oversight

Space Station: Cost Control Problems Are Worsening

Published by the Government Accountability Office on 1997-09-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office

GAO                Report to Congressional Requesters




September 1997
                   SPACE STATION
                   Cost Control Problems
                   Are Worsening




GAO/NSIAD-97-213
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-276834

             September 16, 1997

             The Honorable Dale Bumpers
             United States Senate

             The Honorable John Dingell
             House of Representatives

             As you requested, we have updated certain aspects of our July 1996 report
             on the International Space Station (ISS), which is being developed by the
             United States and others.1 Specifically, this report addresses the Russians’
             performance problems and the National Aeronautics and Space
             Administration’s (NASA) reaction to them, including the additional cost and
             cost risk assumed by NASA; cost and schedule experience under the prime
             contract; and the status of and outlook for the program’s financial
             reserves. You also asked us to identify actions taken by NASA to keep the
             space station program’s funding within certain limits through the
             completion of the station’s assembly.


             NASA  and its international partners—Japan, Canada, the European Space
Background   Agency (ESA), and Russia—are building the ISS as a permanently orbiting
             laboratory to conduct materials and life sciences research under nearly
             weightless conditions. Each partner is providing station hardware and
             crew members and is expected to share operating costs and use of the
             station. The NASA Space Station Program Manager is responsible for the
             cost, schedule, and technical performance of the total program. The
             Boeing Corporation, the station’s prime contractor, is responsible for ISS
             integration and assembly. As of June 30, 1997, the prime contractor
             reported that over 200,000 pounds of its station hardware was being built
             or had been completed. According to NASA, by the end of fiscal year 1998,
             hardware for the first six flights will be at Kennedy Space Center for
             launch processing.

             In our July 1996 report and subsequent testimony,2 we noted that the cost
             and schedule performance of the space station’s prime contractor had
             deteriorated and that the station’s near-term funding included only limited
             financial reserves.3 We also identified an emerging risk to the program: the

             1
              Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17, 1996).
             2
              Space Station: Cost Control Difficulties Continue (GAO/T-NSIAD-96-210, July 24, 1996).
             3
              Financial reserves are used to fund unexpected contingencies, such as cost growth, schedule delays,
             or changes in project objectives or scope.



             Page 1                                                           GAO/NSIAD-97-213 Space Station
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                   indications of problems in the Russian government’s ability to meet its
                   commitment to furnish a Service Module providing ISS power, control, and
                   habitation capability.

                   For several years, the space station program has been subject to a
                   $2.1 billion annual funding limitation and a $17.4 billion overall funding
                   limitation through the completion of assembly, which until recently had
                   been scheduled for June 2002. According to NASA, these funding
                   limitations, or caps, came out of the 1993 station redesign. Previous
                   redesigns had been largely financially driven and the caps were intended
                   to stabilize the design and ensure that it could be pursued. However, the
                   caps are not legislatively mandated, although references to them in
                   congressional proceedings and reports indicate that NASA was expected to
                   build the space station within these limits.4 When the caps were first
                   imposed, the program had about $3 billion in financial reserves.

                   In our July 1996 report, we concluded that, if program costs continued to
                   increase, threats to financial reserves worsened, and the Russian
                   government failed to meet its commitment in a timely manner, NASA would
                   either have to exceed its funding limitation or defer or rephase activities,
                   which could delay the space station’s schedule and would likely increase
                   its overall cost. In June 1997 testimony, we said that, if further cost and
                   schedule problems materialized, a congressional review of the program
                   would be needed to determine the future scope and cost level for a station
                   program that merits continued U.S. government support.5 Over the past
                   several months, NASA has acknowledged that the potential for cost growth
                   in the program has increased.


                   In May 1997, NASA revised the space station assembly sequence and
Results in Brief   schedule to accommodate delays in the production and delivery of the
                   Service Module. This revision occurred after more than a year of
                   speculation regarding Russia’s ability to fund its space station
                   manufacturing commitments. To help mitigate the adverse effects of the
                   Russian’s performance problems and address the possibility that such
                   problems would continue, NASA developed and began implementing
                   step 1 of a 3-step contingency plan. NASA has budgeted an additional


                   4
                    These limitations apply only to the station budget line providing funds to support development,
                   utilization, and operation activities. This budget line does not cover all station and station-related
                   requirements, including NASA personnel and personnel-related activities, space shuttle launch
                   support, and shuttle performance improvements needed to meet station requirements.
                   5
                    Space Station: Cost Control Problems Continue to Worsen (GAO/T-NSIAD-97-177, June 18, 1997).



