Statement of

**RUSSELL A. RAU**

**Assistant Inspector General**

**for Auditing**

**NATIONAL AERONAUTICS AND SPACE ADMINISTRATION**

**Before the**

**HOUSE COMMITTEE ON SCIENCE**

**April 4, 2001**

Mr. Chairman and Members of the Committee,

Thank you for the opportunity to be here today to discuss NASA's
management of the International Space Station (ISS) Program. The NASA
Office of Inspector General (OIG) regularly conducts reviews and audits
of the ISS and related Human Space Flight[^1] programs and has made
numerous recommendations to improve cost, schedule, and technical
performance. In today's testimony, we will highlight major challenges to
the ISS Program with particular emphasis on contract and program
management.

INTRODUCTION

The ISS Program is one of the largest and most complex international
scientific projects ever undertaken. The Program\'s mission is to build
and operate the ISS, a world-class orbital research facility. ISS
assembly in orbit began with the launch of the U.S.-owned, Russian-built
*Zarya* control module on a Russian Proton rocket in November 1998. The
launch of the Space Shuttle *Endeavor* carrying the U.S.-built *Unity*
connecting module followed in December 1998. Further, Space Shuttle and
Russian launches have resulted in the deployment of the *Zvezda* Service
Module and *Destiny* Laboratory Module, among other components. The
first ISS three-member crew was launched in October 2000 on a Russian
*Soyuz* Rocket, and a replacement crew was launched on the Space Shuttle
*Discovery* (STS‑102) in March 2001.

The NASA Inspector General has identified the ISS as one of the Top 10
management challenges at NASA. Specifically, the NASA Inspector General
has identified the keys to an effective ISS Program as:

-   Managing the political, financial, technical, and safety challenges
    presented by an international partnership.

-   Overcoming technical challenges inherent in manufacturing,
    assembling, testing and integrating in space, complex hardware and
    software components provided by different nations.

-   Safely maintaining, upgrading, and operating a structure as
    complicated as the ISS.

-   Maximizing the beneficial use of the ISS for scientific research and
    technology development.

Based on a recent ongoing internal assessment of the ISS Program, NASA
determined that significant revisions were required to continue the
Program in accordance with the funding profile outlined in the FY 2001
President's Budget. In total, the assessment identified that \$11.2
billion was needed for Program requirements of which more than \$4
billion[^2] (56 percent) was in excess of the FY 2001 President\'s
Budget funding profile for the outyears FY 2002 through 2006.[^3] NASA
has stated its commitment to execute the ISS Program in accordance with
the funding profile in the President's Budget and related

statutory cost caps[^4] and has identified a number of options for
consideration in order to meet this commitment. These options include
the canceling of the U.S. Propulsion Module,[^5] a restructured approach
to providing habitation and crew return capabilities, and rephasing
research activities.

In summary, the NASA strategy will focus on:

-   Deferring capabilities, incorporating management reforms, and
    refocusing the workforce to build the ISS and maintain commitments
    to international partners within budget.

```{=html}
<!-- -->
```
-   Identifying the path to achieving a six-person crew capability to
    maximize research activity.

-   Seeking additional partner contributions.

-   Prioritizing science to increase funding of research.

NASA estimates that statutory cost caps on ISS costs will not be
exceeded prior to substantial completion of the ISS,[^6] and no
contingency funding[^7] will be required, although certain contingencies
are anticipated. The contingencies will be funded within the existing
budget. NASA is continuing its review of options to meet the FY 2002 and
beyond funding profile and expects to complete this review in June 2001.

**BACKGROUND**

On January 13, 1995, NASA awarded the ISS prime contract (NAS 15-10000)
to The Boeing Company (Boeing) Space and Communications Group for a
total cost-plus-award fee/fixed fee/incentive fee amount of \$5.638
billion.[^8] The contract requires Boeing to design, develop,
manufacture, integrate, test, verify, and deliver to NASA the U.S.
on-orbit segment of the ISS including ground support equipment and to
provide ground and orbital support operations. Boeing is also required
to provide technical support and data for NASA\'s operation and
utilization of the ISS. Since January 1995, costs have increased
significantly. The total award value is now \$9.598 billion \-- a
70-percent increase over the original contract value. This cost growth
includes new work added to the ISS prime contract, reflecting maturity
in the program, such as integration and operation of on-orbit segments
and cost overruns.

NASA has made significant revisions to the requirements for ISS
components. For example, in August 1999, the ISS prime contract was
modified to eliminate the Habitation Module,[^9] which Boeing forecasted
would overrun budget even before substantive work started. In some
cases, these revisions occurred due to uncertainty concerning the
performance of international partners. In October 2000, NASA halted
further development on the Interim Control Module (ICM)[^10] after
deployment of the Service Module[^11] reduced the risk associated with
the total loss of Russian propulsion capability. Subsequently, in March
2001, NASA canceled the U.S. Propulsion Module due to budget concerns
and the reduced risk of a near-term Russian propulsion shortfall.

In December 1999, NASA modified the fee structure of the ISS
contract[^12] and resolved numerous outstanding and potential contractor
claims as part of a global settlement[^13] that included an increase in
contract cost of \$404 million. A significant change involved the
Government's ability to recoup award fee if on‑orbit performance is
unsatisfactory.[^14] The restructure enables Boeing to earn up to 11
percent technical and cost award fees on new work added to the contract
[^15] (other than spares which have a separate fee arrangement). The
technical award fee on new work is not subject to Government recoupment
based on on-orbit performance problems. NASA accepted all of the
contractor claims in the settlement at the amounts estimated by the
contractor. Additionally, the entire \$404 million amount was applied to
increase the contract target cost, which is subject to award fee.

