oversight

Space Station: Cost Control Problems

Published by the Government Accountability Office on 1997-11-05.

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

                      United States General Accounting Office

GAO                   Testimony
                      Before the Subcommittee on Space and Aeronautics,
                      Committee on Science, House of Representatives




Release on Delivery
Expected at
1:00 p.m., EST
                      SPACE STATION
Wednesday,
November 5, 1997

                      Cost Control Problems
                      Statement of Allen Li, Associate Director,
                      National Security and International Affairs Division




GAO/T-NSIAD-98-54
          Mr. Chairman and Members of the Subcommittee:

          We appreciate this opportunity to discuss the cost control problems of the
          National Aeronautics and Space Administration’s (NASA) Space Station
          program.1 Our testimony today will summarize the results of our recent
          work on this issue and, where available, provide updated information.2
          Specifically, we will focus on cost growth under the prime contract, the
          impact on NASA of the Russians’ performance problems, and the need to
          review the program and to consider funding limitations.


          Last year we reported on the deteriorating cost and schedule performance
Summary   of the space station’s prime contractor and identified 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 the
          station with power, control, and habitation capability.3 Since then, the
          prime contract deterioration has continued and the Service Module delay
          has cost NASA at least several hundreds of millions of dollars, with the
          potential for costing considerably more should the Russians falter again.

          As of June 1997, the station prime contractor—Boeing Defense and Space
          Group—reported that over 200,000 pounds of its station hardware was
          being built or had been completed. However, the contract work is costing
          more and taking longer than planned. For example, in the 17-month period
          between April 1996 and August 1997, the space station prime contract’s
          cost growth more than quadrupled from $89 million to $377 million and
          the estimated value of the effort required to get the contract work back on
          schedule increased by more than 50 percent from $88 million to
          $133 million. The cost growth is especially worrisome because the rate of
          cost deterioration has recently increased. Since the beginning of this year,
          the monthly cost growth rate has more than doubled—to $22 million for
          the 7-month period ending in August 1997 from about $10 million over the
          previous 25 months.



          1
           NASA and its international partners—Japan, Canada, the European Space Agency, and Russia—are
          building the International Space Station as a permanently orbiting laboratory to conduct materials and
          life sciences research under nearly weightless conditions.
          2
           Space Station: Cost Control Problems Are Worsening (GAO/NSIAD-97-213, Sept. 16, 1997) and
          Space Station: Deteriorating Cost and Schedule Performance Under the Prime Contract
          (GAO/T-NSIAD-97-262, Sept. 18, 1997).
          3
            Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17, 1996) and
          (GAO/T-NSIAD-96-210, July 24, 1996).



          Page 1                                                          GAO/T-NSIAD-98-54 Space Station
Several months ago, Boeing more than doubled its estimate of the total
cost growth at contract completion from $278 million to $600 million.
More recently, NASA increased its total cost growth estimate to
$817 million. Both NASA and Boeing recognize the seriousness of the cost
growth issue and have taken actions to address it. Earlier this year, NASA
reduced Boeing’s fees because of poor performance. For its part, Boeing
has implemented a corrective action plan that it believes will improve the
performance of the entire contractor team, and has developed a cost
control strategy. The extent to which these efforts will eventually slow the
continuing cost deterioration remains to be seen.

The Russians’ delay in providing the Service Module has already increased
NASA’s cost by over $300 million. Also, additional cost increases related to
the effect of this delay on the station’s assembly sequence will be seen
once NASA resets the assembly completion milestone. Should the Russians
not meet their revised partnership commitments, the program’s cost could
increase further by as much as several billions of dollars or more,
depending on the severity of Russia’s shortfall and the response to that
shortfall by NASA and its other international partners. NASA has been
monitoring the situation and recently noted that the Russians are
experiencing manufacturing problems, which present some risk to the
Service Module schedule. However, NASA officials believe that the
December 1998 launch date for the Service Module can still be met.

The space station program’s financial reserves have dwindled. In
June 1997, space station program documents showed that over two-thirds
of the $3 billion in financial reserves included in the program’s cost
estimate would be used or committed by the end of fiscal year 1997. The
reduced reserves and the recent and prospective cost increases have put
additional focus on the space station program’s administratively imposed
funding limitation (cap)—$2.1 billion annually and $17.4 billion through
the completion of station assembly. NASA has periodically adjusted the
program’s pace and content to comply with the cap and to replenish the
program’s financial reserves. However, some of NASA’s actions have made
the value of the cap as a funding control mechanism questionable. In our
September 1997 report, we recommended that use of the current cap be
discontinued and suggested that the Congress review the program to
determine its future scope and cost level. After that review, if the Congress
decides to continue the space station program, it could consider imposing
a legislated cap.