                   Page 2                                                               GAO/NSIAD-97-213 Space Station
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$300 million from other NASA activities for the space station program to
cover the hardware costs under step 1. NASA will also incur other costs
under step 1 that have not yet been estimated. Significant additional cost
growth could occur in the station program if NASA has to implement
steps 2 and 3 of its contingency plan.

The cost and schedule performance of the station’s prime contractor has
continued to steadily worsen. From April 1996 to July 1997, the contract’s
cost overrun quadrupled to $355 million, and the estimated cost to get the
contract back on schedule increased by more than 50 percent to
$135 million. So far, NASA and prime contractor efforts have not stopped or
significantly reversed the continuing deterioration. The station program’s
financial reserves have also significantly deteriorated, principally because
of program uncertainties and cost overruns. The near-term reserve posture
is in particular jeopardy, and the program may require additional funding
over and above the remaining reserves before the completion of station
assembly.

To date, NASA has taken a series of actions to keep the program from
exceeding its funding limitations and financial reserves. NASA is accounting
for these actions in ways that enable it to report its continuing compliance
with the funding limitations. However, to show continuing compliance in
some cases, NASA has had to redefine the portion of the program subject to
the funding limitations. Thus, the value of the current limitations as a
funding control mechanism is questionable.

Since our June 1997 testimony, further cost and schedule problems have
materialized and NASA has acknowledged that the potential for cost growth
in the program has increased. More complete estimates of the cost and
schedule impacts of ongoing and planned changes to the program are
scheduled to be available later this year. This information is expected to
provide a more complete and current picture of the cost and schedule
status of the program and clarify some of the major future cost risk it
faces. We believe the program has reached the point where the Congress
may wish to review the entire program. Such a review should focus on
obtaining congressional and administration agreement on the future scope
and cost level for a station program that merits continued U.S. government
support. In view of the expected availability of revised cost estimates, the
first opportunity for such a review would be in conjunction with NASA’s
fiscal year 1999 budget request.




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                      As a partner, Russia committed to making a variety of contributions to the
Russian Performance   ISS. These contributions include (1) the Service Module to provide crew
Problems Cause        habitation during assembly; (2) the Science Power Platform to help
Additional NASA       maintain the station’s orientation; (3) launch services to reboost and
                      resupply the station, including the provision of propellant; and (4) Soyuz
Activity              spacecraft to provide crew return capability during station assembly.6

                      In late 1995, NASA became concerned about Russia’s ability to provide
                      steady and adequate funding for its commitments. According to the NASA
                      Administrator and station program officials, the Russian government said
                      repeatedly that the problem would be resolved, despite mounting evidence
                      to the contrary. Finally, in the fall of 1996, Russia formally notified NASA
                      that funding difficulties would delay the completion of the Service Module,
                      which is a critical component for early assembly. Subsequently, NASA
                      designed a three-step recovery plan. Step 1 focuses on adjusting the
                      station schedule for an 8-month delay in the availability of the Service
                      Module and developing temporary essential capabilities for the station in
                      case the Service Module is further delayed by up to 1 year. Major activities
                      in this phase include delaying the launch of station components that are to
                      precede the Service Module into orbit and building an Interim Control
                      Module to temporarily replace the Service Module’s propulsion capability.
                      Step 1 is underway; the new or modified hardware being developed will be
                      completed even if Russia maintains the Service Module’s revised schedule
                      and delivers it on time. NASA officials told us that Russia has resumed its
                      financial commitment, the Service Module assembly has restarted, and
                      significant progress is being made.

                      Step 2 is NASA’s contingency plan for dealing with any additional delays or
                      the Russian government’s failure to eventually deliver the Service Module.
                      This phase could result in permanently replacing the Service Module’s
                      power, control, and habitation capabilities. NASA will decide later this fall
                      on whether to begin step 2. Under step 3 of NASA’s plan, the United States
                      and other international partners would have to pick up the remaining
                      responsibilities the Russian government would have had, such as station
                      resupply and reboost missions and crew rescue during assembly. A
                      decision on step 3 is planned for sometime next year, at the earliest.