At the time of the global settlement, the cost overrun reported by
Boeing was \$986 million, the amount first formally reported by Boeing
in March 1999. Currently, Boeing is continuing to report the same
overrun (\$986 million[^16]) while at the same time indicating that it
will submit claims for at least an additional \$200 million.

The ISS Program Office estimates that prime contract activities are
about \$2.1 billion (26 percent) of the total new obligation authority
of \$8.0 billion provided in the FY 2001 President's Budget (FY 2001
through 2005). These amounts reflect the completion of design,
development, test and evaluation (DDT&E) activities and an increase in
research, launch, payload ground operations and other

"non-prime" activities. These "non-prime" activities total \$5.9 billion
over the same 5‑year period. As of December 2000, Boeing reported that
the DDT&E portion of the ISS prime contract[^17] was more than 90
percent complete.

**Contract MANAGEMENT**

The prime contract for the ISS Program requires an Earned-Value
Management (EVM)[^18] System for cost and schedule reporting. EVM
systems track variances from budgeted costs and schedules. These
variances can be used to estimate future performance. Our work going
back to 1996 (see Appendix A) shows continuing, significant
understatement by Boeing of the cost estimates to complete work on the
ISS prime contract. We found Boeing has not adequately used EVM data to
identify negative variances nor designed and implemented timely
corrective action plans to mitigate the problems causing adverse cost
and schedule impacts. Additionally, we found that NASA management did
not use cost and schedule data from the contractor's EVM system to
effectively challenge Boeing on its understated estimates.

In February 2000, we issued a report on performance management of the
ISS contract.[^19] We conducted the review resulting in this report at
the request of the NASA Administrator following the disclosure of a
large overrun in the ISS prime contract. Boeing announced in late March
1999 that the total of actual and projected cost overruns on the ISS
prime contract had increased by \$203 million, from \$783 million to
\$986 million.[^20] This was the third major increase in cost overrun
that Boeing reported in 2 years. Boeing attributed part of the cost
overrun to unexpected increases in indirect cost rates due to
reorganizations, including the merger with McDonnell Douglas Corporation
and the acquisition of Rockwell International Corporation.

We concluded that management of the ISS prime contract needed
improvement. Specifically, we found:

-   Boeing reported to NASA unrealistically low estimates of projected
    cost overruns on the ISS prime contract.

-   NASA did not act to effectively challenge understated contractor
    estimates. NASA paid (and later recouped) \$16 million in unearned
    incentive fee based on understated estimates.[^21]

-   NASA and Boeing did not sufficiently emphasize cost management at
    monthly meetings held to discuss the status of the ISS.

-   Boeing extensively delayed negotiating major cost overrun
    modifications by submitting late proposals.

-   NASA did not act to promptly definitize (that is, incorporate into
    the contract by a modification) cost overrun proposals submitted by
    Boeing. The delays in definitizing the overruns negatively impacted
    performance measurement by limiting variance analysis to top-level
    estimates rather than to the detailed distribution to the work
    breakdown structure.[^22]

-   Boeing used "negative" management reserves[^23] to accumulate cost
    overruns that should have been distributed to the specific work
    performed.

-   NASA had not routinely performed independent estimates to complete
    the ISS contract using EVM data.[^24]

-   NASA made optimistic award fee evaluations during a period of
    significantly understated contractor cost overruns.

-   Boeing had not developed mitigation plans for known cost risks.

-   NASA paid insufficient attention to Boeing's reorganization and
    restructuring activities due to mergers and acquisitions and related
    cost impacts on the ISS and other NASA contracts (see Appendix B for
    a discussion of the related NASA OIG audit of Boeing restructuring
    costs).

-   NASA had not structured award fee provisions[^25] of the ISS prime
    contract to provide sufficient weight (and, therefore, incentive) to
    the cost management area to ensure reporting of realistic cost
    estimates. Consequently, even unsatisfactory ratings in this area
    reduced the award fee by only a minimal amount.

-   NASA had not required that monthly status reports on Boeing cost,
    schedule, and technical performance from the Defense Contract
    Management Command (DCMC)[^26] be summarized at the ISS prime
    contract level. These reports provide valuable insight into emerging
    issues, particularly those with cost and schedule impacts, such that
    corrective action can be taken to mitigate these adverse
    consequences.

We made numerous recommendations to improve ISS contract and performance
management. NASA generally concurred with our recommendations.[^27]

**Program MANAGEMENT**

Our oversight of the ISS has found that NASA could make many
improvements in program management. Some of NASA\'s ISS management
practices were inconsistent with the high-risk, technologically complex
environment of the ISS Program. The international aspects of the program
also compound the challenges facing NASA management (see Appendix C for
a discussion of NASA OIG reviews related to ISS Program management and
the risks associated with

international partnerships). We will discuss two particular areas of
concern: the need for periodic, independent life-cycle cost estimates
and Independent Annual Reviews (IARs)[^28] of the ISS Program.

