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Space Station: Cost Control Difficulties Continue (Chapter Report,
07/17/96, GAO/NSIAD-96-135).
Pursuant to congressional request, GAO reviewed the National Aeronautics
and Space Administration's (NASA) International Space Station (ISS)
program, focusing on: (1) the program's cost and schedule status; and
(2) NASA efforts to improve its cost reporting.
GAO found that: (1) although ISS has sufficient financial reserves for
funding some additional costs, future unexpected contingencies may
deplete these reserves; (2) ISS program managers have attempted to
reduce costs and find other ways to replenish its financial reserves;
(3) since January 1995, changes to the prime contract baseline have
increased total contract costs by over $723 million; (4) ISS reserves
may be further reduced if ISS managers are not able to negotiate
contract changes at lower prices; (5) since April 1996, the prime
development effort was about $89 million over cost and $88 million
behind schedule; (6) total overrun estimates range from $60 million to
over $400 million; (7) ISS financial reserves may be further jeopardized
by understated completion costs and the Russian Space Agency's (RSA)
difficulties in meeting its ISS commitments; (8) RSA has renewed its ISS
support commitments in exchange for additional flights to the Mir space
station; (9) if RSA withdraws from the ISS program, sufficient financial
reserves will not be available for program completion within the $17.4
billion estimate and a new funding profile and completion estimate will
be needed; (10) the impact of RSA withdrawal on NASA depends upon the
nature and timing of its withdrawal; and (11) although NASA prime
development contractors and subcontractors have implemented performance
measurement systems to monitor ISS cost and schedule status, the
accuracy of this information is questionable because the baseline for
measuring such performance has not been completely established or
--------------------------- Indexing Terms -----------------------------
     TITLE:  Space Station: Cost Control Difficulties Continue
      DATE:  07/17/96
   SUBJECT:  Space exploration
             Aerospace research
             Future budget projections
             Cost analysis
             Research and development costs
             Aerospace contracts
             Prime contractors
             Cost control
             International cooperation
             Cost overruns
IDENTIFIER:  Mir Space Station
             NASA International Space Station Alpha Program
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================================================================ COVER
Report to the Ranking Minority Member, Committee on Commerce
House of Representatives
July 1996
Space Station
=============================================================== ABBREV
  DOD - Department of Defense
  GAO - General Accounting Office
  ISS - International Space Station
  NASA - National Aeronautics and Space Administration
  RSA - Russian Space Agency
=============================================================== LETTER
July 17, 1996
The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives
Dear Mr.  Dingell: 
As requested, we reviewed the National Aeronautics and Space
Administration's (NASA) actions to improve cost reporting for the
International Space Station program and the cost and schedule status
of that program. 
Unless you announce its contents earlier, we plan no further
distribution of this report until
7 days after its issue date.  At that time, we will send copies to
the Chairs and Ranking Minority Members of the congressional
committees with NASA authorizations, appropriations, and general
oversight responsibilities; the Director of the Office of Management
and Budget; and the NASA Administrator.  We will also provide copies
to others on request. 
Please contact me at (202) 512-4841 if you or your staff have any
questions about this report.  Major contributors to this report were
Frank Degnan, Jim Berry, and Vijay Barnabas. 
Sincerely yours,
Thomas J.  Schulz
Associate Director
Defense Acquisition Issues
============================================================ Chapter 0
---------------------------------------------------------- Chapter 0:1
The International Space Station (ISS) is one of the nation's largest
research and development projects.  The National Aeronautics and
Space Administration (NASA), Japan, Canada, the European Space
Agency, and Russia are building it as a permanently orbiting
laboratory to conduct materials and life sciences research under
nearly weightless conditions.  NASA estimates its development and
operations cost at $17.4 billion from October 1993 through the
completion of assembly, which is currently scheduled for June 2002. 
Cost reporting by NASA contractors and subcontractors at the Johnson
Space Center, including some working on major parts of an earlier
version of the current ISS, was the subject of a congressional
hearing in July 1994.  At the hearing, NASA promised to improve
performance management of its development contracts.  GAO was asked
by Representative John D.  Dingell, who was then Chairman,
Subcommittee on Oversight and Investigations of the former House
Committee on Energy and Commerce, to review the program's cost and
schedule status and NASA's actions to improve cost reporting. 
---------------------------------------------------------- Chapter 0:2
NASA's ISS program includes a prime contract with the Boeing Company
to develop the U.S.  portion of ISS, a large number of smaller
contracts to develop the ground-based and on-orbit capability to use
and operate it, and other contracts to develop on-orbit research
facilities and conduct research.  In mid-1993, a $2.1-billion annual
funding limitation was imposed on the program. 
Performance measurement systems establish detailed baselines to
measure the extent to which tasks are on schedule and within budget. 
Such systems are intended to provide early warning of cost and
schedule problems to enable corrective actions to negate or minimize
their impacts. 
---------------------------------------------------------- Chapter 0:3
Over the past several years, ISS flight hardware has been produced. 
As of April 1996, the ISS prime contract was about $89 million over
cost and about $88 million behind schedule.  Overall, the prime
contract is 45-percent complete and these variances are within
planned funding levels.  However, many cost threats to the
development program remain, and financial reserves needed for
unexpected contingencies remain limited over the next few years.  If
available reserves ultimately prove inadequate, program managers
would have to either exceed the annual funding limitation or defer or
rephase other activities, thus possibly delaying ISS's schedule and
likely increasing its overall cost. 
NASA has made progress toward ensuring that the ISS prime development
contractor and its major subcontractors implement effective
performance measurement systems for managing their contracts, but a
complete performance measurement system is still not in place.  Also,
NASA has made slower progress implementing effective performance
measurement systems on its contracts for developing ground-based and
on-orbit capabilities for using and operating ISS. 
---------------------------------------------------------- Chapter 0:4
-------------------------------------------------------- Chapter 0:4.1
The ISS program has been able to maintain sufficient financial
reserves for funding additional costs that have occurred so far. 
However, identified contingencies that the program might have to fund
would use up most of the financial reserves estimated to be available
over the next several years.  Although program managers are
continuing their efforts to identify cost savings and develop other
strategies that could be used to replenish the financial reserves,
potential additional costs continue to threaten them. 