Page 2                                          GAO/T-NSIAD-98-54 Space Station
                    The cost and schedule performance under the prime contract has been
Cost and Schedule   consistently worsening for some time. In a June 1997 testimony,4 we
Performance         pointed out that between January 1995 and April 1997, the estimated cost
Continues to        of work to get back on schedule had increased from $43 million to
                    $129 million. Since then, the schedule variance5 has remained negative, but
Deteriorate         has worsened only slightly—first rising to $136 million through June
                    before falling back to $133 million by the end of August.

                    Cost growth, however, is a different story. Between January 1995 and April
                    1997, the variance between the actual cost to complete specific work and
                    the budget for that work had gone from a cost underrun of $27 million to a
                    cost overrun of $291 million. Since then, cost growth has significantly
                    worsened. Through July, it stood at $355 million. August added another
                    $22 million, bringing the total cost growth to $377 million. The increased
                    pace of cost growth since early this year is especially worrisome. The
                    average monthly cost growth for the 7-month period ending in August 1997
                    was $22 million. This growth rate is more than twice the average monthly
                    rate of about $10 million for the previous 25 months. Figure 1 illustrates
                    the deteriorating monthly cost growth trend from January 1997 through
                    August 1997.




                    4
                     Space Station: Cost Control Problems Continue to Worsen (GAO/T-NSIAD-97-177, June 18, 1997).
                    5
                     Schedule variances are measured by the estimated dollar value of the difference between the
                    budgeted cost of work planned and work completed.



                    Page 3                                                         GAO/T-NSIAD-98-54 Space Station
Figure 1: Cumulative Monthly Cost
Growth on the Space Station Prime
                                    Dollars in millions
Contract (January 1997 through
August 1997)                           0



                                    -100



                                    -200
                                             -223
                                                      -241
                                                             -263
                                    -300                            -291
                                                                           -310
                                                                                  -327
                                                                                           -355
                                    -400                                                           -377




                                    -500
                                             1/97    2/97    3/97   4/97   5/97   6/97     7/97    8/97




                                    Recently, NASA and Boeing updated their estimates of total cost growth at
                                    contract completion. During this past summer, after many months of
                                    estimating that the total cost growth at the completion of the contract
                                    would not exceed $278 million, Boeing more than doubled its estimate—to
                                    $600 million. Through August 1997, $377 million in cost growth had
                                    already accumulated. Therefore, to keep total cost growth from exceeding
                                    $600 million, Boeing must make up work valued at $133 million to get back
                                    on schedule, as well as slow the average monthly cost growth over the
                                    next 6 years to no more than about $3 million. It would be extremely
                                    challenging to achieve both of these results, partly because regaining
                                    schedule typically involves increased staffing or overtime work. NASA’s
                                    estimate of total cost growth at contract completion, which had been
                                    generally in accord with Boeing’s $600 million estimate, was recently
                                    increased to $817 million. NASA’s higher estimate is based on its
                                    assessment of current trends and its belief that Boeing’s cost control
                                    strategy will not be fully successful.

                                    NASA and Boeing recognize the seriousness of the cost growth situation.
                                    NASA did not give Boeing an award fee for the 6-month period ending in
                                    March 1997 because of program planning, cost-estimating, and hardware




                                    Page 4                                               GAO/T-NSIAD-98-54 Space Station
                       manufacturing problems. In addition, the recent increase in the estimated
                       cost growth at contract completion has reduced the amount of available
                       incentive fee. On its part, Boeing has implemented a corrective action plan
                       that is intended to improve the performance of the entire contractor team.
                       Boeing’s announced strategy includes personnel changes, additional
                       engineers and managers, and the funding of a software integration test
                       facility. Boeing also presented a cost control strategy to NASA that includes
                       organizational streamlining and the transfer of some roles to NASA. The
                       extent to which these efforts will eventually slow the continuing
                       deterioration remains to be seen.


                       The Russian government’s past inability to furnish the Service Module on
Russia’s Delays        time has adversely impacted the space station program. According to NASA
Increase NASA’s Cost   officials, after more than a year of repeated and unfulfilled promises,
                       Russia has resumed its financial commitment, work has restarted on the
                       Service Module, and significant progress is being made. However, the
                       Service Module delay has increased NASA’s cost.