In 1998, the General Accounting Office (GAO)[^29] completed a life-cycle
cost estimate of the ISS Program that totaled about \$96 billion, but
NASA had not developed its own estimate against which the GAO amount
could be compared. NASA has not done an independent life-cycle cost
estimate of the ISS, although the Agency has requested at least one
major external review of ISS costs.[^30] Periodic independent life-cycle
cost estimates are a key program management tool for determining and
assessing budgets and identifying and quantifying areas of program risk.

The ISS Program was not subjected to an IAR in 2000 or to-date in
2001.[^31] The NASA Independent Program Assessment Office reported the
results of the last IAR of the ISS Program in May 1999. That review was
comprehensive and provided clear warning of cost, schedule, and
technical problems that required management attention. Concerning the
ISS prime contract with Boeing, the IAR concluded that cost overruns
were likely to continue to grow because Boeing had not improved its cost
performance since the prior (1998) IAR. Also, the IAR forecasted that
similar poor cost performance could be expected in post-development
activities such as sustaining engineering. The 1999 IAR did not
independently estimate ISS Program life-cycle costs or the cost to
complete the ISS prime contract with Boeing. The 1999 review followed up
on recommendations made in the 1998 IAR of the ISS Program.

In our February 2000 report, we indicated that independent estimates of
ISS contract costs were not routinely performed by an activity outside
the program management chain of command. The ISS Program Office does not
conduct truly independent assessments given its management
responsibilities for the Program. We recommended that such independent
estimates be performed, and NASA agreed to obtain them as part of the
IAR process. Since that time, however, NASA has not performed an IAR.

Independent cost estimates of both the ISS Program and its contracts
serve NASA management as well as the Congress and OMB by providing a
"nonadvocate" perspective on cost estimating assumptions and
methodologies used to develop cost, budget, and other financial
information.

**CONCLUSION**

In summary, NASA can use the framework established by the National
Aeronautics and Space Administration Authorization Act of 2000 to
accurately report ISS costs. In addition, improvements to existing
contract and program management guidance can strengthen oversight of the
ISS Program.

The combination of the following actions will help ensure the most
current status of the ISS Program is reported to the Congress, OMB, and
NASA management:

-   annual accounting for, and GAO verification of, statutory funding
    limitations as required by the National Aeronautics and Space
    Administration Authorization Act of 2000;

```{=html}
<!-- -->
```
-   review by the NASA OIG of NASA notifications, if any, of changes in
    ISS costs that require contingency funding above the statutory caps
    as required by the National Aeronautics and Space Administration
    Authorization Act of 2000;

```{=html}
<!-- -->
```
-   improved use of EVM systems and data for monitoring contractor
    performance;

-   periodic independent life-cycle cost estimates;

-   regular performance of IARs that include independent estimates of
    costs to complete ISS contracts; and

```{=html}
<!-- -->
```
-   timely implementation of actions agreed upon in response to
    independent reviews.

In addition, we plan to continue our emphasis on oversight of the ISS
Program as one of our Top 10 NASA management challenges.

If you are interested in learning more about the activities or reports
referenced in this testimony, you can find the full text of most of our
reports on the NASA OIG homepage, at
[http://www.hq.nasa.gov/office/oig/hq](http://www.hq.nasa.gov/oggice/oig/hq),
or contact our office at (202) 358-2061.

Thank you, and I would be pleased to answer any questions.

**APPENDIX A: EARLIER NASA OFFICE OF INSPECTOR**

> **GENERAL REVIEWS OF INTERNATIONAL**
>
> **SPACE STATION COST AND SCHEDULE**
>
> **MANAGEMENT**

In 1996, we reported that Boeing was not revising its monthly
performance measurement reports on the ISS prime contract to reflect a
reasonable estimate of cost to complete the ISS.[^32] Boeing's
performance management system required that the company review monthly
its estimate at completion and update the estimate at least annually.
Boeing was reporting a variance at completion of about \$13 million.
However, based on our review of Boeing cost performance, we estimated
that the variance at completion could be more than \$140 million ---
\$127 million more than Boeing was then reporting to NASA.

We concluded that NASA did not have a reliable estimate at completion to
manage future funding requirements. We stated that the ISS Program may
have to fund overruns in FY 1996 through 2003 in order to build the ISS.
As a result, we recommended that NASA require Boeing to better analyze
and report estimate-at-completion data. NASA agreed with our
recommendation.

In 1997, based on concerns that Boeing was continuing to report
unrealistic cost estimates on the ISS prime contract, we performed a
follow-up to our prior audit.[^33] Our 1997 audit again found that
Boeing did not report in its monthly performance measurement reports,
reasonable cost estimates for completing work. The estimates were not
realistic because Boeing reduced the monthly estimates provided by major
subcontractors under the prime contract and thus reported a smaller cost
overrun. Boeing stated that it used these reduced estimates as a
management tool to encourage managers to reduce costs. In fact, the
reduced estimates did not decrease costs. Instead, they limited
visibility into expected cost overruns.

In February 1997, Boeing\'s variance at completion\--the expected cost
overrun\--was \$278 million. At this same time, NASA estimated the
overrun to be \$425 million\--\$147 million, or about 53 percent, more
than the Boeing estimate. In June 1997 (after our follow-up audit
began), Boeing increased its estimated variance at completion from \$278
million to \$600 million.

To increase the reliability of Boeing\'s cost estimates, we recommended
that NASA require Boeing to prepare detailed support for adjustments to

subcontractor estimates. We also recommended that the ISS Program Office
monitor Boeing\'s adjustments to subcontractor estimates. NASA agreed
with our recommendations.

