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Space Station: Cost Control Problems (Testimony, 11/05/97, GAO/T-NSIAD-98-54).

GAO discussed the cost control problems of the National Aeronautics and
Space Administration's (NASA) Space Station Program focusing on: (1)
cost growth under the prime contract; (2) the impact on NASA of the
Russians' performance problems; and (3) the need to review the program
and consider funding limitations.
GAO noted that: (1) it had previously reported on the deteriorating cost
and schedule performance of the space station's prime contractor, Boeing
Defense and Space Group, and 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 the station
with power, control, and habitation capability; (2) since then, the
prime contract deterioration has continued and the Service Module delay
has cost NASA at least several hundreds of millions of dollars, with the
potential for costing considerably more should the Russians falter
again; (3) cost growth is especially worrisome because the rate of cost
deterioration has increased; (4) Boeing has more than doubled its
estimate of the total cost growth at contract completion from $278
million to $600 million, and NASA has increased its total cost growth
estimate to $817 million; (5) both NASA and Boeing recognize the
seriousness of the cost growth issue and have taken actions to address
it; (6) the Russian's delay in providing the Service Module has already
increased NASA's cost by over $300 million; (7) the program's cost could
increase further by as much as several billions of dollars or more,
depending on the severity of Russia's shortfall and the response to that
shortfall by NASA and its other international partners; (8) NASA
officials believe that the December 1998 launch date for the Service
Module can still be met; (9) the space station program's financial
reserves have dwindled; (10) NASA has periodically adjusted the
program's pace and content to comply with an administratively imposed
funding cap and to replenish the program's financial reserves; and (11)
some of NASA's actions have made the value of the cap as a funding
control mechanism questionable.
--------------------------- Indexing Terms -----------------------------
 REPORTNUM:  T-NSIAD-98-54
     TITLE:  Space Station: Cost Control Problems
      DATE:  11/05/97
   SUBJECT:  Contractor performance
             Cost overruns
             Cost control
             Aerospace contracts
             Space exploration
             Foreign governments
IDENTIFIER:  Russia
             NASA Space Station Program
             NASA Space Station Service Module
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Cover
================================================================ COVER
Before the Subcommittee on Space and Aeronautics,
Committee on Science, House of Representatives
Release on Delivery
Expected at
1:00 p.m., EST
Wednesday,
November 5, 1997
SPACE STATION - COST CONTROL
PROBLEMS
Statement of Allen Li, Associate Director,
National Security and International Affairs Division
GAO/T-NSIAD-98-54
GAO/NSIAD-98-54T
Space Station
(707312)
Abbreviations
=============================================================== ABBREV
  NASA - National Aeronautics and Space Administration
============================================================ Chapter 0
Mr.  Chairman and Members of the Subcommittee: 
We appreciate this opportunity to discuss the cost control problems
of the National Aeronautics and Space Administration's (NASA) Space
Station program.\1 Our testimony today will summarize the results of
our recent work on this issue and, where available, provide updated
information.\2 Specifically, we will focus on cost growth under the
prime contract, the impact on NASA of the Russians' performance
problems, and the need to review the program and to consider funding
limitations. 
--------------------
\1 NASA and its international partners--Japan, Canada, the European
Space Agency, and Russia--are building the International Space
Station as a permanently orbiting laboratory to conduct materials and
life sciences research under nearly weightless conditions. 
\2 Space Station:  Cost Control Problems Are Worsening
(GAO/NSIAD-97-213, Sept.  16, 1997) and
Space Station:  Deteriorating Cost and Schedule Performance Under the
Prime Contract (GAO/T-NSIAD-97-262, Sept.  18, 1997). 
   SUMMARY
---------------------------------------------------------- Chapter 0:1
Last year we reported on the deteriorating cost and schedule
performance of the space station's prime contractor and 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 the station with power, control, and
habitation capability.\3
Since then, the prime contract deterioration has continued and the
Service Module delay has cost NASA at least several hundreds of
millions of dollars, with the potential for costing considerably more
should the Russians falter again. 
As of June 1997, the station prime contractor--Boeing Defense and
Space Group--reported that over 200,000 pounds of its station
hardware was being built or had been completed.  However, the
contract work is costing more and taking longer than planned.  For
example, in the 17-month period between April 1996 and August 1997,
the space station prime contract's cost growth more than quadrupled
from $89 million to $377 million and the estimated value of the
effort required to get the contract work back on schedule increased
by more than 50 percent from $88 million to $133 million.  The cost
growth is especially worrisome because the rate of cost deterioration
has recently increased.  Since the beginning of this year, the
monthly cost growth rate has more than doubled--to $22 million for
the 7-month period ending in August 1997 from about $10 million over
the previous 25 months. 
Several months ago, Boeing more than doubled its estimate of the
total cost growth at contract completion from $278 million to $600
million.  More recently, NASA increased its total cost growth
estimate to $817 million.  Both NASA and Boeing recognize the
seriousness of the cost growth issue and have taken actions to
address it.  Earlier this year, NASA reduced Boeing's fees because of
poor performance.  For its part, Boeing has implemented a corrective
action plan that it believes will improve the performance of the
entire contractor team, and has developed a cost control strategy. 
