that, by the end of
fiscal year 1997, the remaining uncommitted reserves could be less
than $1 billion. 
Financial reserves have been used to fund additional requirements,
overruns, and other authorized changes.  By June 1997, a station
program analysis indicated that fiscal year 1997 reserves might not
be sufficient to cover all known threats.  More recently, station
officials have estimated that a small reserve surplus is possible in
fiscal year 1997, but concerns are growing regarding the adequacy of
fiscal year 1998 reserves. 
NASA has already identified threats to financial reserves in future
years that, if realized, would outstrip the remaining reserves.  For
example, program reserves have been identified to cover additional
cost overruns; crew rescue vehicle acquisition; hardware costs, in
the event that ongoing negotiations with partners are unsuccessful;
and additional authorized technical changes.  Thus, with up to 6
years remaining until on-orbit assembly of the station is completed,
NASA has already identified actual and potential resource demands
that exceed the station's remaining financial reserves.  Unless these
demands lessen and are not replaced by other demands of equal or
greater value, or NASA is able to find offsets and efficiencies of
sufficient value to replenish the program's reserves, the space
station will require additional funding. 
   NASA ACTS TO STAY WITHIN
   FUNDING LIMITATIONS AND
   REPLENISH ITS FINANCIAL
   RESERVES
------------------------------------------------------------ Letter :6
NASA has been able to consistently report compliance with funding
limitations and avoid exceeding its financial reserves, despite
significant programmatic changes and impacts that have increased
station costs.  To enable it to do so, NASA has implemented or
initiated a variety of actions, including those summarized below: 
  -- The space station program is negotiating with ESA, Canada, and
     Brazil to provide station hardware.  Under proposed offset
     arrangements, the ISS partners--ESA and Canada--would build
     hardware associated with the U.S.  commitment in return for
     launch services or other considerations.  Under a cooperative
     arrangement, Brazil would receive a small allocation of the
     station's research capacity in return for any U.S.  equipment it
     would agree to build.  NASA estimates that $116 million in U.S. 
     station development costs could be saved through these
     arrangements.  Space station officials have scheduled a threat
     of $100 million against the program's financial reserves in case
     the negotiations are unsuccessful.  However, according to
     program officials, most of the negotiations are nearly
     completed. 
  -- NASA dropped the centrifuge from the station budget and opened
     negotiations with the Japanese government to provide it.\9 Also,
     the space station's content at the assembly completion milestone
     was revised to exclude the centrifuge.  This change enabled NASA
     to maintain the then-current June 2002 assembly completion
     milestone, even though the centrifuge and related equipment
     would not be put on the station until after that date. 
  -- NASA transferred $462 million from its science funding to the
     space station development funding in fiscal years 1996 through
     1998.  NASA has scheduled the payback of $350 million--$112
     million less than the amount borrowed--through fiscal year 2002. 
     NASA is also planning to transfer another $70 million in fiscal
     year 1999.\10 All of these funding transfers are within the
     $17.4 billion funding limitation through assembly completion. 
  -- NASA transferred $200 million in fiscal year 1997 funding to the
     station program from other NASA programs to cover costs incurred
     due to Russian manufacturing delays.\11 Congressional action is
     pending on the transfer of another $100 million in fiscal year
     1998.  These funds will be accounted for outside the portion of
     the program subject to the funding limitations. 
  -- NASA uses actual and planned reductions in its fiscal year
     funding requirements to help restore and preserve its actual and
     prospective financial reserves.  Typically, these actions
     involve rephasing or deferring activities to future fiscal
     years.  For example, the agency's current reserve posture
     includes actions such as moving $20 million in spares
     procurement from fiscal years 1997 to 1999 and $26 million in
     nonprime efforts from fiscal year 1997 to various future fiscal
     years.\12
--------------------
\9 The centrifuge is a crucial piece of research equipment for the
space station.  NASA recently listed a threat against future years'
reserves in the event that the negotiation is unsuccessful.  However,
NASA told us that an "agreement in principle" is expected soon. 
\10 NASA expects to make these funds available by employing a new
approach to doing materials research that will not initially require
a facility-class level Furnace Facility. 
\11 The House and Senate Appropriations Committees concurred in the
transfer of almost all of this amount from the space shuttle program. 
\12 The nonprime part of the space station program involves a large
number of relatively small contracts for developing the ground-based
and on-orbit capabilities to use and operate the space station. 
   ADDITIONAL COSTS AND COST
   THREATS ARE NOT YET ESTIMATED
------------------------------------------------------------ Letter :7
The cost impact of the schedule delay associated with step 1 of the
Russian recovery plan is not yet fully understood.  During
congressional testimony in June 1997, the NASA Administrator stated
that NASA was assessing the cost effects of a later assembly
completion date.  Any delay in completing the space station assembly
would increase the program's costs through the completion of assembly
because some costs would continue to accumulate over a longer period. 