In 1999, we reported additional problems related to oversight of
Boeing\'s Earned Value Management System.[^34] We found that NASA had
not ensured that the DCMC, its agent at Boeing's Huntington Beach
facility,[^35] accomplished Government surveillance of Boeing\'s EVM
System, as required by the contract administration delegation and the
DCMC surveillance plan. As a result, the ISS Program had not benefited
from the intended early identification of Program risks and oversight of
corrective actions.

In this same audit, we also found that Boeing had not resolved an
earlier identified weakness in the preparation and submission of the
Variance Analysis Report.[^36] In 1997, the ISS Program Office notified
Boeing that the Variance Analysis Report elements, including recovery
plans for negative variances, were inadequate and out of date. However,
deficiencies still existed in the June 1998 Variance Analysis Report.
NASA concurred with our recommendations to ensure effective surveillance
of the EVM System and to direct Boeing to improve the quality of its
Variance Analysis Reports.

**APPENDIX B: DISCUSSION OF BOEING RESTRUCTURING**

> **COSTS**

In our February 2000 report on performance management of the ISS
contract, we found that Boeing proposed to charge NASA significant costs
related to the company\'s reorganization at the same time that Boeing\'s
military and commercial customers would receive net savings as a result
of the reorganization. To determine the cost impact on the ISS and other
Agency programs, we performed an audit of the effects of the Boeing
restructuring on NASA.[^37]

On December 17, 1999, Boeing entered into an advance agreement[^38] with
the DCMA acting on behalf of the Department of Defense (DoD), NASA, and
other U.S. Government customers of Boeing. The advance agreement allowed
Boeing to claim costs to reorganize and restructure as a result of its
previous acquisitions and mergers, with the expectation that future
savings to the Government would be at least twice the amount of the
restructuring costs incurred and charged to Government contracts. NASA
did not benefit from Boeing\'s restructuring and its advance agreement
with DCMA. Boeing estimated that its DoD customers could realize
potential net savings of \$276 million and that NASA could incur as much
as \$115 million[^39] in additional costs resulting from Boeing\'s
acquisition of the Rockwell International Corporation Aerospace and
Defense Units (Rockwell) and its merger with the McDonnell Douglas
Corporation (McDonnell Douglas). NASA did not have legislation and
regulations[^40] comparable to those of the DoD regarding external
business restructuring costs. Also, NASA was not closely involved in
reviewing and negotiating Boeing\'s restructuring proposal and related
accounting changes. We concluded that NASA has an opportunity to recover
about \$64.7 million[^41] on the ISS and other Boeing contracts through
a more equitable distribution of future contract cost reductions.

We recommended that NASA seek legislation for NASA similar to that
provided to DoD regarding business restructuring costs and participate
in negotiations between DCMA and Boeing to protect NASA interests. NASA
has proposed alternative corrective actions that are potentially
responsive to our recommendations, including the modification of
acquisition regulations to ensure NASA receives a fair share of future
restructuring savings. We are awaiting implementation of the corrective
actions.

APPENDIX C: RELATED NASA OFFICE OF INSPECTOR

> GENERAL REVIEWS OF ISS PROGRAM
>
> MANAGEMENT

The following are summaries of NASA OIG reviews that illustrate the need
for increased management attention on various aspects of the ISS
Program.

**RISK MANAGEMENT**

In a recent inspection, we found several problems with the ISS Portable
Computer System (PCS) and the displays developed for the PCS.[^42] The
on‑board PCS is the crew's primary interface for command and control of
the ISS and provides the crew with caution and warning information.[^43]
We determined that the ISS Program was not using an integrated product
team in the PCS display development process. An integrated product team
would enhance coordination between the various organizations responsible
for display development. The lack of an integrated approach resulted in
a communication breakdown between organizations responsible for PCS
display development and the design of procedures for its use.

We also found that the ISS Program had no independent verification
(evaluation and validation) of PCS displays or of the display
development process, primarily due to schedule and personnel
constraints. An independent verification process would help detect and
correct errors and enhance utility at an earlier stage in the display
development process. In addition, we found several usability issues that
may impact safety, cost, and schedule. The issues include the display of
inaccurate information, inconsistent application of commands, and
cumbersome navigation. Finally, our assessment determined that the ISS
Program does not have a coordinated, well-defined process for software
engineering and software management. In some cases, ISS crew members did
not have an opportunity to see the software until they were trained in
its use, which was so late in the process that changes were difficult to
make. We made several recommendations to improve development of the PCS.
NASA either concurred or partially concurred with our recommendations.

For the X-38/Crew Return Vehicle (CRV) Project, NASA was using a \"rapid
prototyping\"[^44] strategy. Rapid prototyping is one of the
methodologies used to respond to the NASA Administrator's challenge of
performing projects "faster, better, and cheaper." Under rapid
prototyping, the X-38/CRV project was relying on a high degree of
concurrency among design, development, test, and engineering/evaluation
activities, assuming an optimistic schedule to accomplish development
and production of the CRV. While this approach offers potential high
payoff, we found that under the more likely ISS scenarios, the approach
negatively affects NASA's ability to accurately adhere to project
schedule and cost, thus increasing risk.[^45] We recommended the Project
focus attention on risk and performance management, including the use of
documented performance metrics and criteria needed to enter and exit
from each Project phase. NASA agreed with our recommendations to develop
and document major characteristics, criteria, and strategies for
progressing though the major Project phases.

