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)

 ----mX-.“-..m...-- -.~
                          Unclassified Summary to the Chairman, * I
 GAO                      Legislation and National Security
                          Subcommittee, Committee on
                          Government Operations, House of

        1 !l!N
                          STRATEGIC DEFENSE
I!                        INITIATIVE PROGRAM
                          Basis for Reductions in
                          Estimated Cost of
                          Phase I



&A0   General Accounting OfY!ice!
      Washington, D.C. 20548

      National Security and
      Intmnational Affairs Division

      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,

      Nancy R. Kingsbury
      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
                              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

                              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.
                  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

    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
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