----mX-.“-..m...-- -.~ Unclassified Summary to the Chairman, * I GAO Legislation and National Security Subcommittee, Committee on Government Operations, House of Representatives --P-P- my )I 1 !l!N STRATEGIC DEFENSE Y I! INITIATIVE PROGRAM Basis for Reductions in Estimated Cost of Phase I B 141345 GAO/NSIAI)-90-173 united states &A0 General Accounting OfY!ice! Washington, D.C. 20548 National Security and Intmnational Affairs Division B-223094 May 9,199Q The Honorable John Conyers, Jr. Chairman, Legislation and National Security Subcommittee Committee on Government Operations House of Representatives Dear Mr. Chairman: In responseto your request, we have reviewed the Strategic DefenseIni- tiative Organization’s reasonsfor cost reductions between the June 1987 and October 1988 cost estimates for the PhaseI Strategic DefenseSys- tem and the credibility of the October 1988 estimate of $69.1 billion. On May 1, 1990, we issued a classified report on our findings. This is an unclassified summary of our classified report. As requested, we plan no further distribution of this summary until 7 days after its issue date. At that time we will send copies to chairmen of appropriate committees; the Secretariesof Defense,the Air Force, and the Army; the Directors, Strategic DefenseInitiative Organization and Office of Management and Budget; and other interested parties. Pleasecontact me on (202) 276-4268 if you or your staff have any ques- tions concerning this summary. Other major contributors to this sum- mary are listed in appendix I. Sincerely yours, *KG7 Nancy R. Kingsbury Director Air Force Issues Page 1 GAO/NSIAD-go-173SD1Coot EsWte In June 1987 the Strategic DefenseInitiative Organization (SDIO) esti- Purpose mated that the PhaseI Strategic DefenseSystem would cost between $76.6 billion and $146.7 billion. In October-1988SD10 reduced its esti- mate to $69.1 billion. The Chairman, Legislation and National Security Subcommittee, House Committee on Government Operations, asked GAO to (1) assessthe credi- bility of the October 1988 estimate of $69.1 billion and (2) determine the reasonsfor the cost reductions. To accomplish these objectives, the Chairman agreed that GAO would limit its review to the June 1987 and October 1988 estimates for four of the nine phase I elements-the Space-BasedInterceptor (SBI); Ground-BasedSurveillance and Tracking System (GSTS); Battle Managementand Command,Control, and Commu- nications (BM/c~); and launch systems. Since the design and technical characteristics neededfor the phase I sys- Background tem were uncertain, SD10prepared two cost estimates in June 1987-one low estimate and one high estimate. In October 1988 SDIO prepared only a single cost estimate. To examine the reasonsfor the cost reductions between the June 1987 and October 1988 cost estimates, GAO used the June 1987 high estimates for GSTS, BM@, and launch systems becauseof the similarity with the system features in October 1988. However, GAO used the June 1987 low estimate for the SBI comparison becausethe SBI technical characteristics used in that estimate were more similar to those used in the October 1988 estimate. The four elements were estimated to cost $56.2 billion in June 1987 and $36.9 billion in October 1988, a $19.3 billion reduction. Figure 1 shows the change for each of the four elements. Page2 GAO/NSIAD-30473SD1CostEstlmate Figure 1: Comparison of 8010’s June 1987 and October 1988 Coat E8tlmates for Phase I Element8 25 Dollam Inbllllam GAO Reviewed 881 Launch Phr I l loment8 El June 1887 cost dmate OCL 1888amtelitiIllate The $69.1 billion estimate for the phase I system is only a portion of the cost of the total Strategic DefenseInitiative (SDI) program. It is only the estimated cost in 1988 dollars to develop, produce, and deploy the phase I system. It doesnot include the cost of any follow-on phases,the cost for operating and maintaining the system once it is deployed, or an allowance for inflation that may occur between October 1988 and the time the phase I system is deployed. The October 1988 cost estimate was appropriately prepared using stan- Resultsin Brief dard Department of Defensecost estimating models and methodology, but GAO found that SD10 had made someerrors that understated the cost by $2.1 billion. SDIO may also have used overly optimistic assumptions in preparing the SBI estimate, which understated it by at least $6 billion. The $19.3 billion reduction in estimated phase I costs for the four ele- ments resulted primarily from (1) reducing quantities, (2) changing technical characteristics, (3) changing cost estimating models, and Page 3 GAO/NSIAD90-173 SD1Coat Estimate (4) reducing support costs such as training, spare parts, and launch sys- tems. About $2 billion of the reduction in support costs was due to deferring development costs for the Advanced Launch System to subse- quent program phases. Principal Findings Credibility of October 1988 GAO'S review indicated that SDIO used appropriate methods to prepare Estimate the $69.1 billion estimate, but it may have used overly optimistic assumptions. The estimate was derived primarily from parametric cost estimating models. These models, which forecast a system’s cost based on the actual costs of similar systems, are used to estimate costs of future