United States General Accounting Office

GAO Testimony

Before the Subcommittee on Science, Technology, and

Space, Committee on Commerce, Science and

Transportation, United States Senate

For Release on Delivery

Expected at

9:30 am, EDT

Wednesday,

July 24, 1996

SPACE STATION

Cost Control Difficulties

Continue

Statement of Thomas J. Schulz, Associate Director,

Defense Acquisitions Issues, National Security and

International Affairs Division

G O A

years

1921 - 1996

GAO/T-NSIAD-96-210

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss some of the risks involved in

controlling the cost and maintaining the schedule of the National

Aeronautics and Space Administration’s (NASA) International Space Station

program. The testimony today is principally based on our recent report on

the program’s continuing cost control difficulties.1

 The report is being

released today by Representative John D. Dingell, who requested that we

review the station’s cost and performance reporting system when he was

Chairman of the former House Committee on Energy and Commerce,

Subcommittee on Oversight and Investigations. With your permission,

Mr. Chairman, I would like to introduce the report into the record.

The report identifies a variety of issues that warrant continuing oversight

because of their potential negative impact on the cost and schedule of the

station program. While NASA has made progress in developing systems to

control costs and track performance, significant threats to the station’s

cost and schedule remain. NASA also needs to continue implementing

effective performance measurement systems. In the order discussed in our

report, the specific issues requiring attention include (1) long-standing

prime contract changes that need to be priced; (2) the worsening of the

prime contract’s cost and performance trends; (3) performance reports

that contain unrealistic cost estimates at completion, which could be

masking overruns; (4) the decreased level of Russian Space Agency

participation and its implications for the future of the station; and

(5) remaining problems in implementing performance measurement

systems for accurately determining cost and schedule status.

In a worst case situation, these issues could threaten the future of the

program, especially if they result in significantly higher cost estimates and

substantial schedule delays. When considering the sensitivity of the

station’s budget profile to these risks, followup to ensure that promised

corrective actions are taken in a timely manner and that recognized

problems are effectively resolved, is of paramount importance.

As you know, the International Space Station is a major undertaking. NASA

estimates the development and operations cost of the station at

$17.4 billion from October 1993 through completion of assembly in space,

1

Space Station: Cost Control Difficulties Continue (GAO/NSIAD-96-135, July 17, 1996).

Page 1 GAO/T-NSIAD-96-210
which is currently scheduled for June 2002.2

 About $6.3 billion of this

estimate is intended to cover the activities of the prime contractor. Also,

over $5.5 billion is for a large number of smaller contracts to develop the

ground-based and on-orbit capability to use and operate the station, about

$2.6 billion is for other contracts to develop on-orbit research facilities and

conduct research, and more than $3 billion is for financial reserves.3

 In

mid-1993, a $2.1 billion annual funding limitation was imposed on the

program.

The program started producing flight hardware in 1993 and the prime

contract is about 45-percent complete. However, the program continues to

face cost and schedule threats to its already limited financial reserves for

completing the program within its $17.4 billion total and $2.1 billion annual

budget. We do acknowledge that the program has been able to maintain

sufficient reserves to fund additional costs that have occurred so far. We

also note that station managers have identified cost savings and deferrals

that bolstered the fiscal year 1996 reserves, and anticipate that there will

be an unused balance to carryover and augment the expected fiscal

year 1997 reserve level. However, despite these efforts, we are still

concerned that identified contingencies could use up most of these funds,

especially over the next several years. This situation would be exacerbated

if additional continuing threats discussed in our report are realized.

Program managers would then have to either exceed the annual funding

limitation or defer or rephase other activities, thus possibly delaying the

station’s schedule and likely increasing its overall cost.

The first three risks discussed in our report that I mentioned earlier are

the continuing threats to financial reserves. They include:

• a large number of unpriced contract changes,

• unfavorable cost and schedule trends, and

• potentially understated cost estimates.