                      In addition to their effects on space station development activities, these
                      recovery plan steps place additional requirements on the space shuttle
                      program. Under the plan, the space shuttle may be needed to launch and

                      6
                       Russia is also receiving funds under contract to build the U.S.-owned Functional Cargo Block to
                      provide the ISS’ initial guidance and navigational control capability.



                      Page 4                                                           GAO/NSIAD-97-213 Space Station
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                     deliver the Interim Control Module and perform station resupply missions
                     now expected to be done by Russia. Although the full impact of the
                     recovery plan on the space shuttle program is not yet known, the plan has
                     already resulted in the addition of two shuttle flights during the station’s
                     assembly.


                     The prime contractor’s cost and schedule performance on the space
Prime Contractor’s   station, which showed signs of deterioration last year, has continued to
Cost and Schedule    decline virtually unabated. Since April 1996, the cost overrun has
Performance          quadrupled, and the schedule slippage has increased by more than
                     50 percent. Figure 1 shows the cost and schedule variances from
Continues to         January 1995 to July 1997. Cost variances are the differences between
Deteriorate          actual costs to complete specific work and the amounts budgeted for that
                     work. Schedule variances are the dollar values of the differences between
                     the budgeted cost of work planned and work completed. Cost and
                     schedule variances are not additive, but negative schedule variances can
                     become cost variances, since additional work, in the form of overtime, is
                     often required to get back on schedule.




                     Page 5                                           GAO/NSIAD-97-213 Space Station
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Figure 1: Cost and Schedule Variances
on the Space Station Prime Contract        Dollars in millions
(Jan. 1995 to July 1997)
                                                   100



                                                     0



                                                   -100



                                                   -200



                                                   -300



                                                   -400

                                                          1/95 4/95 7/95 10/95 1/96 4/96 7/96 10/96 1/97 4/97 7/97
                                        Cost               27 -16 -19 -48 -62 -89 -123 -163 -223 -291 -355
                                        Schedule          -43 -45 -46 -55 -77 -88 -105 -107 -118 -129 -135



                                        Note: The zero line represents meeting planned cost and schedule. Negative schedule variances
                                        are the estimated cost of work to get back on schedule.




                                        Between January 1995 and July 1997, the prime contract moved from a
                                        cost underrun of $27 million to a cost overrun of $355 million. During that
                                        same period, the schedule slippage increased from a value of $43 million
                                        to $135 million. So far, the prime contractor has not been able to stop or
                                        significantly reverse the continuing decline.

                                        In July 1996, independent estimates of the space station’s prime contract
                                        cost overrun at completion ranged from $240 million to $372 million. Since
                                        then, these estimates have steadily increased, and by July 1997 they ranged




                                        Page 6                                                       GAO/NSIAD-97-213 Space Station
B-276834




from $514 million to $610 million.7 According to program officials, some
financial reserves will be used to help cover the currently projected
overrun.

Delays in releasing engineering drawings, late delivery of parts, rework,
subcontractor problems, and mistakes have contributed to cost overruns.
NASA’s concern about performance problems under the prime contract is
evidenced by its recent incentive and award fee actions. In March 1997,
NASA directed Boeing to begin adjusting its biweekly incentive fee accruals
and billings based on a higher cost estimate at completion than Boeing
was officially reporting. On the basis of an internal review, Boeing
subsequently increased its estimate of cost overrun at completion from
$278 million to $600 million. The increase in Boeing’s estimate potentially
reduces its incentive award by about $48 million over the remainder of the
contract period.

Boeing was also eligible for an award fee of nearly $34 million for the
6-month period ending in March 1997. However, citing significant
problems in program planning, cost estimating, and hardware
manufacturing, NASA concluded that Boeing’s performance did not warrant
an award fee. NASA also directed Boeing to deduct almost $10 million from
its next bill to refund the provisional award fee already paid during the
period.8

Boeing is implementing a corrective action plan for each identified
weakness and has outlined a number of actions to improve the
performance of the entire contractor team, including changing personnel,
recruiting additional software engineers and managers, and committing
funds to construct a software integration test facility. Boeing also
presented a cost control strategy to NASA in July 1997. According to NASA
officials, the strategy includes organizational streamlining and transferring
some roles to NASA.

