oversight

Space Station: Cost Control Problems Continue to Worsen

Published by the Government Accountability Office on 1997-06-18.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Science, Technology, and
                          Space, Committee on Commerce, Science, and
                          Transportation, U.S. Senate


For Release on Delivery
Expected at
2:00 a.m., EDT
                          SPACE STATION
Wednesday,
June 18, 1997

                          Cost Control Problems
                          Continue to Worsen
                          Statement of Thomas J. Schulz, Associate Director,
                          Defense Acquisitions Issues, National Security and
                          International Affairs Division




GAO/T-NSIAD-97-177
          Chairman and Members of the Subcommittee:

          We are pleased to be here today to discuss our current work on the
          International Space Station program. Earlier this year, Senator Bumpers
          and Representative Dingell asked us to update information we reported in
          July 1996 on the status of the program’s financial reserves and the prime
          contract’s cost and schedule variances and estimates at completion.1 They
          also asked that we identify the National Aeronautics and Space
          Administration’s (NASA) actions to maintain the program within its funding
          limitation.2 Our testimony today is based on our work on this request.


          In our report and subsequent testimony before this Subcommittee last
Summary   year,3 we pointed out the deterioration in the prime contractor’s cost and
          schedule performance and noted that the station’s near-term funding
          included only limited financial reserves.4 We also identified what was, at
          that time, an emerging risk to the program: the indications of problems in
          the Russian government’s ability to meet its commitment to furnish a
          Service Module providing power, control, and habitation capability for the
          International Space Station. 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 to cope with the
          increased costs or defer or rephase activities, which could delay the space
          station’s schedule and would likely increase its overall cost.

          Since our report and testimony last year, the risks to the space station’s
          cost and schedule have in fact increased. The Russian government has not
          been able to meet its financial responsibilities to the International Space
          Station, resulting in a currently projected 8-month delay in launching the
          Service Module. Cost control problems under the station prime contract
          have also steadily worsened. Since April 1996, the cost overrun has more
          than tripled to $291 million and the estimated cost to get the contract back
          on schedule has increased by almost 50 percent to $129 million.



          1
           Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17, 1996).
          2
           The limitation is NASA’s self-imposed ceiling not to exceed $2.1 billion annually for the Space Station
          and $17.4 billion through the completion of its assembly.
          3
           Space Station: Cost Control Difficulties Continue (GAO/T-NSIAD-96-210, July 24, 1996).
          4
           Financial reserves are used to fund unexpected contingencies, such as cost growth, schedule delays,
          or changes in project objectives or scope.



          Page 1                                                          GAO/T-NSIAD-97-177 Space Station
                      The station’s financial reserves have also deteriorated significantly. NASA
                      has taken several steps to avoid exceeding its annual and assembly
                      completion funding limitation and to replenish its financial reserves. Such
                      efforts have included transferring work to others, rephasing or deferring
                      work, redefining the “assembly completion” milestone, and keeping
                      additional funding outside the capped portion of the program.

                      In addition to the adverse cost and schedule impacts of the Service
                      Module delay recently announced by NASA, considerable further cost and
                      schedule problems could occur if the Russian government continues to be
                      unable to fulfill its partnership commitment to the International Space
                      Station. If further problems do materialize, we believe a congressional
                      review of the entire program would be needed. 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 1993, NASA and its international partners agreed to significant changes in
Russian Performance   the space station to bring the Russian government into the program as a
Problems              full partner. NASA claimed that Russian participation would enable the cost
                      of the station, through completion of assembly, to be $17.4 billion—a
                      $2 billion savings from the projected $19.4 billion cost of the existing
                      design at that time. Of the expected savings, $1.6 billion was to be
                      achieved by completing the station’s assembly 15 months earlier than
                      planned—by June 2002 instead of late 2003. We reported in 1994 that
                      Russian participation in the program did not result in $2 billion in savings
                      and that NASA would have to find other savings to accelerate assembly
                      completion by the 15 months and reduce the station’s cost by the $2 billion
                      that was to have resulted from the Russian’s participation.5

                      Because of the recently recognized problem with the Russian
                      government’s ability to provide the Service Module on schedule, NASA has
                      begun to implement a three step recovery plan. Step 1, which is now
                      underway, 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 step 1 activities include delaying the launch
                      of station components that are to precede the Service Module into orbit
                      and building a stand-by temporary replacement for the Service Module’s

                      5
                        Space Station: Update on the Impact of the Expanded Russian Role (GAO/NSIAD-94-248, July 29,
                      1994). Also, see Space Station: Impact of the Expanded Russian Role on Funding and Research
                      (GAO/NSIAD-94-220, June 21, 1994).



