Space Station: Cost Control Problems Are Worsening
Published: 1997-09-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO provided information on the International Space Station (ISS), which is being developed by the United States and others, focusing on: (1) Russia's performance problems and the National Aeronautics and Space Administration's (NASA) reaction to them, including the additional cost and cost risk assumed by NASA; (2) cost and schedule experience under the prime contract; and (3) the status of and outlook for the program's financial reserves. GAO also identified actions taken by NASA to keep the space station program's funding within certain limits through the completion of the station's assembly.
section_title: What GAO Found
paragraphs: GAO noted that: (1) in May 1997, NASA revised the space station assembly sequence and schedule to accommodate delays in the production and delivery of the Service Module; (2) this revision occurred after more than a year of speculation regarding Russia's ability to fund its space station manufacturing commitments; (3) to help mitigate the adverse effects of the Russians' performance problems and address the possibility that such problems would continue, NASA developed and began implementing step 1 of a three-step contingency plan; (4) NASA has budgeted an additional $300 million from other NASA activities for the space station program to cover the hardware cost under step 1; (5) NASA will also incur other costs under step 1 that have not yet been estimated; (6) significant additional cost growth could occur in the station program if NASA has to implement steps 2 and 3 of its contingency plan; (7) the cost and schedule performance of the station's prime contractor has continued to steadily worsen; (8) from April 1996 to July 1997, the contract's cost overrun quadrupled to $355 million, and the estimated cost to get the contract back on schedule increased by more than 50 percent to $135 million; (9) so far, NASA and prime contractor efforts have not stopped or significantly reversed the continuing deterioration; (10) the station program's financial reserves have also significantly deteriorated, principally because of program uncertainties and cost overruns; (11) the near-term reserve posture is in particular jeopardy, and the program may require additional funding over and above the remaining reserves before the completion of station assembly; (12) to date, NASA has taken a series of actions to keep the program from exceeding its funding limitations and financial reserves; (13) NASA is accounting for these actions in ways that enable it to report its continuing compliance with the funding limitations; (14) however, to show continuing compliance in some cases, NASA has had to redefine the portion of the program subject to the funding limitations; (15) thus, the value of the current limitations as a funding control mechanism is questionable; (16) since GAO's June 1997 testimony, further cost and schedule problems have materialized and NASA has acknowledged that the potential for cost growth in the program has increased; and (17) GAO believes the program has reached the point where the Congress may wish to review the entire program.

section_title: Letter
paragraphs: As you requested, we have updated certain aspects of our July 1996 report on the International Space Station (ISS), which is being developed by the United States and others. Specifically, this report addresses the Russians’ performance problems and the National Aeronautics and Space Administration’s (NASA) reaction to them, including the additional cost and cost risk assumed by NASA; cost and schedule experience under the prime contract; and the status of and outlook for the program’s financial reserves. You also asked us to identify actions taken by NASA to keep the space station program’s funding within certain limits through the completion of the station’s assembly.
subsections: section_title: Background
paragraphs: NASA and its international partners—Japan, Canada, the European Space Agency (ESA), and Russia—are building the ISS as a permanently orbiting laboratory to conduct materials and life sciences research under nearly weightless conditions. Each partner is providing station hardware and crew members and is expected to share operating costs and use of the station. The NASA Space Station Program Manager is responsible for the cost, schedule, and technical performance of the total program. The Boeing Corporation, the station’s prime contractor, is responsible for ISS integration and assembly. As of June 30, 1997, the prime contractor reported that over 200,000 pounds of its station hardware was being built or had been completed. According to NASA, by the end of fiscal year 1998, hardware for the first six flights will be at Kennedy Space Center for launch processing.
In our July 1996 report and subsequent testimony, we noted that the cost and schedule performance of the space station’s prime contractor had deteriorated and that the station’s near-term funding included only limited financial reserves. We also 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 ISS power, control, and habitation capability.
For several years, the space station program has been subject to a $2.1 billion annual funding limitation and a $17.4 billion overall funding limitation through the completion of assembly, which until recently had been scheduled for June 2002. According to NASA, 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. However, the caps are not legislatively mandated, although references to them in congressional proceedings and reports indicate that NASA was expected to build the space station within these limits. When the caps were first imposed, the program had about $3 billion in financial reserves.
In our July 1996 report, we concluded that, if program costs continued to increase, threats to financial reserves worsened, and the Russian government failed to meet its commitment in a timely manner, NASA would either have to exceed its funding limitation or defer or rephase activities, which could delay the space station’s schedule and would likely increase its overall cost. In June 1997 testimony, we said that, if further cost and schedule problems materialized, a congressional review of the program would be needed to determine the future scope and cost level for a station program that merits continued U.S. government support. Over the past several months, NASA has acknowledged that the potential for cost growth in the program has increased.
section_title: Russian Performance Problems Cause Additional NASA Activity
paragraphs: As a partner, Russia committed to making a variety of contributions to the ISS. These contributions include (1) the Service Module to provide crew habitation during assembly; (2) the Science Power Platform to help maintain the station’s orientation; (3) launch services to reboost and resupply the station, including the provision of propellant; and (4) Soyuz spacecraft to provide crew return capability during station assembly.