Station officials assessed Boeing’s efforts to improve its performance as
part of the midpoint review for the current evaluation period. They



7
 Cost reports include internal and independent assessments of total program cost variance at
completion. Methodologies include statistical calculations and analyses using a software program
developed by the Department of Defense for analyzing contractor-reported cost data. Independent
estimates are developed by NASA and the Department of Defense’s Defense Contract Management
Command (DCMC).
8
 Under the terms of the contract, Boeing could receive a previously denied award fee after NASA’s
final assessment at the end of the contract.



Page 7                                                          GAO/NSIAD-97-213 Space Station
                         B-276834




                         concluded that, while there was some improvement, it was insufficient to
                         permit resumption of provisional award fee payments.


                         When NASA redesigned the space station in 1993 and brought Russia into
Financial Reserves       the program as a partner, the program had approximately $3 billion in
Are Dwindling            financial reserves to cover development contingencies. Since then, the
                         program reserves have been significantly depleted. In June 1997, the
                         financial reserves available to the program were down to about
                         $2.2 billion. NASA estimated that, by the end of fiscal year 1997, the
                         remaining uncommitted reserves could be less than $1 billion.

                         Financial reserves have been used to fund additional requirements,
                         overruns, and other authorized changes. By June 1997, a station program
                         analysis indicated that fiscal year 1997 reserves might not be sufficient to
                         cover all known threats. More recently, station officials have estimated
                         that a small reserve surplus is possible in fiscal year 1997, but concerns are
                         growing regarding the adequacy of fiscal year 1998 reserves.

                         NASA  has already identified threats to financial reserves in future years
                         that, if realized, would outstrip the remaining reserves. For example,
                         program reserves have been identified to cover additional cost overruns;
                         crew rescue vehicle acquisition; hardware costs, in the event that ongoing
                         negotiations with partners are unsuccessful; and additional authorized
                         technical changes. Thus, with up to 6 years remaining until on-orbit
                         assembly of the station is completed, NASA has already identified actual
                         and potential resource demands that exceed the station’s remaining
                         financial reserves. Unless these demands lessen and are not replaced by
                         other demands of equal or greater value, or NASA is able to find offsets and
                         efficiencies of sufficient value to replenish the program’s reserves, the
                         space station will require additional funding.


                         NASA has been able to consistently report compliance with funding
NASA Acts to Stay        limitations and avoid exceeding its financial reserves, despite significant
Within Funding           programmatic changes and impacts that have increased station costs. To
Limitations and          enable it to do so, NASA has implemented or initiated a variety of actions,
                         including those summarized below:
Replenish Its
Financial Reserves   •   The space station program is negotiating with ESA, Canada, and Brazil to
                         provide station hardware. Under proposed offset arrangements, the ISS
                         partners—ESA and Canada—would build hardware associated with the



                         Page 8                                           GAO/NSIAD-97-213 Space Station
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    U.S. commitment in return for launch services or other considerations.
    Under a cooperative arrangement, Brazil would receive a small allocation
    of the station’s research capacity in return for any U.S. equipment it would
    agree to build. NASA estimates that $116 million in U.S. station development
    costs could be saved through these arrangements. Space station officials
    have scheduled a threat of $100 million against the program’s financial
    reserves in case the negotiations are unsuccessful. However, according to
    program officials, most of the negotiations are nearly completed.
•   NASA dropped the centrifuge from the station budget and opened
    negotiations with the Japanese government to provide it.9 Also, the space
    station’s content at the assembly completion milestone was revised to
    exclude the centrifuge. This change enabled NASA to maintain the
    then-current June 2002 assembly completion milestone, even though the
    centrifuge and related equipment would not be put on the station until
    after that date.
•   NASA transferred $462 million from its science funding to the space station
    development funding in fiscal years 1996 through 1998. NASA has scheduled
    the payback of $350 million—$112 million less than the amount
    borrowed—through fiscal year 2002. NASA is also planning to transfer
    another $70 million in fiscal year 1999.10 All of these funding transfers are
    within the $17.4 billion funding limitation through assembly completion.
•   NASA transferred $200 million in fiscal year 1997 funding to the station
    program from other NASA programs to cover costs incurred due to Russian
    manufacturing delays.11 Congressional action is pending on the transfer of
    another $100 million in fiscal year 1998. These funds will be accounted for
    outside the portion of the program subject to the funding limitations.
•   NASA uses actual and planned reductions in its fiscal year funding
    requirements to help restore and preserve its actual and prospective
    financial reserves. Typically, these actions involve rephasing or deferring
    activities to future fiscal years. For example, the agency’s current reserve
    posture includes actions such as moving $20 million in spares
    procurement from fiscal years 1997 to 1999 and $26 million in nonprime
    efforts from fiscal year 1997 to various future fiscal years.12