When NASA redesigned the station in 1993, it estimated that Russia's
inclusion as a partner would reduce program costs by $1.6 billion
because the station's assembly would be completed by June 2002--15
months earlier than previously scheduled.\13 NASA has recently
acknowledged that the completion of the station's assembly will slip
into 2003, but it has not yet scheduled the revised assembly
completion milestone.  If the scope and capability of the program
under the June 2002 assembly completion milestone remain the same,
the new milestone date will be set for the latter part of 2003. 
Consequently, most, if not all, of the reduced costs claimed by
accelerating the schedule would be lost. 
NASA estimated the additional hardware costs associated with step 1
of the Russian recovery plan at $250 million.  When the estimate was
made, the specific costs of many of the components of the plan were
not known.  For example, NASA's initial estimate includes $100
million for the Interim Control Module, but NASA now estimates that
the module will cost $113 million.\14 The total of $300 million in
additional funding for the space station program in fiscal years 1997
and 1998 includes financial reserves.  The most recent cost estimate
for the Interim Control Module already indicates threats to those
reserves. 
NASA plans to use the extra time created by the schedule slip to
perform integration testing of early assembly flight hardware at the
Kennedy Space Center.  As of June 1997, the cost of this testing had
not been fully estimated.  However, NASA is currently budgeting $15
million in reserves for the effort. 
If NASA initiates further steps in the recovery plan, new or refined
cost estimates would be required.  Step 2 provides for the
development of a permanent propulsion/reboost capability and
modifications to the U.S.  Laboratory to provide habitation. 
According to the NASA Administrator, the effort under this step could
be funded incrementally, thus limiting the up-front commitment. 
NASA's initial cost estimate for step 2 is $750 million. 
Step 3 of the plan would result in the greatest overall cost impact
on NASA because it assumes that Russia would no longer be a partner
and that NASA, along with its remaining partners, would have to
provide the services now expected from Russia.  For its share of the
mission resupply role, NASA would have to use the space shuttle or
purchase those services from Russia or others.  In addition, the
United States would have to purchase Soyuz vehicles from Russia or
accelerate the development of the six-person permanent crew return
vehicle.  NASA has not officially estimated the cost of step 3, but
it clearly would be very expensive:  the potential cost of shuttle
launches or purchased launch services alone over the station's
10-year operational life would be in the billions of dollars.  NASA
expects to have more refined cost estimates for the contingency plan
later this year. 
--------------------
\13 For a discussion of the costs related to Russia's inclusion in
the ISS program as a partner, see Space Station:  Impact of the
Expanded Russian Role on Funding and Research (GAO/NSIAD-94-220, June
21, 1994) and Space Station:  Update on the Impact of the Expanded
Russian Role (GAO/NSIAD-94-248, July 29, 1994). 
\14 A further refinement of the cost estimate for the Interim Control
Module is expected shortly. 
   CONCLUSIONS AND RECOMMENDATION
------------------------------------------------------------ Letter :8
Some of NASA's actions to reinforce its financial reserves and keep
the program within its funding limitations have involved redefining
the portion of the program subject to the limitations.  Such actions
make the value of the current limitations as a funding control
mechanism questionable.  Therefore, we recommend that the NASA
Administrator, with the concurrence of the Office of Management and
Budget, direct the space station program to discontinue the use of
the current funding limitations. 
   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :9
More complete estimates of the cost and schedule impacts of ongoing
and planned changes to the program will be available later this year. 
This information will help provide a more complete and current
picture of the cost and schedule status of the program and clarify
some of the major future cost risk it faces.  After this information
is available, the Congress may wish to consider reviewing the
program.  This review could focus on reaching agreement with the
executive branch on the future scope and cost level for a station
program that merits continued U.S.  government support.  In view of
the expected availability of revised cost estimates, the first
opportunity for such a review would be in conjunction with NASA's
fiscal year 1999 budget request. 
At the end of the review, if the Congress decides to continue the
space station program, it may wish to consider, after consultation
with NASA, reestablishing funding limitations that include firm
criteria for measuring compliance. 
   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10
In commenting on a draft of this report, NASA said that the report
was a good representation of the program's performance and remaining
major challenges, but NASA was concerned that the report did not
provide sufficient detail for the reader to appreciate the progress
the space station program has made or understand the factors that
have influenced the decisions already made and those that will be
made in the future. 
NASA agreed with our recommendation.  NASA said that it had
consistently taken the position that the flat funding cap, while a
fiscal necessity, was inconsistent with a normal funding curve for a
developmental program.  NASA added that the flat funding profile
resulted in the deferral of substantial reserves to later years,
instead of being available in the program's middle years. 
NASA said that the station's financial reserves were not intended to
cover the unanticipated costs of the Russian contingency activities,
but rather were largely intended to protect against U.S.  development
uncertainty. 
