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

Wednesday,

November 5, 1997

SPACE STATION

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.

Summary Last year we reported on the deteriorating cost and schedule performance

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
Cost and Schedule

Performance

Continues to

Deteriorate

The cost and schedule performance under the prime contract has been

consistently worsening for some time. In a June 1997 testimony,4

 we

pointed out that between January 1995 and April 1997, the estimated cost

of work to get back on schedule had increased from $43 million to

$129 million. Since then, the schedule variance5

 has remained negative, but

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

Contract (January 1997 through

August 1997)

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

-500

-400

-300

-200

-100

0

-223

-241

-263

-291

-310

-327

-355

-377

Dollars in millions

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.

Russia’s Delays

Increase NASA’s Cost

The Russian government’s past inability to furnish the Service Module on

time has adversely impacted the space station program. According to NASA

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.

Lower Financial

Reserves and

Increased Costs

Focus Attention on

Funding Limitations

When NASA redesigned the space station in 1993, the program had

approximately $3 billion in financial reserves.6

 Since then, the program

reserves have been significantly depleted. By June 1997, the program’s

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

end of fiscal year 1997, reducing the remaining uncommitted reserves to

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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