# INTERNATIONAL PARTICIPATION

We reviewed the planned acquisition of the Propulsion Module and have
issued a draft report to NASA on our findings and recommendations. The
purpose of the Propulsion Module Project was to develop a U.S.
propulsion capability to mitigate the risk of a Russian failure to
deliver critical elements or provide support to the ISS. NASA began the
Project in October 1998 and selected a design called the U.S. Propulsion
Module (USPM) in February 1999. In May 2000, NASA canceled one of two
major elements of the USPM because of unacceptable safety, technical,
and cost risks.[^46] In September 2000, NASA selected a new design
called the U.S. Propulsion System (USPS) that was intended to be simpler
and safer than the USPM. The Project Office estimated that the cost to
complete the USPS would be \$675 million. However, NASA canceled the
USPS in March 2001 because of budgetary concerns and the reduced risk of
a near-term shortfall in Russian propulsion capability due to the
deployment of the Service Module in July 2000.

In relation to managing the risks of international participation, we
also reported that the ISS Program Office had not effectively
transferred lessons learned to subsequent phases of the program for
experiences gained in other long-duration space flights and in working
with international partners.[^47] In another review, we found that the
ISS Program Office had not developed an integrated and comprehensive
contingency plan to address risks to the successful assembly of the ISS
by the possible delay or default of the international partners.[^48] The
contingency plan did not contain or clearly identify several critical
elements for effective risk management, as required by Agency guidance.
Specifically, the Program contingency plan did not contain cost and
schedule impacts and did not clearly identify risk mitigation measures
and primary consequences of the contingencies. In addition, certain
Agency actions being planned and implemented to prevent additional
schedule delays caused by problems in Russian participation had not been
incorporated into the contingency plan because the plan was not kept
current. NASA cannot assess the feasibility of the proposed contingency
responses or determine the budgetary impacts without current and
complete contingency plans. NASA basically agreed to establish
procedures to ensure the ISS Program contingency plan complies with
Agency guidance for effective risk management and to establish a process
to ensure the plan is kept current.

Another area of risk involving international partners is common
operations offsets or "bartering" agreements intended for NASA and its
international partners to make exchanges in furtherance of their
individual and collective interests. For example, in response to a
request by the Chairman, House Committee on Science, we conducted an
assessment of a barter arrangement between NASA and Japan and its
National Space Development Agency.[^49] We found that NASA already had
operational contingency plans and partnership agreements in place to
meet current emergency crew medical transport requirements and that the
Agency's decision to proceed to acquire an aircraft through a barter
arrangement was based on an incomplete analysis, did not consider all
reasonable alternatives, and cannot be clearly linked to overall crew
medical requirements.

Because barter agreements lack the structure and visibility that would
otherwise be provided by contractual actions requiring appropriated
funds, we recently announced a review of these arrangements to determine
whether NASA is receiving reasonable consideration for launch services
and other "bartered" items identified in the related agreements with
international partners.

**APPENDIX D: PRIOR NASA OFFICE OF INSPECTOR**

> **GENERAL REVIEWS OF NASA\'S INDEPENDENT**
>
> **ASSESSMENT PROCESS**

NASA\'s ability to provide accurate and credible cost assessments for
its projects has been a concern for many years. The 1990 Report of the
Advisory Committee on the future of the U.S. Space Program recommended
NASA for an independent cost analysis group made up of about 20
\"top-notch specialized personnel\" to advise the Administrator on
significant cost estimates provided to the OMB and Congress. In 1992,
the GAO emphasized that \"estimates and analysis provided to the
Administrator by the cost analysis group need to be independent in fact
and appearance.\"

In 1996, we reported on the organizational location of NASA's
independent program evaluation and assessment function.[^50] At the time
of our review, the Office of the Chief Financial Officer at NASA
Headquarters performed the function. NASA planned to transfer the
function from Headquarters to the Langley Research Center (Langley).

We concluded that locating the independent assessment and cost
estimation function in a subordinate organization (that is, Langley)
placed the function's independence and impartiality at risk. True
independence and impartiality require that the function reside with
officials without any stake in the competition for limited resources.
Moreover, accessibility of the function's analysts to both top
management officials and key program and project staff at Headquarters
and in the field was a significant issue and was fundamental to the
function's success. A staff at Headquarters would have ready access to
key counterparts at GAO, DoD, and other Federal agencies. Staff at the
Langley Research Center would not have this same access.

We recommended that NASA locate a core staff at Headquarters capable of
managing and overseeing the independent assessment and cost estimation
function. Assistance could be provided by personnel located at Langley
but functionally assigned to Headquarters. Management established the
Independent Program Assessment Office at Langley but did not locate a
core staff at Headquarters.

In 2000, we conducted a review to assess NASA's current and planned
ability to develop independent cost estimates[^51] in support of the
Agency's program and project management processes. We found that NASA
was taking positive steps to improve its cost estimating capability by
establishing a System Management Office (SMO)[^52] at each Center and by
adding cost estimators in the Independent Program Assessment Office at
Langley. However, we found that the organizational structures for the
independent cost estimating function at the Independent Program
Assessment Office and SMO did not provide for independent reporting of
findings directly to the approving official who is designated depending
on the nature of the individual program or project. Also, the
Independent Program Assessment Office and SMO are funded through the
Centers --- a process that may hinder their independence. Consequently,
NASA has less assurance that the opinions, conclusions, and
recommendations made to the Administrator or other approval authority on
acquisitions for Agency programs and projects are independent in fact
and appearance.