Authorized, but unpriced, changes to the prime contract baseline
since January 1995 would increase contract costs, according to
contractor estimates, by over $723 million, or about 14 percent over
the original contract amount.  Program managers have budgeted
reserves for these changes, but in amounts lower than the
contractors' estimates.  If they are unable to negotiate the changes
at the lower prices they expect, program reserves may have to be
further reduced.  As of April 1, 1996, the price of only one minor
authorized change had been negotiated.  NASA officials have received
proposals covering many of the changes and they told GAO that they
plan to have them all negotiated by July 31, 1996. 
Contractor performance is declining.  As of April 1996, the prime
development effort was about $89 million over cost and about $88
million behind schedule--down from a cost underrun of about $27
million and a negative schedule variance of about $43 million in
January 1995.  Based on progress to early 1996, predictions of the
overrun at completion range from about $60 million to over $400
million.  An additional threat to financial reserves is posed by the
fact that some contractors may be understating their cost estimates
to complete work. 
-------------------------------------------------------- Chapter 0:4.2
The Russian Space Agency's (RSA) difficulties in meeting its ISS
commitments threaten NASA with added cost, either to develop ISS
components it had agreed to provide or for additional NASA support
for its development effort.  NASA rejected a RSA proposal to change
the nature and timing of its commitments to ISS's development,
assembly, and operations.  However, NASA agreed to provide additional
flights to the Russian Space Station MIR to ease RSA's launch
requirements.  In turn, RSA and high-level government officials
renewed their remaining ISS support commitments. 
Ultimately, if RSA is unable to meet its commitments, NASA will have
to make up the shortfall.  The extent of the cost impact on NASA
depends on the nature and timing of any shortfall.  ISS managers are
currently analyzing the potential cost and schedule impact of such
actions.  A total and sudden withdrawal would likely leave the
program with insufficient financial reserves for achieving the
completion of assembly within the current $17.4- billion estimate. 
With no RSA participation, the ISS program would be substantially
altered and a new funding profile and completion estimate would have
to be developed.  However, there is some flexibility to handle a
gradual phasedown and withdrawal. 
-------------------------------------------------------- Chapter 0:4.3
NASA's prime development contractor and its major subcontractors have
implemented performance measurement systems to monitor cost and
schedule status.  They have established detailed budgets and
schedules for measuring and reporting progress, and their reports
include detailed cost and schedule performance information, variance
analyses, and corrective action plans.  However, the baseline for
measuring cost and schedule performance is not yet completely
established and implementation problems affect the accuracy of the
cost and schedule information reported. 
Reviews of the performance measurement system have been conducted by
NASA and Boeing.  Such reviews, which are intended to find potential
problems and areas of improvement, identified implementation
deficiencies that could lead to inaccurate progress reporting.  In
one instance, performance progress was not being reported using an
accepted method.  In another instance, there was not good oversight
of lower tier subcontractors' performance measurement status.  NASA,
Boeing, and the major subcontractors are working on correcting
deficiencies and continued surveillance is planned. 
---------------------------------------------------------- Chapter 0:5
This report provides information on NASA's efforts to improve
contractor performance management and on the cost and schedule status
of ISS.  It contains no recommendations. 
---------------------------------------------------------- Chapter 0:6
NASA concurred with most of the report, including GAO's assessment
that the ISS program faces many cost control challenges and that not
all of the program's difficulties are behind it.  NASA expressed
confidence that the ISS program will continue to perform on schedule
and within budget.  Information provided by NASA has been added to
the report, as appropriate.  NASA's comments, together with GAO's
comments, are included in
appendix II. 
============================================================ Chapter 1
In late 1997, the National Aeronautics and Space Administration
(NASA) is scheduled to begin assembling the International Space
Station (ISS).  The facility is scheduled to be completely assembled
in orbit by June 2002, and NASA is planning a 10-year operational
life following its assembly.  Its current configuration (see fig 1.1)
is the result of the program's last redesign, conducted in 1993 to
compensate for additional funding cuts and to bring Russia into the
program as a full partner along with Japan, Canada, the European
Space Agency, and the United States. 
   Figure 1.1:  Artist's
   Conception of ISS With the
   Space Shuttle Docked
   (See figure in printed
NASA's cost estimate for ISS development and operation is $17.4
billion from October 1993 through the planned completion of assembly
in space in June 2002.\1 NASA's $17.4 billion program includes a
prime contract effort to develop the U.S.  portion of ISS, nonprime
efforts involving a large number of smaller contracts to develop the
ground-based and on-orbit capability to use and operate it, and NASA
headquarters-managed contracts to develop on-orbit research
facilities and conduct research. 
In its fiscal year 1996 budget, NASA estimated the price of the prime
contractor's activities at approximately $6.3 billion; the nonprime
efforts, $5.6 billion; research capability effort, $2.6 billion; and
about $3.1 billion in financial reserves for the remaining 7 years of
development.\2 Figure 1.2 shows the percentage distribution of the
ISS development budget.  In mid-1993, a $2.1-billion annual funding
limitation was imposed by the administration on the program to
prevent it from consuming increasingly larger portions of NASA's
research and development budget. 
   Figure 1.2:  Distribution of
   ISS Development Budget
   (See figure in printed
In November 1993, NASA signed a letter contract with the Boeing
Company for the prime development effort.  The prime effort
encompassed the work previously under separate contracts with the
former Space Station Freedom work package contractors.  Under this
prime contract, the former work package contractors--McDonnell
Douglas, Rocketdyne, and Boeing-Huntsville--became major product
group subcontractors to Boeing.  Product group subcontracts account
for over 80 percent of the total estimated cost of the prime
\1 Exclusive of costs through 1993 and station-related requirements
to June 2002 totaling $30.8 billion, as detailed in Space Station: 
Estimated Total U.S.  Funding Requirements (GAO/NSIAD-95-163, June
12, 1995). 
\2 Anticipating and accurately estimating the development and
operations costs of major research and development projects is highly
unlikely.  Accordingly, NASA's cost estimates for such projects
include both a baseline program to fund the costs of known
requirements and allowances for financial reserves to fund unexpected
major contingencies, such as schedule delays or changes in project
objectives or scope. 