The extent to which these efforts will eventually slow the continuing
cost deterioration remains to be seen. 
The Russians' delay in providing the Service Module has already
increased NASA's cost by over $300 million.  Also, additional cost
increases related to the effect of this delay on the station's
assembly sequence will be seen once NASA resets the assembly
completion milestone.  Should the Russians not meet their revised
partnership commitments, the program's cost could increase further by
as much as several billions of dollars or more, depending on the
severity of Russia's shortfall and the response to that shortfall by
NASA and its other international partners.  NASA has been monitoring
the situation and recently noted that the Russians are experiencing
manufacturing problems, which present some risk to the Service Module
schedule.  However, NASA officials believe that the December 1998
launch date for the Service Module can still be met. 
The space station program's financial reserves have dwindled.  In
June 1997, space station program documents showed that over
two-thirds of the $3 billion in financial reserves included in the
program's cost estimate would be used or committed by the end of
fiscal year 1997.  The reduced reserves and the recent and
prospective cost increases have put additional focus on the space
station program's administratively imposed funding limitation
(cap)--$2.1 billion annually and $17.4 billion through the completion
of station assembly.  NASA has periodically adjusted the program's
pace and content to comply with the cap and to replenish the
program's financial reserves.  However, some of NASA's actions have
made the value of the cap as a funding control mechanism
questionable.  In our September 1997 report, we recommended that use
of the current cap be discontinued and suggested that the Congress
review the program to determine its future scope and cost level. 
After that review, if the Congress decides to continue the space
station program, it could consider imposing a legislated cap. 
--------------------
\3 Space Station:  Cost Control Difficulties Continue
(GAO/NSIAD-96-135, July 17, 1996) and (GAO/T-NSIAD-96-210, July 24,
1996). 
   COST AND SCHEDULE PERFORMANCE
   CONTINUES TO DETERIORATE
---------------------------------------------------------- Chapter 0:2
The cost and schedule performance under the prime contract has been
consistently worsening for some time.  In a June 1997 testimony,\4 we
pointed out that between January 1995 and April 1997, the estimated
cost of work to get back on schedule had increased from $43 million
to $129 million.  Since then, the schedule variance\5 has remained
negative, but has worsened only slightly--first rising to $136
million through June before falling back to $133 million by the end
of August. 
Cost growth, however, is a different story.  Between January 1995 and
April 1997, the variance between the actual cost to complete specific
work and the budget for that work had gone from a cost underrun of
$27 million to a cost overrun of $291 million.  Since then, cost
growth has significantly worsened.  Through July, it stood at $355
million.  August added another $22 million, bringing the total cost
growth to $377 million.  The increased pace of cost growth since
early this year is especially worrisome.  The average monthly cost
growth for the 7-month period ending in August 1997 was $22 million. 
This growth rate is more than twice the average monthly rate of about
$10 million for the previous 25 months.  Figure 1 illustrates the
deteriorating monthly cost growth trend from January 1997 through
August 1997. 
   Figure 1:  Cumulative Monthly
   Cost Growth on the Space
   Station Prime Contract (January
   1997 through August 1997)
   (See figure in printed
   edition.)
Recently, NASA and Boeing updated their estimates of total cost
growth at contract completion.  During this past summer, after many
months of estimating that the total cost growth at the completion of
the contract would not exceed $278 million, Boeing more than doubled
its estimate--to $600 million.  Through August 1997, $377 million in
cost growth had already accumulated.  Therefore, to keep total cost
growth from exceeding $600 million, Boeing must make up work valued
at $133 million to get back on schedule, as well as slow the average
monthly cost growth over the next 6 years to no more than about $3
million.  It would be extremely challenging to achieve both of these
results, partly because regaining schedule typically involves
increased staffing or overtime work.  NASA's estimate of total cost
growth at contract completion, which had been generally in accord
with Boeing's $600 million estimate, was recently increased to $817
million.  NASA's higher estimate is based on its assessment of
current trends and its belief that Boeing's cost control strategy
will not be fully successful. 
NASA and Boeing recognize the seriousness of the cost growth
situation.  NASA did not give Boeing an award fee for the 6-month
period ending in March 1997 because of program planning,
cost-estimating, and hardware manufacturing problems.  In addition,
the recent increase in the estimated cost growth at contract
completion has reduced the amount of available incentive fee.  On its
part, Boeing has implemented a corrective action plan that is
intended to improve the performance of the entire contractor team. 
Boeing's announced strategy includes personnel changes, additional
engineers and managers, and the funding of a software integration
test facility.  Boeing also presented a cost control strategy to NASA
that includes organizational streamlining and the transfer of some
roles to NASA.  The extent to which these efforts will eventually
slow the continuing deterioration remains to be seen. 