    9
     The centrifuge is a crucial piece of research equipment for the space station. NASA recently listed a
    threat against future years’ reserves in the event that the negotiation is unsuccessful. However, NASA
    told us that an “agreement in principle” is expected soon.
    10
      NASA expects to make these funds available by employing a new approach to doing materials
    research that will not initially require a facility-class level Furnace Facility.
    11
     The House and Senate Appropriations Committees concurred in the transfer of almost all of this
    amount from the space shuttle program.
    12
      The nonprime part of the space station program involves a large number of relatively small contracts
    for developing the ground-based and on-orbit capabilities to use and operate the space station.



    Page 9                                                            GAO/NSIAD-97-213 Space Station
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                       The cost impact of the schedule delay associated with step 1 of the
Additional Costs and   Russian recovery plan is not yet fully understood. During congressional
Cost Threats Are Not   testimony in June 1997, the NASA Administrator stated that NASA was
Yet Estimated          assessing the cost effects of a later assembly completion date. Any delay in
                       completing the space station assembly would increase the program’s costs
                       through the completion of assembly because some costs would continue
                       to accumulate over a longer period. When NASA redesigned the station in
                       1993, it estimated that Russia’s inclusion as a partner would reduce
                       program costs by $1.6 billion because the station’s assembly would be
                       completed by June 2002—15 months earlier than previously scheduled.13
                       NASA has recently acknowledged that the completion of the station’s
                       assembly will slip into 2003, but it has not yet scheduled the revised
                       assembly completion milestone. If the scope and capability of the program
                       under the June 2002 assembly completion milestone remain the same, the
                       new milestone date will be set for the latter part of 2003. Consequently,
                       most, if not all, of the reduced costs claimed by accelerating the schedule
                       would be lost.

                       NASA  estimated the additional hardware costs associated with step 1 of the
                       Russian recovery plan at $250 million. When the estimate was made, the
                       specific costs of many of the components of the plan were not known. For
                       example, NASA’s initial estimate includes $100 million for the Interim
                       Control Module, but NASA now estimates that the module will cost
                       $113 million.14 The total of $300 million in additional funding for the space
                       station program in fiscal years 1997 and 1998 includes financial reserves.
                       The most recent cost estimate for the Interim Control Module already
                       indicates threats to those reserves.

                       NASA plans to use the extra time created by the schedule slip to perform
                       integration testing of early assembly flight hardware at the Kennedy Space
                       Center. As of June 1997, the cost of this testing had not been fully
                       estimated. However, NASA is currently budgeting $15 million in reserves for
                       the effort.

                       If NASA initiates further steps in the recovery plan, new or refined cost
                       estimates would be required. Step 2 provides for the development of a
                       permanent propulsion/reboost capability and modifications to the U.S.


                       13
                        For a discussion of the costs related to Russia’s inclusion in the ISS program as a partner, see Space
                       Station: Impact of the Expanded Russian Role on Funding and Research (GAO/NSIAD-94-220, June 21,
                       1994) and Space Station: Update on the Impact of the Expanded Russian Role (GAO/NSIAD-94-248,
                       July 29, 1994).
                       14
                         A further refinement of the cost estimate for the Interim Control Module is expected shortly.