In response to NASA's comments, we added more information to the
report, including information on the status of the program and the
origin of the funding caps.  However, the question of what the
station's financial reserves were largely intended to cover is not
relevant to our assessment, which focused on whether the funding cap
was an effective cost control mechanism.  Moreover, the central theme
of our report is that funding requirements have been rising and
additional funds may be needed.  We do not suggest what the source of
those funds should be. 
   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :11
To obtain information for this report, we interviewed officials in
the ISS and space shuttle program offices at the Johnson Space
Center, Houston, Texas, and NASA Headquarters, Washington, D.C.  We
also interviewed contractor and DCMC personnel in Huntsville,
Alabama, and Houston.  We reviewed pertinent documents, including the
prime contract between NASA and Boeing, contractor performance
measurement system reports, DCMC surveillance reports, program
reviews, international partner agreements, independent assessment
reports, and reports by NASA's Office of Safety and Mission
Assurance. 
We performed our work from January to July 1997 in accordance with
generally accepted government auditing standards. 
--------------------------------------------------------- Letter :11.1
We are sending copies of this report to the NASA Administrator; the
Director, Office of Management and Budget; and appropriate
congressional committees.  We will also make copies available to
other interested parties on request. 
Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are Thomas Schulz, Frank Degnan, John Gilchrist, and Fred Felder. 
Allen Li
Associate Director, Defense
 Acquisitions Issues
(See figure in printed edition.)Appendix I
COMMENTS FROM THE NATIONAL
AERONAUTICS AND SPACE
ADMINISTRATION
============================================================== Letter 
See p.  12. 
See comment 1. 
(See figure in printed edition.)
See p.  12. 
See comment 1. 
See p.  12. 
See p.  12 and
comment 2. 
See comment 3. 
(See figure in printed edition.)
See comment 1. 
(See figure in printed edition.)
Now on p.  5. 
See comment 4. 
Now on p.  6. 
See comment 5. 
(See figure in printed edition.)
Now on p.  9,
para.  1. 
See comment 1. 
Now on p.  9,
para.  2. 
(See figure in printed edition.)
See comment 6. 
See comment 1. 
See comment 7. 
Now on p.  9,
para.  3. 
(See figure in printed edition.)
See comment 1. 
Now on p.  9,
para.  5. 
Now on p.  11,
para.  5. 
The following are GAO's comments on the National Aeronautics and
Space Administration's (NASA) letter dated September 8, 1997. 
   GAO COMMENTS
----------------------------------------------------------- Letter :12
1.  We have modified the report based on NASA's comments. 
2.  The purpose and use of financial reserves is not the relevant
issue.  Our focus was on whether or not funding caps could be
effective cost control mechanisms under circumstances where program
content subject to the controls can be flexibly defined.  In the
past, NASA claimed the benefits of Russian participation on the
program's cost and schedule, but now that Russian participation is
having negative cost and schedule effects, NASA argues that the
additional funding needed should be accounted for outside the portion
of the program subject to the funding limitation.  Doing so dilutes
the cost control ability of a funding limitation. 
3.  NASA's claimed cost savings from including Russia as a partner
was based mainly on a 15-month acceleration of the station's assembly
completion milestone.  Our purpose was to point out that the delay in
the assembly completion date means that NASA will incur additional
costs during the station's developmental period.  Only the amount
remains to be determined.  In this report, we do not evaluate any of
the claimed benefits, including cost reductions, of Russian
participation in the program as a partner. 
4.  NASA correctly points out that the negative schedule variance
under the prime contract is growing at a much slower rate than the
negative cost variance, as shown by the slope of the lines in figure
1. 
5.  Figure 1 in the report accurately reflects cost and schedule
variance changes and is directly relevant to supporting our point
that NASA could experience additional cost growth if the
deteriorating trend was not reversed or at least slowed because the
final actual cost growth could exceed expected cost growth.  After we
completed our fieldwork on this assignment, the prime contractor
reported that its estimate of the cost overrun at completion had more
than doubled, from $278 million to $600 million. 
6.  NASA correctly notes that the centrifuge was not included in the
development program when it was initially capped at $17.4 billion. 
However, NASA subsequently budgeted the centrifuge within the program
and scheduled it for launch before the June 2002 assembly completion
milestone.  The centrifuge was later removed from the budget and NASA
began negotiations with the Japanese to provide it.  At that time, it
was rescheduled for launch after the June 2002 assembly completion
date.  The centrifuge example helps to illustrate the leeway NASA has
to change the content of the station program within the current cap. 
Such leeway undermines the cap's value as a cost control mechanism. 
7.  We were asked to identify those methods NASA had used to stay
within its funding limitations, not to evaluate NASA's use of
"no-exchange-of-funds" or "negotiated offset" arrangements. 
*** End of document. ***




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