                      Page 2                                                      GAO/T-NSIAD-97-177 Space Station
                     propulsion capability. The cost of step 1 activities through fiscal year 1998
                     is estimated at $250 million to $300 million.

                     Step 2 is NASA’s contingency plan for dealing with more delay or the
                     Russian government’s failure to deliver the Service Module. Step 2 could
                     result in permanently replacing the Service Module’s power, control, and
                     habitation capabilities. NASA’s initial cost estimate for step 2 is
                     $750 million. Under step 3, the United States and its other international
                     partners would have to pick up all or most of the financial and operational
                     responsibilities the Russian government would have had, such as station
                     resupply missions. The cost of step 3 has not been estimated.

                     In addition to directly affecting space station development activities, the
                     recovery plan places additional requirements on the space shuttle
                     program. However, the full impact of the recovery plan on the space
                     shuttle program is not yet known.

                     The space station program’s overall costs will likely increase by billions of
                     dollars if the full recovery plan is implemented. NASA’s decision on the
                     need to begin step 2 is currently scheduled for later this year. This time
                     frame will not allow the impact of NASA’s recovery plan to be fully
                     understood before the Congress finishes its deliberations on NASA’s fiscal
                     year 1998 budget. If NASA decides to initiate step 2, we believe a thorough
                     congressional review of the total program would be warranted. Such a
                     review should focus on evaluating the scope and cost of the station
                     program that the Congress and the administration can agree upon in light
                     of current circumstances. To support such a review, NASA should provide
                     its best estimates of the additional resources required to execute its
                     recovery plan.


                     NASA recently told the Congress that the performance of the space station’s
Worsening Cost and   prime contractor had not improved as much as planned. In fact, the station
Schedule             prime contractor’s cost and schedule performance, which showed signs of
Performance          deterioration last year, has continued to decline virtually unabated. The
                     prime contract’s cost and schedule variances have steadily worsened since
                     April 1996, with the cost overrun more than tripling and the schedule




                     Page 3                                         GAO/T-NSIAD-97-177 Space Station
                                           slippage increasing by almost 50 percent. Figure 1 shows the cost and
                                           schedule variances from January 1995 to April 1997.6



Figure 1: Cost and Schedule Variances on the Space Station Prime Contract From January 1995 to April 1997
(Dollars in Millions)

 50

   0

 -50

-100

-150

-200

-250

-300

-350
       1/95    4/95      7/95      10/95        1/96        4/96        7/96        10/96        1/97          4/97

                                               Cost    Schedule




                                           Note: The zero line represents meeting planned cost and schedule.




                                           Between January 1995 and April 1997, the schedule slippage increased
                                           from a value of $43 million to $129 million—the estimated amount that it
                                           would cost to do the work required to get the contract back on schedule.
                                           During that same period, the prime contract moved from a cost underrun

                                           6
                                            Cost variances are the difference between actual costs to complete specific work 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
                                           negative schedule variances can become cost variances as additional work in the form of overtime is
                                           often required to regain schedule.



                                           Page 4                                                       GAO/T-NSIAD-97-177 Space Station
                                       of $27 million to a cost overrun of $291 million. So far, the prime
                                       contractor has not been able to moderate or reverse the continued decline.
                                       Unless the deteriorating cost trend is moderated, overall cost growth at
                                       the completion of the prime contract may end up substantially higher than
                                       the cost growth currently factored into the station’s budget.


                                       To fund cost overruns and other requirements, NASA has been using the
Dwindling Financial                    space station program’s financial reserves at a substantial rate. Over the
Reserves                               last 16 months, the program’s financial reserves have decreased
                                       significantly—from almost $3 billion to under $2.2 billion. NASA estimates
                                       that its total remaining reserves by the end of fiscal 1997 will be reduced
                                       further to just over $1.4 billion, with almost $500 million in estimated
                                       future reserve uses (threats) listed against that balance.7 Table 1
                                       summarizes NASA’s current estimate of its fiscal year 1997 reserves and
                                       threats to them.