---------------------------------------------------------- Chapter 1:1
In 1994, the Defense Contract Audit Agency identified a number of
cost reporting weaknesses by NASA contractors at the Johnson Space
Center, including some contractors that had worked on the Freedom
version of the space station.  These weaknesses, which led to
misleading reporting of the program's true cost status, including
underreporting of potential overruns, were the focus of a July 1994
hearing before the Subcommittee on Oversight and Investigations of
the House Committee on Energy and Commerce.  In responding to these
audit findings, NASA required its major space station contractors and
product group subcontractors to establish detailed contract budgets
and baselines, and to report periodic cost and schedule performance
status using validated performance measurement systems.  NASA also
stipulated that (1) the performance measurement baseline would be
changed only by formal modifications to the contract for scope of
work changes, (2) cost growth on the contract would be proposed by
the contractor and authorized by NASA before the additional costs
were incurred, (3) an estimate to complete work would be evaluated on
a monthly basis, and (4) the contract would include an incentive fee
feature to encourage and motivate contractor cost performance. 
---------------------------------------------------------- Chapter 1:2
The Chairman of the Subcommittee on Investigations and Oversight,
House Commerce Committee, asked us to review the program's cost and
schedule status and NASA's actions to improve cost reporting.  To
accomplish these objectives, we interviewed ISS program office and
contractor personnel and reviewed pertinent documents, including the
prime contract between NASA and Boeing, contractor performance
measurement system reports, the prime contractor's management system
plan, and surveillance reports prepared by the Department of
Defense's (DOD) Defense Plant Representative Office personnel at
product group subcontractor locations. 
We also interviewed NASA officials at the Johnson Space Center and
the Marshall Space Flight Center, observed reviews conducted by NASA
and Boeing personnel to verify that the prime and the major product
group subcontractors had implemented valid cost and schedule control
systems, and identified the program's cost and schedule trends over
time using performance measurement data.  We did not review the
portion of the estimated development budget representing the $2.6
billion for research capability. 
We performed our review from August 1995 to April 1996 in accordance
with generally accepted government auditing standards. 
============================================================ Chapter 2
The ISS program has been producing flight hardware since 1993. 
However, it continues to face cost and schedule issues that threaten
the already limited financial reserves available to complete the
station within its $17.4-billion total and $2.1-billion annual
budget, including (1) the large number of authorized unpriced changes
to the prime development contract, (2) unfavorable cost and schedule
trends, and (3) potentially understated cost estimates at completion. 
Further, NASA's ability to complete the station program on schedule
and within budget is potentially threatened by the risk of the
Russian Space Agency (RSA) not totally or substantially meeting its
---------------------------------------------------------- Chapter 2:1
In our June 1995 report, we noted that the station's financial
reserves for fiscal years 1996 and 1997 were low at $102 million and
$182 million, respectively.  During fiscal year 1995, program
managers identified cost savings and deferrals that increased the
fiscal year 1996 reserves.  If the cost of the currently known
threats to financial reserves are realized and station managers are
unable to find ways to offset the added cost, the financial reserves
will continue to be low over the next several years, as shown in
table 2.1. 
                               Table 2.1
                 Status of the ISS Program's Financial
                       Reserves, as of March 1996
                         (Dollars in millions)
Fiscal year    1996  1997  1998  1999  2000  2001  2002      Total
-------------  ----  ----  ----  ----  ----  ----  ----  =============
Reserves        226   194   261   620   605   558   480      2,944
Total threats   158   124   238   321   335   158    85      1,419
Balance          68    70    23   299   270   400   395      1,525
The two largest threats--a crew rescue vehicle ($586 million) and a
control module ($250 million)--account for $836 million, or about
59 percent, of the $1.42 billion.  Another threat is related to an
accounting issue.  As initially raised by the prime contractor, NASA
would pay an additional $76 million in overhead costs.  NASA does not
believe the additional costs should be allowed, but has agreed to
abide by the decision of the DOD administrative contracting officer. 
A decision by DOD is pending. 
Inadequate reserves would hinder program managers' ability to cope
with unanticipated technical problems.  If a problem's solution could
not be funded by available reserves, program managers could be faced
with either exceeding the annual funding cap or deferring or
rephasing other activities, thus possibly delaying the development
schedule and likely increasing overall funding requirements. 
However, program managers believe that it is unlikely that all known
contingencies will require funding.  They also said that they are
continuing their efforts to identify future cost savings and develop
other strategies that could be used to offset the potential cost
growth threats.  Recently, they were able to increase the reserves by
negotiating with the Office of Life and Microgravity Sciences to fund
some items, such as laboratory support equipment, that were to have
been funded by the development budget.  Also, ISS managers have
challenged the managers of the nonprime efforts to reduce their
future costs by 10 percent.  If the nonprime managers are successful,
reserves would increase. 
In commenting on a draft of this report, NASA said that, as of April
1996, the financial reserves for fiscal year 1996 totaled $176
million, with $108 million in threats.  NASA anticipates that there
will be an unused balance of fiscal year 1996 reserves to carryover
and augment the expected fiscal year 1997 reserve level. 
---------------------------------------------------------- Chapter 2:2
NASA's current list of potential cost increases does not include some
items that could further erode financial reserves.  First, contractor
estimates of the cost of authorized changes are higher than NASA's
estimates.  The higher contractor estimates, if realized, would
create a greater use of reserves than NASA anticipates.  Second, the
prime contractor's performance measurement status reports show that
cost and schedule performance is worsening.  Third, the prime
contractor's performance measurement status reports do not appear to
present realistic estimates of completion costs on some station
elements, thus potentially masking additional overruns. 
-------------------------------------------------------- Chapter 2:2.1
Authorized unpriced changes to the prime contract baseline since
January 1995 may increase prime contract costs by over $723 million,
or about 14 percent of the original contract amount, according to
contractor estimates.  About $300 million of this amount is related
to the Russian functional energy block, which was added to the prime
contract when Boeing agreed to manage the acquisition, and to the
accounting change noted above that Boeing wants but NASA is
disputing.  As of January 1996, the contractor-estimated value of the
remaining changes was, therefore, just over $400 million.  In April
1996, NASA budgeted funds to accommodate most, but not all, of this
amount because ISS program managers expect to negotiate these changes
for less than the contractors' estimates.  If program managers are
unable to negotiate them at the lower amounts they expect, financial
reserves will be further reduced. 