                       Page 10                                                           GAO/NSIAD-97-213 Space Station
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                  Laboratory to provide habitation. According to the NASA Administrator, the
                  effort under this step could be funded incrementally, thus limiting the
                  up-front commitment. NASA’s initial cost estimate for step 2 is $750 million.

                  Step 3 of the plan would result in the greatest overall cost impact on NASA
                  because it assumes that Russia would no longer be a partner and that NASA,
                  along with its remaining partners, would have to provide the services now
                  expected from Russia. For its share of the mission resupply role, NASA
                  would have to use the space shuttle or purchase those services from
                  Russia or others. In addition, the United States would have to purchase
                  Soyuz vehicles from Russia or accelerate the development of the
                  six-person permanent crew return vehicle. NASA has not officially
                  estimated the cost of step 3, but it clearly would be very expensive: the
                  potential cost of shuttle launches or purchased launch services alone over
                  the station’s 10-year operational life would be in the billions of dollars.
                  NASA expects to have more refined cost estimates for the contingency plan
                  later this year.


                  Some of NASA’s actions to reinforce its financial reserves and keep the
Conclusions and   program within its funding limitations have involved redefining the portion
Recommendation    of the program subject to the limitations. Such actions make the value of
                  the current limitations as a funding control mechanism questionable.
                  Therefore, we recommend that the NASA Administrator, with the
                  concurrence of the Office of Management and Budget, direct the space
                  station program to discontinue the use of the current funding limitations.


                  More complete estimates of the cost and schedule impacts of ongoing and
Matters for       planned changes to the program will be available later this year. This
Congressional     information will help provide a more complete and current picture of the
Consideration     cost and schedule status of the program and clarify some of the major
                  future cost risk it faces. After this information is available, the Congress
                  may wish to consider reviewing the program. This review could focus on
                  reaching agreement with the executive branch on the future scope and
                  cost level for a station program that merits continued U.S. government
                  support. In view of the expected availability of revised cost estimates, the
                  first opportunity for such a review would be in conjunction with NASA’s
                  fiscal year 1999 budget request.

                  At the end of the review, if the Congress decides to continue the space
                  station program, it may wish to consider, after consultation with NASA,



                  Page 11                                          GAO/NSIAD-97-213 Space Station
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                     reestablishing funding limitations that include firm criteria for measuring
                     compliance.


                     In commenting on a draft of this report, NASA said that the report was a
Agency Comments      good representation of the program’s performance and remaining major
and Our Evaluation   challenges, but NASA was concerned that the report did not provide
                     sufficient detail for the reader to appreciate the progress the space station
                     program has made or understand the factors that have influenced the
                     decisions already made and those that will be made in the future.

                     NASA agreed with our recommendation. NASA said that it had consistently
                     taken the position that the flat funding cap, while a fiscal necessity, was
                     inconsistent with a normal funding curve for a developmental program.
                     NASA added that the flat funding profile resulted in the deferral of
                     substantial reserves to later years, instead of being available in the
                     program’s middle years.

                     NASA said that the station’s financial reserves were not intended to cover
                     the unanticipated costs of the Russian contingency activities, but rather
                     were largely intended to protect against U.S. development uncertainty.

                     In response to NASA’s comments, we added more information to the report,
                     including information on the status of the program and the origin of the
                     funding caps. However, the question of what the station’s financial
                     reserves were largely intended to cover is not relevant to our assessment,
                     which focused on whether the funding cap was an effective cost control
                     mechanism. Moreover, the central theme of our report is that funding
                     requirements have been rising and additional funds may be needed. We do
                     not suggest what the source of those funds should be.


                     To obtain information for this report, we interviewed officials in the ISS
Scope and            and space shuttle program offices at the Johnson Space Center, Houston,
Methodology          Texas, and NASA Headquarters, Washington, D.C. We also interviewed
                     contractor and DCMC personnel in Huntsville, Alabama, and Houston. We
                     reviewed pertinent documents, including the prime contract between NASA
                     and Boeing, contractor performance measurement system reports, DCMC
                     surveillance reports, program reviews, international partner agreements,
                     independent assessment reports, and reports by NASA’s Office of Safety and
                     Mission Assurance.




                     Page 12                                          GAO/NSIAD-97-213 Space Station
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We performed our work from January to July 1997 in accordance with
generally accepted government auditing standards.