We made recommendations to improve the independence of the cost
estimating function and revise Agency policy to require an independent
cost estimate at major milestone reviews. NASA agreed to make the policy
changes. Management stated that the Agency conducts cost assessments
annually as part of the IAR process. NASA policy also requires that an
independent cost estimate be performed during a Non-Advocate
Review.[^53] In response to our recommendation, management agreed to
require another independent cost estimate after the Critical Design
Review.[^54] However, NASA has not implemented our recommendations to
enhance the independence of the cost estimating function.

[^1]: NASA was appropriated \$5.46 billion in FY 2001 for Human Space
    Flight.

[^2]: This overrun accounts for planned program content in accordance
    with the most current ISS assembly sequence. The FY 2001
    President\'s Budget provided a funding profile for FY 2002 through
    2006 totaling \$7.2 billion, and the ISS assessment concluded \$11.2
    billion was required, a difference of about \$4 billion. Primary
    areas of cost growth included mission operations and production and
    integration of hardware and software, the Habitation and Propulsion
    Modules, and avionics.

[^3]: On February 28, 2001, the President signed \"A Blueprint for New
    Beginnings.\" The Blueprint states: \"To address this unprecedented
    cost growth and ensure the program remains within the five-year
    budget plan, the President\'s 2002 Budget will include important
    decisions regarding the funding and management of the (ISS) program
    while preserving the highest priority goals: permanent human
    presence in space, world class research in space, and accommodation
    of international partner elements. Thus, the U.S. core will be
    complete once the Space Station is ready to accept major
    international hardware elements.\"

[^4]: The National Aeronautics and Space Administration Authorization
    Act of 2000 establishes a funding limitation on the ISS Program of
    \$25 billion. The statutory cost cap is not associated with a
    specific set of requirements or configuration of the ISS. The Act
    provides that, with each annual budget request and as otherwise
    deemed necessary, the Administrator will provide a written notice
    and analysis of funding required in excess of the limitation. The
    notice is required prior to obligating any funding in excess of the
    limitation, and the NASA Office of Inspector General is required to
    review the notice and supporting analysis and report to the
    Congress. The Act limits this contingency funding in excess of the
    limitation to \$5 billion and to certain listed contingencies. The
    Act also requires that NASA submit an accounting for the funding
    limitations as part of the annual budget request and arrange with
    the General Accounting Office (GAO) to perform a verification of the
    accounting.

[^5]: In March 2001, NASA canceled the Propulsion Module, which was
    intended to provide a backup U.S. propulsion capability to the
    Russian Service Module.

[^6]: The Act states substantial completion of the ISS occurs when the
    development costs comprise 5 percent or less of the total ISS costs
    for the fiscal year. Based on this provision, NASA estimates that
    substantial completion will occur in FY 2005 and that the cumulative
    ISS budget will exceed \$25 billion in FY 2006, when the funding
    limitation is no longer applicable.

[^7]: Contingencies identified in the Act include (a) the lack of
    performance or the termination of participation of any of the
    international countries that are party to the Intergovernmental
    Agreement, (b) the loss or failure of a U.S.-provided element during
    launch or on-orbit, (c) on-orbit assembly problems, (d) new
    technologies or training to improve safety on the ISS, and (e) the
    need to launch a Space Shuttle to ensure the safety of the crew or
    to maintain the integrity of the station.

[^8]: Boeing initially proposed a contract price of \$6.6 billion but
    reached agreement with NASA on August 31, 1994, at a "not-to-exceed"
    price of \$6.2 billion. On January 13, 1995, NASA and Boeing agreed
    to the \$5.638 billion award. At the time of the contract award,
    NASA and Boeing entered into a Memorandum of Understanding that
    Boeing officials stated reflected an understanding that the
    \$600 million difference between the prior agreement and negotiated
    price would be added to the contract target cost, if needed. We
    found that Boeing expected the \$600 million reduction in contract
    price negotiated in January 1995 to be added to the contract target
    cost, if needed. NASA disagreed with this interpretation. In
    February 2000, we recommended the agreement be rescinded, and NASA
    agreed.

[^9]: The Habitation Module was intended to provide crew quarters
    including a galley, wardroom and eating area, exercise equipment,
    and crew cleansing compartment.

[^10]: The ICM was intended to provide a low-cost capability to ensure
    ISS guidance and navigation control, attitude control, and reboost
    for at least a year to bridge a potential gap between the end of the
    useful service life of the Russian-built Control Module and the
    deployment of the Russian Service Module. After the Service Module
    became operational, the ICM would have been a short-term solution to
    delays or shortages in Russian Progress resupply vehicles. The Naval
    Research Laboratory was performing the work on the ICM.

[^11]: The Service Module, which Russia successfully delivered to the
    ISS in July 2000, provides attitude and reboost control,
    communications, electrical power generation, life support supplies
    and storage, crew systems, and mechanism control.