NASA's goal for negotiating prices on contract changes, as stated in
the NASA Supplement to the Federal Acquisition Regulations, is 180
days.  However, as of March 1996, 39 unpriced contract actions with
an estimated value of $507.6 million exceeded NASA's target date for
completing negotiations.  A major problem has been obtaining initial
cost proposals from the prime contractor and product group
subcontractors for starting price negotiations.  As of early March
1996, contractors had provided proposals covering less than 20
percent of the value of all changes. 
Program managers recognize the unpriced change orders as a major
problem and have implemented a task team to expedite their final
pricing.  NASA's strategy includes (1) negotiating older changes for
which cost proposals have been received as a lump settlement; (2)
requesting immediate contractor preparation and submittal of cost
proposals for the top 20 changes, which represent approximately 71
percent of the estimated cost of all changes, and immediately
negotiating them; (3) establishing time frames for contractor
preparation and submittal of cost proposals and negotiations for the
remaining critical changes; and (4) suspending and, perhaps,
canceling 10 changes that were determined to be less critical, even
though the contractor has already begun work and incurred costs. 
Table 2.2 shows the status of the prime contract changes in March
                               Table 2.2
                Status of Prime Contract Changes, as of
                             March 13, 1996
                         (Dollars in millions)
                                                    Number  Contractor
                                                        of   estimated
Category                                           changes       value
------------------------------------------------  --------  ----------
Firm proposals submitted by contractor                  69       $90.8
Top changes without proposals submitted                 21       348.7
Additional changes with a 90-day authorization           8        15.3
Remaining critical changes                              60        35.4
Suspended/Canceled changes                              10         2.3
Definitized changes                                      1         0.1
Total                                                  169      $492.6
\a This new goal provides 30 days each to process the change order
documentation, prepare a cost proposal, and definitize the change. 
NASA officials told us that they have now received proposals covering
many of these changes and that they plan to have them all negotiated
by July 31, 1996. 
-------------------------------------------------------- Chapter 2:2.2
Data from the prime contractor's performance measurement status
reports show the prime development program is behind its planned cost
and schedule, with deteriorating cost and schedule trends.  As
illustrated in figure 2.1, the cost variance went from a positive
$26.5 million in January 1995 to a negative $88.6 million in April
1996.  Similarly, the schedule variance worsened over the same time
period, going from a negative $43.2 million in January 1995 to a
negative $87.9 million.\1
   Figure 2.1:  Cost and Schedule
   Variances for ISS Prime
   (See figure in printed
Technical difficulties have caused the unfavorable cost and schedule
conditions.  Problems include the development of the node,\2 which is
scheduled to be launched on the first U.S.  launch in December 1997,
and the U.S.  Laboratory section.  Most of the adverse cost and
schedule variances are due to development problems being experienced
by lower tier subcontractors.  Data from the Performance Measurement
Status Report show that 67 percent of the over cost and 52 percent of
the behind schedule conditions at the end of 1995 existed at lower
tier subcontractors where performance measurement oversight is
limited.  Program managers have identified lower tier subcontract
performance as a top program risk.  The program manager for the
largest product group subcontractor also told us that subcontractor
performance is one of his major concerns. 
These unfavorable trends indicate developing cost and schedule
problems that may be difficult to overcome.  Contractor analyses in
early 1996 showed that the unfavorable cost variance could exceed
$114 million by July 1996 if the trends continued and recovery
actions were unsuccessful.  Analyses of cost performance data at that
time predicted estimates of project completion costs ranging from
$5.93 billion to $6.29 billion.\3 As previously mentioned, the prime
contractor's January 1996 cost estimate, including all authorized but
unpriced changes, was $5.87 billion.  Against this baseline,
estimated overruns at project completion ranged from about $60
million to over $400 million. 
\1 Cost variances represent the difference between actual costs
incurred to complete specific work steps and the amounts budgeted for
that work.  Schedule variances are the dollar value of the difference
between the budgeted cost of work planned and work completed.  Cost
and schedule variances are not additive but schedule variances become
cost variances as additional work; that is, overtime, is often
required to regain schedule. 
\2 A pressurized element that will serve primarily as a storage
locker and berthing location for other pressurized elements. 
\3 NASA's analyses were performed using Performance Analyzer, a
DOD-developed software program for analyzing contractor-reported
performance measurement data.  The estimates at completion represent
generally accepted estimating techniques that range from "best" to
"worse" case scenarios. 
-------------------------------------------------------- Chapter 2:2.3
The monthly performance measurement status reports include instances
where the contractor's estimated total completion costs did not
recognize over budget conditions.  The accompanying narrative did not
explain how the over budget conditions would be corrected and
included indications that overrun conditions could worsen.  To the
extent that contractors' estimates of completion costs are based on
overly optimistic recovery plans, reported estimated completion costs
would be understated and would potentially obfuscate the funding
requirements for completing the program.  Understated costs will
ultimately further strain the limited financial reserves. 
Accurate information and analyses of cost and schedule status and
estimates of total completion costs are important because they
provide cost visibility of the actual funding requirements for the
approved scope of work.  At a minimum, estimates of completion costs
should consider actual performance and costs to date, projections of
future performance, and estimates of the cost of work remaining. 
Research has shown that once a project is about 15-percent complete,
it becomes increasingly unlikely that unfavorable cost or schedule
trends will be reversed and more likely that the percent overrun at
completion will be greater than the percent overrun to date.\4 Such
circumstances heighten the importance of contractors detailing their
recovery plans when they claim that there will be no or little cost
overrun at completion.  NASA's and Boeing's surveillance audits of
contractor cost and schedule control system compliance, which are
discussed in chapter 3, also identified the lack of realistic
completion estimates as a problem area. 
The following examples illustrate potentially understated completion
cost estimates from the January 1996 performance measurement status
  -- The structures and mechanism line item, with 40 percent of the
     work completed, showed a $11.3-million, or 11-percent, overrun. 
     The estimate at completion forecast a $5-million overrun.  The
     report narrative said that a lower tier subcontractor forecast a
     $16-million overrun at project completion for its portion of the
     work.  This subcontractor had developed a recovery plan that
     would take 2 years to 3 years to implement.  The product group
     subcontractor had reviewed its subcontractor's cost estimate and
     had established a lower provisional estimate. 