                       After Russia formally notified NASA about a year ago that its funding
                       difficulties would delay the completion of the Service Module, NASA
                       designed a three-step recovery plan. Step one, which is now underway,
                       focuses on adjusting the station’s 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 a year. Major step one activities include delaying the launch of
                       station components that are to precede the Service Module into orbit and
                       building a temporary replacement for the Service Module’s propulsion
                       capability. NASA has been monitoring the Russian effort and recently noted
                       that the Service Module is experiencing manufacturing problems that pose
                       some schedule risk. However, NASA officials believe that the Service
                       Module’s revised December 1998 launch date can still be met. NASA will
                       complete step one regardless of how the Russians perform.

                       Step two is NASA’s contingency plan for dealing with more delay or the
                       Russian government’s failure to ultimately deliver the Service Module.
                       Step two could result in permanently replacing the Service Module’s
                       power, control, and habitation capabilities. Under step three, the Russians
                       would no longer be a partner in the International Space Station.
                       Consequently, the United States and its remaining international partners
                       would have to pick up all or most of the financial and operational




                       Page 5                                          GAO/T-NSIAD-98-54 Space Station
                      responsibilities the Russian government would have had, such as the
                      station resupply mission.

                      The cost of step one activities is currently estimated at over $300 million,
                      with almost all of that in fiscal years 1997 through 1999. Additional cost
                      increases related to the station’s delayed assembly sequence will be
                      established once NASA resets the assembly completion milestone. NASA’s
                      initial cost estimate for step two is $750 million, but no decision has yet
                      been made to initiate step two. The cost of step three has not been
                      estimated, but just the cost of additional launch services for the station
                      resupply mission would be in the billions of dollars. Consequently, should
                      the Russians not meet their revised partnership commitments, the
                      program’s cost could further increase by as much as several billions of
                      dollars or more, depending on the severity of Russia’s shortfall and the
                      response to that shortfall by NASA and its other international partners.


                      When NASA redesigned the space station in 1993, the program had
Lower Financial       approximately $3 billion in financial reserves.6 Since then, the program
Reserves and          reserves have been significantly depleted. By June 1997, the program’s
Increased Costs       financial reserves were down to about $2.2 billion. Overall, more than
                      two-thirds of the reserves were estimated to be used or committed by the
Focus Attention on    end of fiscal year 1997, reducing the remaining uncommitted reserves to
Funding Limitations   less than $1 billion. Further, with about 6 years remaining until on-orbit
                      assembly of the station is completed, NASA had identified threats in future
                      years that, if realized, would require funding in excess of the remaining
                      uncommitted reserves. Recently, NASA announced additional space station
                      funding requirements totaling $430 million in fiscal year 1998. Changes in
                      the space station program’s estimated funding requirements for fiscal year
                      1999 and beyond are expected to be available within the next few months.

                      Reduced reserves and increased cost have put additional focus on the
                      program’s funding limitations. For several years, the space station
                      program has been subject to a $2.1-billion annual and a $17.4-billion
                      overall funding limitation. 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. The caps are not legislatively mandated, although


                      6
                       Since accurately estimating the cost of research and development projects is extremely difficult,
                      NASA’s project cost estimates include both a baseline portion to fund known requirements and a
                      financial reserves portion to fund unexpected contingencies, such as schedule delays or changes in
                      projects’ objectives or scope.



                      Page 6                                                         GAO/T-NSIAD-98-54 Space Station
           references to them in congressional proceedings and reports indicate that
           NASA was expected to build the space station within these limits.


           To remain within the cap, NASA has periodically adjusted the program’s
           pace and content. However, some of NASA’s actions have made the value of
           the cap as a funding control mechanism questionable. For example, in
           establishing the cap, NASA claimed the cost and schedule advantages that it
           estimated would accompany the inclusion of the Russians in the program
           as a partner. However, now that Russian participation is having negative
           cost and schedule effects, NASA is accounting for the additional funds
           required to implement its Russian recovery plan outside of the portion of
           the space station program subject to the cap.

           In our September 1997 report, we recommended that the use of the
           current cap be discontinued. We also suggested that the Congress consider
           taking two actions: (1) review the program’s future scope and cost level in
           conjunction with NASA’s fiscal year 1999 budget request and (2) if the
           Congress decides to continue the program, establish funding limitations
           that include firm criteria for measuring compliance. To assist in that
           review, we have been requested by the Chairmen of the Senate Committee
           on Commerce, Science, and Transportation and its Subcommittee on
           Science, Technology, and Space, to update our life-cycle cost estimate of
           the space station program.


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




(707312)   Page 7                                         GAO/T-NSIAD-98-54 Space Station
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