[^12]: The Price Negotiation Memorandum for this modification stated:
    "In January 1999, Boeing notified the Government that the estimated
    Variance at Completion (VAC) for contract NAS 15-10000 was \$986
    million. This additional VAC means that the contractor will now earn
    the minimum incentive fee (2 percent) specified in the contract.
    Therefore, there is no longer either a positive or negative
    incentive to control costs on existing work. Additionally, the
    earnings potential of any new work is penalized by past performance
    issues. It is important to re-incentivize Boeing's cost
    performance." The prior award fee provisions did not emphasize cost
    management because the incentive fee provisions were focused
    exclusively on cost. Therefore, the previous incentive fee
    provisions were converted to a fixed fee at the minimum 2 percent,
    and award fee pools were established for cost and technical
    management on new work added to the contract. The objective was to
    incentivize cost management by enabling the contractor to earn a
    reasonable return on the new work and not be further penalized by
    previous poor cost performance.

[^13]: The Price Negotiation Memorandum referred to the global
    settlement in the following manner: "The global settlement was
    negotiated as an integral part of the overall contract restructure
    which included moving to a new fee structure and reorganizing the
    Statement of Work to allow a new management approach for the
    Integration and Operations effort. No attempt was made to establish
    negotiation positions for, or to reach cost or fee agreement on
    individual issues. . . . The required result of the global
    settlement was to reach bottom line agreement on the estimated cost
    and fixed fee amount to be added to contract value to settle RFEA
    (Request for Equitable Adjustment) issues."

[^14]: Unearned award fee is also subject to reconsideration that could
    result in the fee being paid.

[^15]: In its Master Buy Plan for the ISS as of March 2001, NASA
    estimates that about \$1 billion in additional contract value will
    be added to the ISS contract through completion in December 2003 for
    sustaining engineering, post-production support, and integration and
    operation activities.

[^16]: NASA estimates the cost overrun to be \$1.14 billion, \$154
    million more than Boeing\'s estimate.

[^17]: The ISS prime contract with Boeing has performance-based and
    level-of-effort portions. The performance-based portion includes:
    DDT&E, the development, verification, and delivery of hardware and
    software for the U.S. on-orbit segment of the ISS; the integration
    and operation of U.S. and other ISS elements; acquisition and
    deployment of spare hardware components for ISS maintenance and
    repair; and development and delivery of hardware and software
    including ground support equipment. The level-of-effort portion
    includes: sustaining engineering, multi-element integrated testing,
    technical definition, and post-production support.

[^18]: Earned-value management is a tool that assists in the effective
    execution, management, and control of contract performance through
    integrated evaluation of cost, schedule, and technical performance
    against a performance measurement baseline. The baseline is an
    allocation of the contract target cost to specific contract tasks.

[^19]: The OIG issued Report IG-00-007, \"Performance Management of the
    International Space Station Contract,\" on February 16, 2000.

[^20]: Boeing submitted an "Over --Target Baseline" proposal for a \$600
    million overrun on February 19, 1999, and a "Delta" proposal for an
    additional \$183 million on April 15, 1999. Boeing stated in the
    "Delta" proposal that another proposal would be submitted by June
    28, 1999, for additional cost growth. Boeing submitted this proposal
    for the remaining \$203 million in cost overrun on September 22,
    1999, resulting in the \$986 million projected overrun.

[^21]: NASA had previously reduced award fee payments to Boeing due to
    deficiencies in its cost and schedule performance reporting to the
    Government.

[^22]: The work breakdown structure displays and defines the product, or
    products, to be developed and/or produced. It relates the elements
    of the work to be accomplished to each other and to the end product.

[^23]: Management reserve is an amount of the contract target cost set
    aside for management control purposes that is not budgeted to
    accomplish specific contract tasks. "Negative\" management reserves
    represent cost overruns that have been identified but not allocated
    to specific contract work. As a result, the cost overrun for that
    work is understated.

[^24]: Periodic independent assessments performed by an entity
    independent of the Program Office would help ensure that the
    Government has a reliable basis for (1) challenging unrealistically
    low contractor cost estimates, (2) adjusting fee payments based on
    cost performance, and (3) budgeting sufficient funds to complete the
    contract. See the discussion starting on page 9 concerning
    independent assessments of costs to complete the contract.

[^25]: Award fee is an element of a contract that provides for a fee
    consisting of (1) a base amount fixed at inception of the contract
    and (2) an award amount that the contractor may earn in whole or in
    part during performance and that is sufficient to provide motivation
    for excellence in such areas as quality, timeliness, technical
    ingenuity, and cost-effective management.

[^26]: The Defense Contract Management Command was the predecessor to
    the present Defense Contract Management Agency (DCMA). NASA
    generally delegates numerous contract administration
    responsibilities to DCMA related to oversight of NASA contracts
    including surveillance of EVM systems and data.

[^27]: Although NASA concurred with the recommendation to estimate the
    cost to complete the ISS contract as part of independent reviews,
    the Agency has not performed a review since 1999.

[^28]: NASA has established an Independent Program Assessment Office
    that is intended to conduct reviews of programs and projects in
    support of the NASA program and project management process. The
    Assessment Office conducts IARs of major programs and projects, the
    results of which are presented to the NASA Program Management
    Council, which is chaired by the NASA Associate Deputy
    Administrator. The Council is NASA's highest level forum for
    addressing planning, implementation, and management of NASA
    programs. (See Appendix D for a discussion of prior OIG reviews on
    the NASA independent assessment process.)