  -- The U.S.  Node 1 line item, with 64 percent of work completed,
     showed a $17.4-million, or 15-percent, overrun and a 7-percent
     behind schedule condition, valued at $8.3 million.  However, the
     contractor forecasts about a $0.3-million underrun at
     completion.  The report narrative said that plans to regain
     schedule include using three shifts working 7 days a week, which
     indicates that additional cost overruns can be expected.  The
     narrative also said that this line item will experience a cost
     overrun at completion but efforts are being made to limit its
  -- With 62 percent of work completed, the U.S.  Laboratory line
     item is $19.2 million, or 5 percent, over budget and $20.1
     million behind schedule.  The report, however, predicted only
     about a $0.6-million underrun at completion.  Reasons for the
     current overruns included increased spending to recover from
     schedule delays, purchase substitute parts, and pay premiums for
     accelerated deliveries; testing taking longer than planned; and
     poor vendor performance.  The narrative said that the prime
     contractor is working on recovery plans to reduce these
     unfavorable variances, but that the majority of the cost
     variance is unrecoverable.  It also predicted that several U.S. 
     Laboratory cost elements would not recover from their current
  -- The communications and tracking line item, with 55 percent of
     work completed, showed a $5.3-million, or 6-percent, overrun but
     forecast completing the effort with no overrun.  The narrative
     said that some elements had experienced technical development
     problems and testing failures and that they will experience cost
     overruns at completion.  However, the narrative also said that
     the unfavorable cost variances will be offset by good
     performance elsewhere within this cost account and that a
     subcontractor will cover other unanticipated costs with
     management reserve funding.  The narrative did not say how the
     current overrun would be corrected, but stated that the primary
     tier II subcontractor was managing to reduce budgets, which, if
     successful, would produce savings to offset the overrun. 
  -- With 46 percent of work completed, the thermal control line item
     shows a $3.9-million, or 7-percent, overrun, and the estimate at
     completion predicts a $1.8-million overrun.  The narrative said
     that a subcontractor, who is primarily responsible for much of
     the current overrun, has prepared an estimate that projects a
     $2.7-million overrun at completion.  While the narrative said
     that recovery plans are in place to reduce the overrun by about
     $0.4 million, the narrative did not say how the remaining
     $2.4-million overrun would be reduced to $1.8 million. 
  -- A product group subcontractor reported a $2.6-million, or
     9-percent, overrun of the radiator orbital replacement unit line
     item at the 49-percent completion point.  However, this
     subcontractor reported completing the project with no overrun,
     although a lower tier subcontractor performing the work forecast
     a $2.6-million overrun at completion for its portion of the
     work.  The narrative explained that because the lower tier
     subcontractor had started cost recovery actions to potentially
     reduce some of the current overrun and was evaluating other
     actions, the product group subcontractor chose not to recognize
     any variance at completion until additional studies were
The performance measurement status reports also do not show the most
recent bottom-up project completion cost estimates of the largest
product group subcontractor, McDonnell Douglas, which was conducted
prior to the July 1995 negotiations with the prime contractor.  The
estimate totaled $1.99 billion, $210 million more than the amount
negotiated with Boeing and currently reported in the performance
measurement system.  During negotiations, the subcontractor agreed on
a lower estimated cost of
$1.78 billion, provided that it would be exempted from sharing the
cost of overruns up to $150 million.\5
The difference between the estimate used in the performance
measurement system and McDonnell Douglas' most recent bottom-up
estimate is an additional cost risk.  McDonnell Douglas did not plan
to do its next bottom-up estimate of completion costs until the fall
of 1996, although it is considering completing a new estimate by this
summer.  By the time a new estimate is done, over half of the total
development effort is scheduled to be completed.  If the new estimate
projects a cost overrun, recovery will be difficult, if not
\4 Gary E.  Cristle, Office of the Assistant Secretary of Defense
(Comptroller), in a paper entitled "Contractor Performance
Measurement-Projecting Estimates at Completion," at the conference
Cost/Schedule Control Systems and Performance Measurement Systems,
sponsored by the Institute of Cost Analysis, Atlanta, Georgia,
October 26, 1987.  Data updated 200 to 500 contractors in September
1991.  (Source:  Cost/Schedule Control Systems Criteria:  The
Management Guide to C/SCSC, Revised Edition, 1992, Quentin W. 
Fleming, Probus Publishing Company, Chicago, IL.)
\5 While the subcontractor is reporting against a $1.78-billion
baseline, it has included a caveat in its performance measurement
status report that this figure only represents a target and does not
reflect its actual estimate of $1.99 billion.  This same matter is
also discussed in chapter 3, as it relates to the lack of a
completely established performance measurement baseline. 
---------------------------------------------------------- Chapter 2:3
In mid-December 1995, RSA proposed major changes in its involvement
in the development effort.  RSA proposed the change because it
claimed that it could not sustain the number of launches needed to
support both MIR and ISS.  The proposal added to concerns about RSA's
ability to fulfill its obligations to the program.  If RSA does not
meet its commitments, NASA's cost to develop and operate ISS will
increase.  Some of this potential cost is included in the potential
threats to the financial reserves previously discussed in this
chapter.  However, a total and sudden RSA withdrawal would likely
prevent the ISS program from achieving the completion of assembly
within its current $17.4-billion estimate.  NASA officials stated
that a complete and sudden withdrawal by RSA could result in a
renegotiation of the annual $2.1-billion funding profile and the
overall $17.4-billion assembly completion estimate. 
Initially, RSA committed to provide a Service Module for habitation
and for guidance, navigation, and control; Soyuz vehicles to provide
for emergency return through the completion of station assembly; and
Progress vehicles to resupply dry cargo (food, clothing, etc.) and
the propellant needed to maneuver and reboost ISS to maintain orbit. 
RSA's December 1995 proposed revision to that commitment included two
options.  Both essentially called for ISS elements to be attached to
the MIR Space Station.  One would have allowed RSA to delay
development of the Service Module and the upgrading of Progress
vehicles.  Under the other, RSA would deliver the Service Module on
time, but all other modules would be deferred past 2002.  The most
significant change for both options was the deletion of the Zenit
launch vehicle, thereby eliminating RSA's use of upgraded Progress
vehicles with larger payload capacity and its ability to launch the
Science Power Platform. 