We are sending copies of this report to the NASA Administrator; the
Director, Office of Management and Budget; and appropriate
congressional committees. We will also make copies available to other
interested parties on request.

Please contact me at (202) 512-4841 if you or your staff have any questions
concerning this report. Major contributors to this report are Thomas
Schulz, Frank Degnan, John Gilchrist, and Fred Felder.




Allen Li
Associate Director, Defense
  Acquisitions Issues




Page 13                                         GAO/NSIAD-97-213 Space Station
Appendix I

Comments From the National Aeronautics
and Space Administration




See p. 12.

See comment 1.




                 Page 14       GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




See p. 12.




See comment 1.




See p. 12.




See p. 12 and
comment 2.




See comment 3.




                 Page 15                                  GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




See comment 1.




                 Page 16                                  GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




Now on p. 5.




See comment 4.




Now on p. 6.

See comment 5.




                 Page 17                                  GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




Now on p. 9,
para. 1.




See comment 1.




Now on p. 9,
para. 2.




                 Page 18                                  GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




See comment 6.




See comment 1.



See comment 7.




Now on p. 9,
para. 3.




                 Page 19                                  GAO/NSIAD-97-213 Space Station
                 Appendix I
                 Comments From the National Aeronautics
                 and Space Administration




See comment 1.




Now on p. 9,
para. 5.




Now on p. 11,
para. 5.




                 Page 20                                  GAO/NSIAD-97-213 Space Station
               Appendix I
               Comments From the National Aeronautics
               and Space Administration




               The following are GAO’s comments on the National Aeronautics and Space
               Administration’s (NASA) letter dated September 8, 1997.


               1. We have modified the report based on NASA’s comments.
GAO Comments
               2. The purpose and use of financial reserves is not the relevant issue. Our
               focus was on whether or not funding caps could be effective cost control
               mechanisms under circumstances where program content subject to the
               controls can be flexibly defined. In the past, NASA claimed the benefits of
               Russian participation on the program’s cost and schedule, but now that
               Russian participation is having negative cost and schedule effects, NASA
               argues that the additional funding needed should be accounted for outside
               the portion of the program subject to the funding limitation. Doing so
               dilutes the cost control ability of a funding limitation.

               3. NASA’s claimed cost savings from including Russia as a partner was
               based mainly on a 15-month acceleration of the station’s assembly
               completion milestone. Our purpose was to point out that the delay in the
               assembly completion date means that NASA will incur additional costs
               during the station’s developmental period. Only the amount remains to be
               determined. In this report, we do not evaluate any of the claimed benefits,
               including cost reductions, of Russian participation in the program as a
               partner.

               4. NASA correctly points out that the negative schedule variance under the
               prime contract is growing at a much slower rate than the negative cost
               variance, as shown by the slope of the lines in figure 1.

               5. Figure 1 in the report accurately reflects cost and schedule variance
               changes and is directly relevant to supporting our point that NASA could
               experience additional cost growth if the deteriorating trend was not
               reversed or at least slowed because the final actual cost growth could
               exceed expected cost growth. After we completed our fieldwork on this
               assignment, the prime contractor reported that its estimate of the cost
               overrun at completion had more than doubled, from $278 million to
               $600 million.

               6. NASA correctly notes that the centrifuge was not included in the
               development program when it was initially capped at $17.4 billion.
               However, NASA subsequently budgeted the centrifuge within the program
               and scheduled it for launch before the June 2002 assembly completion



               Page 21                                         GAO/NSIAD-97-213 Space Station
           Appendix I
           Comments From the National Aeronautics
           and Space Administration




           milestone. The centrifuge was later removed from the budget and NASA
           began negotiations with the Japanese to provide it. At that time, it was
           rescheduled for launch after the June 2002 assembly completion date. The
           centrifuge example helps to illustrate the leeway NASA has to change the
           content of the station program within the current cap. Such leeway
           undermines the cap’s value as a cost control mechanism.

           7. We were asked to identify those methods NASA had used to stay within
           its funding limitations, not to evaluate NASA’s use of
           “no-exchange-of-funds” or “negotiated offset” arrangements.




(707239)   Page 22                                       GAO/NSIAD-97-213 Space Station
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