Most of the contractor estimates of the value of authorized changes for

which prices had not yet been negotiated are included in the current

budget baseline. However, NASA did not budget for the full amount because

2

Exclusive of $30.8 billion for funding through fiscal year 1993 and station-related requirements to

June 2002. The total of $48.2 billion is detailed in Space Station: Estimated Total U.S. Funding

Requirements (GAO/NSIAD-95-163, June 12, 1995).

3

Anticipating and accurately estimating the development and operations costs of major research and

development projects is highly unlikely. Accordingly, NASA’s cost estimates for such projects include

both a baseline program to fund the costs of known requirements and allowances for financial

reserves to fund unexpected major contingencies, such as schedule delays or changes in project

objectives or scope.

Page 2 GAO/T-NSIAD-96-210
station personnel believe they can price these changes for less. NASA said it

would complete the pricing by the end of this month. If NASA is unable to

negotiate the lower prices it expects, financial reserves could be further

reduced.

As of April 1996, the performance measurement system showed the station

prime contractor about $89 million over cost and about $88 million behind

schedule at the 45-percent completion point.4

 Although these variances are

currently within planned future funding levels, both showed deteriorating

trends. It is our understanding these trends have continued to worsen.

The monthly cost performance reports included several instances where

the contractor’s total estimate of the cost to complete work did not

recognize over-budget conditions even when the accompanying narrative

included indications that the budget overrun could worsen. This omission

of potential overruns concerns us, especially since NASA and the prime

contractor identified the lack of realistic estimates of the cost to complete

work as a problem during their initial assessments of the performance

measurement systems. All the major subcontractors were expected to

update their estimates of the cost to complete work by this summer.

An additional cost risk discussed in our report involves the continued

participation by the Russian Space Agency. This cost risk does not

threaten financial reserves in the same way as those threats I have

previously mentioned. In a worst case situation resulting in a complete

and sudden withdrawal from the station program by the Russians, a

renegotiation of the total $17.4 billion and annual $2.1 billion development

budget could be required. Only limited changes in the scope and timing of

the Russian participation might be covered by the financial reserves.

Despite recent statements of confidence regarding Russia’s participation,

we are aware of continuing concerns about its ability to deliver, and we

believe this issue would benefit from continuing congressional oversight.

Two years ago, at a congressional hearing on cost reporting on Johnson

Space Center contracts involving major parts of an earlier version of the

current station, NASA promised to institute an improved performance

measurement system on station contracts. This system would determine

the extent that tasks are on schedule and within budget. Such systems are

4

Cost variances represent the difference between actual costs to complete specific work steps 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

schedule variances can become cost variances as additional work, that is, overtime, is often required

to regain schedule.

Page 3 GAO/T-NSIAD-96-210
intended to provide early warning of cost and schedule problems so

corrective actions can be taken. At the time we completed our review, a

complete performance measurement system was not yet in place.

Nevertheless, NASA had made progress, especially toward ensuring that the

station prime contractor and its major subcontractors had an adequate

performance measurement system. We considered cost and schedule

management as still being at risk, however, because all the deficiencies

identified by NASA and the station prime contractor during their

performance measurement system reviews were not yet corrected and the

overall performance baseline for measuring cost and schedule progress

was not yet completely established. In commenting on our report, NASA

acknowledged that it faces many cost control challenges and that not all of

the program’s difficulties are behind it. However, NASA was confident that

the program would continue to perform on schedule and within budget.

In summary, Mr. Chairman, there are numerous matters—both major and

minor—which continue to threaten the station program’s ability to stay

within cost limits and on its current schedule. In some cases,

commitments were made by NASA and its contractors to resolve or

complete actions on the issues described in our report. It would be useful

to the oversight of the station program to update those commitments and

factor their results into a more current assessment of the program’s cost

and schedule status. Also, the possibility that the Russians might

ultimately not be able to meet their commitments is a key threat to the

program’s cost and schedule and a most important one for congressional

oversight.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or the members of the Subcommittee may have.

(707193) Page 4 GAO/T-NSIAD-96-210
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