NASA rejected RSA's proposal because of unacceptable safety, cost,
and operational impacts.  However, it countered with an offer to ease
RSA's launch requirements by using the space shuttle to fly supplies
to MIR, and to launch the Science Power Platform.  RSA accepted and,
in return, committed to, among other things, delivering the Service
Module on time, increasing the capacity of the Progress vehicle,
developing a new vehicle for resupplying propellant and dry cargo,
and modifying the Soyuz vehicles to accommodate a larger percentage
of the U.S.  astronaut corps.\6
Despite RSA's recommitment, NASA officials continue to be concerned
about RSA's ability to meet its obligations.  If RSA is totally or
substantially unable to meet its obligations, NASA would have to make
up the shortfall.  Some of the cost of this additional work is
included in the list of potential threats to the program's financial
reserves.  For example, NASA has designated $250 million for
developing a Control Module as a potential substitute for the Service
Module.  However, other additional costs are not currently identified
as threats to reserves, including, for example, the cost of modifying
shuttle orbiters to enable them to resupply propellant to the
NASA headquarters officials said that the cost impact could not be
entirely met by using reserves, if RSA is totally or substantially
unable to meet its commitments.  Early estimates of the cost and
schedule impacts are currently being analyzed.  The specific impacts
are not yet known since they depend on the timing and extent of RSA's
withdrawal.  However, ISS managers told us that, in general, the
major impact would be the slip in the assembly schedule.  A delay in
completing assembly would likely increase ISS' cost because
requirements would increase and development and operations would be
rephased over a longer period of time. 
\6 Currently, size restrictions of the Soyuz prevent more than half
of the U.S.  astronaut corps from being eligible for tours on ISS. 
============================================================ Chapter 3
NASA has made significant progress in implementing detailed and
comprehensive performance measurement systems at its major
contractors and product group subcontractors working on the prime
development program.  However, NASA's ability to routinely monitor
cost and schedule status using such systems is hampered because (1)
the baseline against which cost and schedule progress is measured is
not yet completely established and (2) some inconsistencies and
deficiencies in implementing the systems impact the accuracy of the
cost and schedule information reported. 
NASA has made slower progress in obtaining performance measurement
data from nonprime contractors.  Nonprime activity is spread across
several NASA centers and many contracts do not require performance
measurement data.  Also, NASA managers responsible for all the
nonprime work have not yet agreed with ISS managers on the type and
detail of performance data to be provided; and some nonprime
contractors providing performance data have not had their performance
measurement systems reviewed. 
---------------------------------------------------------- Chapter 3:1
The contractors working on the prime development effort have made
significant progress in implementing validated performance
measurement systems to monitor cost and schedule status.\1
Contractors have established detailed time-phased budgets and
schedules against which progress is being measured and reported.  The
contractors are submitting monthly reports that include:  detailed
cost and schedule performance information by work breakdown structure
to the 5th level, variance analyses, and corrective action plans to
mitigate significant cost and schedule problems.\2
However, some obstacles to an effective performance measurement
system remain.  The baseline against which progress is measured is
not yet completely agreed to.  Also, surveillance audits conducted by
NASA and the prime contractor disclosed problems that need to be
corrected to ensure accurate, consistent, and comprehensive
\1 See app.  I for a description of a performance measurement system
and its goals. 
\2 A work breakdown structure is a product-oriented family tree
subdivision of the hardware, software, services, and program-unique
tasks that organizes, defines, and graphically displays the work to
be accomplished and the product to be produced.  The work breakdown
structure provides a common framework for program management
decisions, proposal preparation, definition and authorization of
work, and allocation of resources. 
\3 Surveillance audits of the prime contractor and the three major
product group subcontractors were done to ensure that the
implementation of the cost and schedule control systems complied with
each contractor's corporate system description.  The audits were
completed in December 1995. 
-------------------------------------------------------- Chapter 3:1.1
The latest version of the program has been underway since November
1993 and NASA and Boeing reached basic agreement in January 1995.  At
that time, NASA had only conditionally consented to the prime
contractor's agreements with two of its three major product group
subcontractors.\4 NASA had opposed these subcontract agreements, in
part, because (1) the fee arrangements negotiated with the product
groups caused Boeing to assume more fee risk, which Boeing requested
to pass on to the government and (2) the negotiated spending plans
exceeded NASA's annual funding limitations.  NASA and Boeing
officials re-opened contract negotiations in January 1996 to settle
their remaining differences related to subcontractor annual spending
plans and fee arrangements.  On March 18, 1996, NASA and Boeing
signed a memorandum of agreement.  In early May, the memorandum of
agreement was superseded by a contract modification.  However, while
the modification addresses fee arrangements, it did not establish an
agreed annual funding profile.  The annual phasing of funds is
especially important given the $2.1-billion annual funding cap. 
In January 1995, when NASA and Boeing definitized the prime contract,
they agreed to the funding to be allocated to each of the three major
product group subcontractors.  However, Boeing has had difficulty
staying within these allocations in its negotiations with some of its
subcontractors.  For example, NASA and Boeing agreed that the work
performed by McDonnell Douglas should cost $1.719 billion.  As
previously noted in chapter 2, McDonnell Douglas' estimate for doing
the work is $1.99 billion.  In October 1995, Boeing and McDonnell
Douglas agreed to a completion cost estimate of $1.78 billion, $61
million over NASA's target cost,\5 and negotiated a target cost
adjustment clause that would allow McDonnell Douglas to overrun this
amount by up to $150 million without invoking the incentive fee
clause requiring contractors to share in any overruns.\6
\4 The prime contractor's negotiations with the other major product
group subcontractor was completed to NASA's satisfaction. 
\5 In accordance with the NASA and Boeing contract at the time,
Boeing's incentive fee pool was reduced by about $15 million.  Thus,
the net impact on NASA of this $61 million increase was $46 million. 
\6 Essentially, McDonnell Douglas is pledging its best effort to
achieve the lower estimate but wants to be indemnified against any
penalty if its own estimate proves more accurate.  This same matter
is discussed in chapter 2, as it relates to the potential for further
use of the program's remaining financial reserves. 
-------------------------------------------------------- Chapter 3:1.2
All the contractors passed their initial surveillance audits
performed by NASA or the prime contractor to assess the
implementation of their performance measurement systems.  However,
the reviews identified implementation deficiencies, including the
  -- The method used by the prime contractor to record "earned value"
     was not consistent with its corporate system description and may
     have resulted in subjective and inaccurate measurement of
     development progress.\7 Also, the prime contractor's criteria
     for completing established milestones were not well defined and
     some managers were taking credit for milestones not fully
     completed.  A program official told us that the contractor is
     revamping its performance measurement system to correct these
     problems.  The target period for reporting data using the new
     system is the summer of 1996. 