systems, such as phase I systems, until detailed design informa- tion is available. GAO replicated portions of the October 1988 estimate and found someerrors that understated costs by $2.1 billion. Even though SD10 applied proper cost estimating methods, the credibility of the estimate largely dependson the validity of assumptions used in the estimate. GAO and the Department of Defense’sCost Analysis Improvement Group believe that someof the assumptions used by SD10 may be too optimistic, For example, SDIO assumedthat improvements in manufacturing technology would be available to reduce the cost of pro- ducing SBI significantly. SDIO has research programs to provide the neededimprovements, but if the programs are not successful,SBI hard- ware costs could increase as much as $6 billion based on SDIO'S estimate, or $12.9 billion based on an independent cost estimate prepared by a contractor for SDIO. According to the Cost Analysis Improvement Group, achieving these improvements, although not impossible, will be a great challenge. The $69.1 billion estimate includes a cost reserve of $7.6 billion, or 11 percent. This cost reserve is intended to cover future increases,for example, those changesthat result from technical or schedule changes. Whether this reserve is adequate will largely depend on the extent to which the estimate’s assumptions prove to be correct. The estimate also includes a performance cost reserve of $1.1 billion for additional quanti- ties of the system elements that may be neededto meet military requirements. Page 4 GAO/NSIAD-fW-173SD1Cost EMmate SDIO’S $69.1 billionestimate represents only a snapshot at a point in time that is very early in the development cycle of the PhaseI Strategic DefenseSystem. Department of Defenseexperience has shown that such early estimates usually increase for a variety of reasons. Reasonsfor Cost Changes As shown in table 1, the October 1988 cost estimates for the four phase I elements that GAO reviewed were $19.3 billion lower than the June 1987 estimates. The acquisition and deployment cost reductions were due to quantity changesof $8.4 billion, technical changesof $1.2 billion, and support changesof $9.8 billion. These cost reductions were offset by an increase of $0.1 billion due to cost estimating model changes. Table 1: Analydr of Coat Change8 for Four Phere I Element@ Dollars in billions Reasons for cost change8 SBI GSTS BM/C3 Launch Total Quantity $-6.6 $-1.7 l l $-8.4 Technical 1.6 -2.8 . . -1.2 Estimatinn 1.2 -1.1 . . 0.1 Support -1.9 -0.4 0.3 -7.8 -9.8 Total 8-5.8 8-6.0 $0.3 S-7.8 s-is.3 Note: Totals do not add due to rounding Quantity Changes Between June 1987 and October 1988, SDIO determined that different quantities of SBI and GSTSsatellites would be neededfor the phase I sys- tem, which reduced costs by about $8.4 billion. Technical Changes On the basis of continuing concept and design studies, SD10 changed some of the SBI and GST8 technical characteristics, which reduced costs by about $1.2 billion. Estimating Changes Estimating changesresulted in an increase of $114 million between the June 1987 and October 1988 estimates. The changesincluded using dif- ferent cost models, adding cost reservesto the SBI estimate, and cor- recting an error in the June 1987 osrs estimate. Page 6 GAO/NSIAD9O-173SD1Coat.Estimate The changesin cost estimating models resulted in reductions of $27 bil- lion. The Air Force added $3.4 billion to cover possible future cost increasesfor SBI. Also, SD10 corrected an error in the June 1987 GS’IS esti- mate that resulted in a reduction of $619 million. Support Changes Reductions in support costs accounted for $9.8 billion of the difference between the two estimates. The primary reduction was $7.8 billion for the cost of launching space-basedsystems, which resulted from decreasesin the quantity and weight of satellites to be launched and the use of less expensive launch systems. By switching from the Advanced Launch System to a modified Peacekeeper,SD10 avoided the $2 billion development cost for the Advanced Launch System during phase I. SD10 still supports develop- ment of the system for future phases. GAO'S report is not making any recommendations. Recommendations As requested,GAO did not obtain official agency comments. However, Agency Comments GAO discusseda draft of this report with SD10 officials and incorporated their comments where appropriate. Page 0 GAO/NSIAD-90-173SDIChtEstSmate Y Page 7 GAO/NSIAD-30473 SD1Cost Estimate Appendix I Major Contributors to This Summary Norman J. Rabkin, Associate Director National Security and J. Klein Spencer,Assistant Director International Affairs Samuel N. Cox, Assignment Manager Thomas L. Gordon, Evaluator John W. Randall, Jr., Evaluator (ae2422) Page 8 GAO/-NSIAD-30-173SD1Cost Estimate Rt~lut~sts for copies of GAO reports should be sent. t.o: 1J.S. Gewral Accouut.iug Offiw Post Office Hox 6016 Gai thtwburg, Mary laud 20877 ‘IIt* first five copies of each rtqmrt are free. Additional copies are $2.00 rwh ‘I’httrc~ is a 25% cliscouut~ 011orders for 100 or more copies uuClet1 t.0 a siugle addwss.
Strategic Defense Initiative Program: Basis for Reductions in Estimated Cost of Phase I
Published by the Government Accountability Office on 1990-05-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)