[^29]: The GAO issued Report NSIAD-98-147, \"International Space
    Station: U.S. Life-Cycle Funding Requirements,\" on May 22, 1998.
    GAO reported that life-cycle cost is the sum total of direct,
    indirect, recurring, and nonrecurring cost of a system over its
    entire life through disposal. GAO concluded the life-cycle cost to
    develop, assemble, and operate the ISS to be \$96 billion, a \$2
    billion increase over a similar estimate GAO made in June 1995. NASA
    did not agree with several key aspects of the GAO estimates.

[^30]: In September 1997, the NASA Administrator asked the Chairman of
    the NASA Advisory Council to establish a Cost Assessment and
    Validation Task Force, reporting through the Advisory Committee on
    the International Space Station (ACISS) to the NASA Advisory
    Council, for an independent review and assessment of cost, schedule,
    and partnership performance on the ISS Program. In April 1998, the
    Task Force reported its estimates that the overrun on the ISS prime
    contract could be \$1 billion based on work included in the contract
    at that time. In addition, the Task Force estimated funding
    requirements of \$24.6 billion through FY 2003 compared to \$20.3
    billion in the FY 1999 budget request. This report was a one-time
    review of ISS costs but did not include a full life-cycle cost
    estimate and was not a part of an established independent cost
    estimating process within NASA.

[^31]: NASA has advised us that an IAR is now scheduled for July 2001,
    but the scope has not been defined. The NASA OIG is presently
    reviewing NASA\'s IAR implementation.

[^32]: The OIG issued Report JS-96-002, \"Space Station Prime Contractor
    Performance Management," on June 11, 1996.

[^33]: The OIG issued Report IG-98-002, \"Space Station Performance
    Measurement Cost Data,\" on November 13, 1997.

[^34]: The OIG issued Report IG-99-007, \"Space Station Corrective
    Action Plans,\" on January 28, 1999.

[^35]: Boeing Huntington Beach is one of the prime contractor\'s sites
    that supports the ISS Program.

[^36]: Boeing uses the Variance Analysis Reports to identify problems
    causing negative cost and schedule variances, record corrective
    action plans, and report progress on implementing corrective action
    to NASA.

[^37]: The OIG issued Report IG-01-006, \"Impact of the Boeing
    Company\'s Restructuring on NASA,\" on November 27, 2000.

[^38]: The Federal Acquisition Regulation (FAR) and the Department of
    Defense Federal Acquisition Regulation Supplement permit contractors
    to enter into advance agreements with the Government for the
    treatment of special or unusual costs.

[^39]: The amount related to the ISS prime contract could be \$30.6
    million.

[^40]: The Defense Federal Acquisition Regulation Supplement (DFARS) is
    the implementing guidance for DoD concerning contractor
    restructuring as a result of legislation provided under Section 8115
    of the DoD Appropriations Act of 1997 (Public Law 104-208). This Act
    is implemented through the DFARS, which states: \". . . (DoD) must
    certify that projections of future restructuring savings resulting
    to DoD from the business combination are based on audited cost data
    and the audited projected savings for the DoD will either exceed the
    costs allowed by a factor of at least 2-to-1 or that the business
    combination results in the preservation of a critical capability
    that might otherwise be lost to DoD."

[^41]: NASA agreed to pursue this amount, but the actual settlement has
    not yet occurred.

[^42]: We issued Report G-99-01A, "Assessment of the Portable Computer
    System and the Data Display Process," on August 11, 2000.

[^43]: The caution and warning system is designed to warn the crew of
    conditions that may adversely affect ISS operations. The system
    consists of hardware and electronics that provide the crew with both
    visual and aural cues when a system exceeds predefined operating
    limits.

[^44]: Rapid prototyping allows project maturation through fault
    detection, analysis, and correction during system development rather
    than after system development.

[^45]: The OIG issued Report IG-00-005, \"X-38/Crew Return Vehicle
    Project Management,\" on February 9, 2000.

[^46]: The unacceptable risks related to the use of a volatile
    bipropellant fuel; a complex system of lines, valves, and tanks for
    transferring the fuel; a permanent weight increase of about 1,500
    pounds to the Space Shuttle Orbiters; and significant cost growth.

[^47]: The OIG issued Report G-98-012, "Review of International Space
    Station Phase I Lessons Learned Activity," on December 23, 1998.

[^48]: The OIG issued Report IG-99-009, \"Space Station Contingency
    Planning for International Partners,\" on March 9, 1999.

[^49]: The OIG issued a letter (G‑00‑015) to Hon. James F. Sensenbrenner
    regarding the Crew Medical Transport on October 6, 2000.

[^50]: The OIG issued a report on "Assessment of the Relocation of
    NASA's Independent Program Evaluation & Assessment Activities to
    LaRC \[Langley Research Center\]," on July 8, 1996.

[^51]: An independent cost estimate is a cost projection by analysts who
    are not part of the program/project under review.

[^52]: The SMOs, which are located at some NASA Centers, provide (1)
    support and independent evaluation of projects and programs for
    compliance with and implementation of NASA guidelines; (2)
    leadership, consultation services, and technical expertise on system
    engineering process; and (3) support in forecasting costs for
    advanced program/project planning initiatives.

[^53]: A Non-Advocate Review is an analysis of a proposed program or
    project by a nonadvocate team comprised of management and technical
    and budget personnel who will not participate in the implementation
    of the proposed program or project. The review provides Agency
    management with independent assessments of new program and project
    starts.

[^54]: NASA performs a Critical Design Review to determine that the
    detailed design of a program or project satisfies the performance
    and engineering requirements of the development specification.