  -- The prime contractor's budgets contain excessive level-of-effort
     work.  ISS program officials tasked the prime contractor to
     determine the extent of level-of-effort work within both prime
     and product group subcontractor budgets and identify ways to
     reduce that amount.\8
  -- One product group subcontractor did not have good processes for
     overseeing its lower tier subcontractors' performance
     measurement status.  Program officials tasked the prime
     contractor to provide more in-depth reporting on actions planned
     to mitigate the subcontractors' cost and schedule problems. 
  -- One product group subcontractor was reporting its estimate at
     completion at the negotiated amount instead of its most likely
     estimate of costs to complete contracted work.  Also, the latest
     revised completion cost estimates in other product group
     subcontractors' monthly performance measurement status reports
     were thought to be unrealistic.  A program official told us that
     this issue was addressed in the prime contractor's award fee
     evaluation for the period ending March 1996. 
  -- Two product group subcontractors had not completed comprehensive
     re-evaluations of estimates to complete contracted work in
     accordance with their corporate system descriptions.  These
     subcontractors' corporate system descriptions require that such
     re-evaluations be done at least annually.  One of these product
     group subcontractors expected to report the revised estimates in
     the April 1996 performance measurement status report.  The other
     product group subcontractor was considering completing a
     re-evaluation by June 1996. 
Until corrected, these deficiencies could impact the accuracy of
reported cost and schedule progress.  However, NASA has made progress
in addressing the problems noted during the surveillance audits,
including those previously mentioned.  In addition, NASA plans to
perform periodic follow-up reviews and has delegated surveillance
responsibilities to DOD contract administration organizations where
they are co-located at contractor plants. 
\7 "Earned value" is defined in app.  I. 
\8 Level-of-effort work can only be measured in terms of resources
consumed.  Large amounts or proportions of level-of-effort work could
obscure progress.  Therefore, to the extent possible, work should be
in discrete components for scheduling and measuring. 
---------------------------------------------------------- Chapter 3:2
ISS program managers do not get the same level of detailed
performance data on nonprime work that they get on the prime
development effort.  There are several reasons for this.  First, the
work is widely dispersed, with many contracts spread out across
various NASA centers and managed by different NASA organizations,
with no single entity responsible for the entire effort.  Second,
many contracts were awarded before NASA issued its draft policy on
reporting performance measurement information and thus do not require
performance status reporting; in other cases, some of the contracts'
dollar values are too low to require detailed reporting.  Third, ISS
program managers have not agreed with all contract managers at the
centers on what performance measurement information will be reported. 
Finally, some contractors who were providing performance measurement
data either did not have recently reviewed systems or were providing
only summary data with little detail or analyses. 
NASA officials said that the recent designation of Johnson as lead
center for the ISS program is intended to provide the needed
consolidated management and oversight in these areas.  In addition,
in commenting on a draft of this report, NASA said that the program
recently made significant progress in obtaining performance measures
on the nonprime effort, noting the new quarterly earned value
reporting (discussed in the following section) and the coordination
of earned value determination techniques between the nonprime
organizations and the ISS program office. 
-------------------------------------------------------- Chapter 3:2.1
Nonprime work, which is related primarily to ISS operation and use,
including the construction of the control center, operational
training facilities, and space shuttle modifications to support ISS,
accounts for $5.6 billion of the total $17.4 billion development
budget.  According to program office statistics, 5 NASA field centers
had more than 65 contractors working on nonprime tasks in fiscal year
Although generally dispersed, the nonprime effort is somewhat
concentrated at the Johnson Space Center, where various directorates
are responsible for more than 27 contractors working on over 40
tasks.  Except for a small number of contracts awarded for specific
ISS-related requirements, virtually all of the nonprime work was
added to existing center support contracts.  For example, ISS
operations and training tasks were added to existing contracts under
the Johnson Space Center Mission Operations Directorate, and
engineering development work was added to the Engineering
Directorate's support contract.  The tasks added to existing
contracts usually have dollar values too low to require performance
measurement reporting.\9
These support contracts have historically been level-of-effort
contracts on which progress is difficult to determine because work is
typically measured in terms of resources consumed instead of
accomplishments against established milestones.  Also, some support
contracts were awarded before NASA revised its policy on using
performance measurement in 1995.  Consequently, current performance
measurement reporting requirements were not included in the
contracts.  For example, the major contracts supporting ISS-related
tasks for the Space and Life Sciences Directorate at Johnson Space
Center were awarded in 1991, 1993, and 1995.  The contract awarded in
1995 is a completion form contract, but its value of about $20
million, is too low to require performance measurement reporting. 
The contract that provides most engineering support was awarded in
1994, also before NASA revised its policy. 
Managers at the Johnson Space Center are attempting to convert
support service contracts from level of effort to completion form
contracts, with established product delivery milestones to improve
their performance measurement oversight.  In commenting on a draft of
this report, NASA said that agreements have recently been reached for
quarterly earned value reporting on nonprime tasks estimated to cost
$2 million annually or $5 million in total. 
\9 Contracts that are less than $25 million in value do not require
the application of performance management systems criteria. 
-------------------------------------------------------- Chapter 3:2.2
Issues involved in reaching agreement with contract managers to
provide performance management assessments for their ISS-related
tasks include who will prepare the assessments, the scope of
coverage, and the detail that will be provided.  This task is made
more difficult because the performance measurement systems specified
by the centers' contracts do not prescribe the same level of
disciplined planning and contractor conformity to validated
performance measurement systems as required of the ISS prime
development contractor, and nonprime contract managers are not as
familiar with the newer performance measurement concepts as the prime
contract managers are. 
In October 1995, ISS program managers queried the major nonprime
contract managers to obtain a performance progress assessment.  The
assessment reported most of the nonprime effort to be behind schedule
and within budget.  However, in reviewing that data, ISS program
managers agreed that the reported information was not an accurate
assessment of performance progress because performance was not
measured against budgeted milestones and, in most cases, only
reflected spending status; that is, actual costs incurred compared to
budgeted costs. 