Table 1: Space Station Financial
Reserves and Threats to Reserves for   Dollars in millions
Fiscal Year 1997                                                                                                                        Amount
                                       FY 1997 reserve level identified in FY 1998 budget request                                              $180
                                       Minus: approved and anticipated uses of reserves in                                                     (319)
                                       FY 1997
                                       Plus: estimated value of actual and planned reductions in                                                150
                                       FY 1997 funding requirements
                                       Equals: net estimated FY 1997 reserves at the end of                                                     12
                                       FY 1997
                                       Minus: estimated FY 1997 impact of currently recognized                                                  (19)
                                       threats to reserves
                                       Equals: estimated value of required additions to FY 1997                                                  (7)
                                       financial reserves if the recognized threats materialize
                                       Note: Table does not add due to rounding.



                                       NASA uses actual and planned reductions in its fiscal year funding
                                       requirements to help restore and preserve its financial reserves. Typically,
                                       these actions involve the rephasing or deferral of activities from the
                                       current year to future years. For example, the $150 million figure in table 1
                                       includes moving $20 million in spares procurement from fiscal year 1997
                                       to 1999, and $26 million in effort under the nonprime portion of the



                                       7
                                        We do not yet have cost estimates for all the potential uses, restorations, and threats to financial
                                       reserves identified by NASA.



                                       Page 5                                                           GAO/T-NSIAD-97-177 Space Station
    program from fiscal year 1997 to future years.8 If the restoration actions
    are unsuccessful and the anticipated threats occur at their estimated
    values, NASA will need additional funding in fiscal year 1997, unless it can
    reduce or offset its use of reserves in other ways.

    Since 1993, NASA has consistently reported compliance with its
    self-imposed funding limitation for the space station of $2.1 billion
    annually and $17.4 billion through the completion of assembly. NASA has
    taken or planned some major actions to help it remain within the
    program’s funding limitation and to replenish and preserve its financial
    reserves. For example:

•   NASA dropped the station’s centrifuge from the station budget and is
    negotiating with the Japanese government to provide it.9 Along with this
    change, the space station’s content at the “assembly complete” milestone
    was revised to exclude the centrifuge. This change enabled NASA to
    maintain the previous June 2002 assembly completion milestone, even
    though the centrifuge and related equipment would not be put on the
    station until after that date.
•   NASA moved $462 million from the station science budgets to the station
    development budgets for fiscal years 1996 to 1998. NASA officials told us
    that further review of the science portion of the station’s budgets indicated
    that estimated funding did not match station requirements in those years.
    They said that these funds will be paid back in accordance with the
    science program’s needs. NASA is currently scheduling the payback of
    $350 million through fiscal year 2002.
•   NASA is attempting to transfer U.S. development costs to other parties. The
    station program office is negotiating with its foreign partners and another
    potential foreign participant to build hardware for the United States in
    return for free or reduced-cost access to and use of the station, or other
    consideration. NASA has estimated that $116 million in U.S. station
    development costs could be covered by these offset arrangements. Some
    of the negotiations are further along than others, but none are completed.
    Recently, NASA recorded a threat to its future years’ financial reserves
    totaling $100 million, based on an assumption that it may not be able to
    successfully negotiate most of these offsets.



    8
     The nonprime part of the space station program involves a large number of relatively small contracts
    for developing the ground-based and on-orbit capability to use and operate the space station.
    9
     The centrifuge is a crucial piece of research equipment for the space station. NASA recently recorded
    a threat against future years’ reserves based on being unsuccessful in these negotiations. We do not yet
    have information on the value of that threat.



    Page 6                                                         GAO/T-NSIAD-97-177 Space Station
           In addition, NASA recently requested permission to provide $200 million
           more in fiscal year 1997 funding to the station from other NASA accounts
           and to reallocate $100 million of its fiscal year 1998 funding request to the
           station program.10 These amounts are intended to fund the first phase of
           NASA’s recovery plan. NASA intends to account for these funds in a budget
           line outside the capped portion of the station program.

           Space station costs have been increasing substantially and are likely to
           continue doing so. If some of these increased costs are just placed on
           another set of “books” and the content of the space station at “assembly
           complete” can be revised, we question the value of any continued reliance
           on the current funding limitation as a cost control mechanism.



           Mr. Chairman, this concludes our statement. We would be happy to
           answer any questions that you or the members of the Subcommittee may
           have.




           10
            The House and Senate Appropriations Committees recently approved the fiscal year 1997 funds.
           NASA has not yet determined the exact amount and source of the fiscal year 1998 funds.



(707266)   Page 7                                                      GAO/T-NSIAD-97-177 Space Station
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