--------------------
\4 Space Station:  Cost Control Problems Continue to Worsen
(GAO/T-NSIAD-97-177, June 18, 1997). 
\5 Schedule variances are measured by the estimated dollar value of
the difference between the budgeted cost of work planned and work
completed. 
   RUSSIA'S DELAYS INCREASE NASA'S
   COST
---------------------------------------------------------- Chapter 0:3
The Russian government's past inability to furnish the Service Module
on time has adversely impacted the space station program.  According
to NASA officials, after more than a year of repeated and unfulfilled
promises, Russia has resumed its financial commitment, work has
restarted on the Service Module, and significant progress is being
made.  However, the Service Module delay has increased NASA's cost. 
After Russia formally notified NASA about a year ago that its funding
difficulties would delay the completion of the Service Module, NASA
designed a three-step recovery plan.  Step one, which is now
underway, focuses on adjusting the station's 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 a year.  Major step one activities
include delaying the launch of station components that are to precede
the Service Module into orbit and building a temporary replacement
for the Service Module's propulsion capability.  NASA has been
monitoring the Russian effort and recently noted that the Service
Module is experiencing manufacturing problems that pose some schedule
risk.  However, NASA officials believe that the Service Module's
revised December 1998 launch date can still be met.  NASA will
complete step one regardless of how the Russians perform. 
Step two is NASA's contingency plan for dealing with more delay or
the Russian government's failure to ultimately deliver the Service
Module.  Step two could result in permanently replacing the Service
Module's power, control, and habitation capabilities.  Under step
three, the Russians would no longer be a partner in the International
Space Station.  Consequently, the United States and its remaining
international partners would have to pick up all or most of the
financial and operational responsibilities the Russian government
would have had, such as the station resupply mission. 
The cost of step one activities is currently estimated at over $300
million, with almost all of that in fiscal years 1997 through 1999. 
Additional cost increases related to the station's delayed assembly
sequence will be established once NASA resets the assembly completion
milestone.  NASA's initial cost estimate for step two is $750
million, but no decision has yet been made to initiate step two.  The
cost of step three has not been estimated, but just the cost of
additional launch services for the station resupply mission would be
in the billions of dollars.  Consequently, should the Russians not
meet their revised partnership commitments, the program's cost could
further increase by as much as several billions of dollars or more,
depending on the severity of Russia's shortfall and the response to
that shortfall by NASA and its other international partners. 
   LOWER FINANCIAL RESERVES AND
   INCREASED COSTS FOCUS ATTENTION
   ON FUNDING LIMITATIONS
---------------------------------------------------------- Chapter 0:4
When NASA redesigned the space station in 1993, the program had
approximately $3 billion in financial reserves.\6 Since then, the
program reserves have been significantly depleted.  By June 1997, the
program's financial reserves were down to about $2.2 billion. 
Overall, more than two-thirds of the reserves were estimated to be
used or committed by the end of fiscal year 1997, reducing the
remaining uncommitted reserves to less than $1 billion.  Further,
with about 6 years remaining until on-orbit assembly of the station
is completed, NASA had identified threats in future years that, if
realized, would require funding in excess of the remaining
uncommitted reserves.  Recently, NASA announced additional space
station funding requirements totaling $430 million in fiscal year
1998.  Changes in the space station program's estimated funding
requirements for fiscal year 1999 and beyond are expected to be
available within the next few months. 
Reduced reserves and increased cost have put additional focus on the
program's funding limitations.  For several years, the space station
program has been subject to a $2.1- billion annual and a
$17.4-billion overall funding limitation.  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.  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. 
To remain within the cap, NASA has periodically adjusted the
program's pace and content.  However, some of NASA's actions have
made the value of the cap as a funding control mechanism
questionable.  For example, in establishing the cap, NASA claimed the
cost and schedule advantages that it estimated would accompany the
inclusion of the Russians in the program as a partner.  However, now
that Russian participation is having negative cost and schedule
effects, NASA is accounting for the additional funds required to
implement its Russian recovery plan outside of the portion of the
space station program subject to the cap. 
In our September 1997 report, we recommended that the use of the
current cap be discontinued.  We also suggested that the Congress
consider taking two actions:  (1) review the program's future scope
and cost level in conjunction with NASA's fiscal year 1999 budget
request and (2) if the Congress decides to continue the program,
establish funding limitations that include firm criteria for
measuring compliance.  To assist in that review, we have been
requested by the Chairmen of the Senate Committee on Commerce,
Science, and Transportation and its Subcommittee on Science,
Technology, and Space, to update our life-cycle cost estimate of the
space station program. 
--------------------
\6 Since accurately estimating the cost of research and development
projects is extremely difficult, NASA's project cost estimates
include both a baseline portion to fund known requirements and a
financial reserves portion to fund unexpected contingencies, such as
schedule delays or changes in projects' objectives or scope. 
-------------------------------------------------------- Chapter 0:4.1
Mr.  Chairman, this concludes our statement.  We will be happy to
answer any questions you or the Members of the Subcommittee may have. 
*** End of document. ***




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