-------------------------------------------------------- Chapter 3:2.3
While most nonprime contracts involving ISS-related tasks do not
require performance measurement assessments, a few do.  Examples
include the Mission Systems and Training Systems contracts and
portions of the space shuttle and space suit contracts managed by the
Johnson Space Center, and the utilization contract managed by the
Marshall Space Flight Center. 
The Mission Systems and Training Systems contracts were awarded in
1989 and the Johnson Space Center's Mission Operations Directorate,
which oversees these contracts, began pursuing performance
measurement reporting for these two contracts in late 1992.  As a
result, these two contractors have implemented performance
measurement systems.  NASA has reviewed and approved both
contractors' systems.  The contractors provide NASA with monthly
performance measurement status reports using DOD-specified formats. 
The space shuttle and space suit contractors are also providing
performance measurement assessments for some ISS-related tasks, even
though their contracts do not require a validated performance
measurement system or specify the type of performance data to be
provided.  However, NASA has not verified that these contractors are
properly using performance measurement systems to track and report
progress.  The reports provided by these contractors do not include
variance analyses or corrective action plans. 
NASA last conducted a review of the utilization contract at the
Marshall Space Flight Center in 1992, when that contract was a part
of the Space Station Freedom Work Package 1 contract.  However, with
the inception of ISS, the Freedom contract was novated, resulting in
the current utilization contract.\10 The contractor's system has not
been reviewed since the novation.  NASA officials at the Marshall
Space Flight Center told us that they plan to conduct a review as
soon as the contractor establishes a new baseline, most likely
sometime in the summer of 1996.  Changes in the content of the
contract, budget changes, and NASA's efforts to reduce its funding
requirements have led to the current instability in the contract's
baseline.  NASA officials at the Marshall Space Flight Center said
that the instability had prevented them from using the performance
measurement system to its fullest advantage. 
\10 Novation is a legal term describing the substitution of a new
obligation for an old obligation.  In this case, when the Freedom
work package contractors became major product group subcontractors
under the ISS contract, the utilization portion of the Work Package 1
contract became a new contract between NASA and Boeing.  This Boeing
entity is different from both the Boeing prime contractor and the
Boeing major product group subcontractor. 
=========================================================== Appendix I
Performance measurement is a management tool for planning,
monitoring, and controlling all aspects of program and project
management--cost, schedule, and technical requirements.  Performance
measurement has its origins in the Department of Defense (DOD)
programs of the 1960s.\1 Interest and application of the performance
measurement concept spread to other government agencies in the 1970s
and 1980s.  Today, it is being applied to major programs of DOD, the
National Security Agency, the Department of Energy, the Federal
Aviation Administration, and the National Aeronautics and Space
Administration (NASA). 
NASA's ability to track the development schedule for the
International Space Station (ISS) is critical as the total program is
spending over $5 million a day.  To improve cost control and
management of space station development contracts, NASA committed its
contractors to implementing validated performance measurement
systems.  Also, in July 1995, NASA issued a draft policy directive
and procedures to adopt DOD's Cost/Schedule Management Guide on all
NASA contracts.\2 The new directive established a set of performance
measurement system criteria for NASA that were identical to those
used by DOD.  The intent of standardizing NASA and DOD requirements
was to enable NASA contractors to use DOD processes and management
reports and save the cost of creating and operating separate systems. 
When fully implemented, a performance measurement system has a
detailed baseline program from which to measure whether tasks are
ahead of or behind schedule, and/or under or over budget.  The system
is intended to provide early identification of potential cost and
schedule problems and accurate information to help program managers
take corrective actions.  Trends can be extrapolated from the data to
produce a range of cost and schedule estimates at completion for part
or all of a project or its major segments. 
Effective performance management requires a stable budget baseline
that is consistent with an integrated master program schedule.  A
properly integrated time-phased budget baseline and program schedule
identifies detailed work requirements or milestones against which
ongoing contract performance can be measured. 
The performance measurement monthly status reports compare planned
budgets and schedules with actual work performed.  The amount of work
accomplished against the work schedule is called the "earned value."
Knowledge of the earned value is essential to monitoring progress
because it provides insights into the cost and schedule status of
tasks.  The performance measurement status reports also highlight
significant variances against the baseline cost and schedule. 
Variances that exceed established thresholds require analyses of the
nature and cause of the problem.  These analyses are required to
describe the impact of the variance on the program and corrective
actions taken or planned.  Trend analyses of the cumulative costs and
of the schedule for completing the project can be used to further
assess project progress and to project the total cost and schedule to
complete the project called the "estimate at completion."
Realistic estimates at completion permit program managers to compare
estimated final costs to the budgeted and contracted amounts and
provide cost visibility with regard to what the actual funding
requirements might be for the approved scope of work.  To be
meaningful, an estimate at completion should include actual costs and
accomplishments to date, knowledgeable projections of what remains to
be accomplished, and realistic estimates of how much the remaining
work will cost.  Such estimates should be examined on a monthly basis
and updated when warranted. 
(See figure in printed edition.)Appendix II
\1 Cost and Schedule Control Systems Criteria was established in 1967
by DOD to standardize contractor requirements for the reporting of
performance measurement data on major contracts and provide
visibility of performance progress. 
\2 NASA hopes to finalize the draft policy in the very near future. 
=========================================================== Appendix I
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's Comments on NASA's letter dated May 16, 1996. 
--------------------------------------------------------- Appendix I:1
1.  NASA's general observations are included throughout the report
text to the extent appropriate. 
2.  NASA's views on the adequacy of the remaining fiscal year 1996
financial reserves and the carryover of unused fiscal year 1996
reserves to fiscal year 1997 have been added to the report. 
3.  NASA pointed out that outstanding issues related to fees were
settled with a contract modification on May 4, 1996, and stated that
the cost baseline is not an unresolved issue and that costs are
agreed to between the prime contractor and the product group
subcontractors.  The report has been revised to recognize the updated
information provided by NASA.  However, the annual phasing of funds
is still not settled.  Also, as discussed in the report, MacDonnell
Douglas still professes a higher likely cost baseline than the one
they are being measured against in the performance management status
report.  When these matters are settled, the cost baseline will be
4.  The updated information on earned value reporting and
coordination has been added to the body of the report. 
5.  We added information showing a range of cost overrun estimates,
from "best" to "worst" case. 
6.  Information regarding cost growth sharing through reductions to
contractor's fee has been added to the report. 
*** End of document. ***

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