In late 1995, NASA became concerned about Russia’s ability to provide steady and adequate funding for its commitments. According to the NASA Administrator and station program officials, the Russian government said repeatedly that the problem would be resolved, despite mounting evidence to the contrary. Finally, in the fall of 1996, Russia formally notified NASA that funding difficulties would delay the completion of the Service Module, which is a critical component for early assembly. Subsequently, NASA designed a three-step recovery plan. Step 1 focuses on adjusting the station schedule for an 8-month delay in the availability of the Service Module and developing temporary essential capabilities for the station in case the Service Module is further delayed by up to 1 year. Major activities in this phase include delaying the launch of station components that are to precede the Service Module into orbit and building an Interim Control Module to temporarily replace the Service Module’s propulsion capability. Step 1 is underway; the new or modified hardware being developed will be completed even if Russia maintains the Service Module’s revised schedule and delivers it on time. NASA officials told us that Russia has resumed its financial commitment, the Service Module assembly has restarted, and significant progress is being made.
Step 2 is NASA’s contingency plan for dealing with any additional delays or the Russian government’s failure to eventually deliver the Service Module. This phase could result in permanently replacing the Service Module’s power, control, and habitation capabilities. NASA will decide later this fall on whether to begin step 2. Under step 3 of NASA’s plan, the United States and other international partners would have to pick up the remaining responsibilities the Russian government would have had, such as station resupply and reboost missions and crew rescue during assembly. A decision on step 3 is planned for sometime next year, at the earliest.
In addition to their effects on space station development activities, these recovery plan steps place additional requirements on the space shuttle program. Under the plan, the space shuttle may be needed to launch and deliver the Interim Control Module and perform station resupply missions now expected to be done by Russia. Although the full impact of the recovery plan on the space shuttle program is not yet known, the plan has already resulted in the addition of two shuttle flights during the station’s assembly.
section_title: Prime Contractor’s Cost and Schedule Performance Continues to Deteriorate
paragraphs: The prime contractor’s cost and schedule performance on the space station, which showed signs of deterioration last year, has continued to decline virtually unabated. Since April 1996, the cost overrun has quadrupled, and the schedule slippage has increased by more than 50 percent. Figure 1 shows the cost and schedule variances from January 1995 to July 1997. Cost variances are the differences between actual costs to complete specific work and the amounts budgeted for that work. Schedule variances are the dollar values of the differences between the budgeted cost of work planned and work completed. Cost and schedule variances are not additive, but negative schedule variances can become cost variances, since additional work, in the form of overtime, is often required to get back on schedule. 1/95 4/95 7/95 10/95 1/96 4/96 7/96 10/96 1/97 4/97 7/97 -89 -123 -163 -223 -291 -35527-62-16-19-48 -88 -105 -107 -118 -129 -135-43-77-45-46-55 Between January 1995 and July 1997, the prime contract moved from a cost underrun of $27 million to a cost overrun of $355 million. During that same period, the schedule slippage increased from a value of $43 million to $135 million. So far, the prime contractor has not been able to stop or significantly reverse the continuing decline.
In July 1996, independent estimates of the space station’s prime contract cost overrun at completion ranged from $240 million to $372 million. Since then, these estimates have steadily increased, and by July 1997 they ranged from $514 million to $610 million. According to program officials, some financial reserves will be used to help cover the currently projected overrun.
Delays in releasing engineering drawings, late delivery of parts, rework, subcontractor problems, and mistakes have contributed to cost overruns. NASA’s concern about performance problems under the prime contract is evidenced by its recent incentive and award fee actions. In March 1997, NASA directed Boeing to begin adjusting its biweekly incentive fee accruals and billings based on a higher cost estimate at completion than Boeing was officially reporting. On the basis of an internal review, Boeing subsequently increased its estimate of cost overrun at completion from $278 million to $600 million. The increase in Boeing’s estimate potentially reduces its incentive award by about $48 million over the remainder of the contract period.
Boeing was also eligible for an award fee of nearly $34 million for the 6-month period ending in March 1997. However, citing significant problems in program planning, cost estimating, and hardware manufacturing, NASA concluded that Boeing’s performance did not warrant an award fee. NASA also directed Boeing to deduct almost $10 million from its next bill to refund the provisional award fee already paid during the period.
Boeing is implementing a corrective action plan for each identified weakness and has outlined a number of actions to improve the performance of the entire contractor team, including changing personnel, recruiting additional software engineers and managers, and committing funds to construct a software integration test facility. Boeing also presented a cost control strategy to NASA in July 1997. According to NASA officials, the strategy includes organizational streamlining and transferring some roles to NASA.
Station officials assessed Boeing’s efforts to improve its performance as part of the midpoint review for the current evaluation period. They concluded that, while there was some improvement, it was insufficient to permit resumption of provisional award fee payments.
section_title: Financial Reserves Are Dwindling
paragraphs: When NASA redesigned the space station in 1993 and brought Russia into the program as a partner, the program had approximately $3 billion in financial reserves to cover development contingencies. Since then, the program reserves have been significantly depleted. In June 1997, the financial reserves available to the program were down to about $2.2 billion. NASA estimated that, by the end of fiscal year 1997, the remaining uncommitted reserves could be less than $1 billion.
Financial reserves have been used to fund additional requirements, overruns, and other authorized changes. By June 1997, a station program analysis indicated that fiscal year 1997 reserves might not be sufficient to cover all known threats. More recently, station officials have estimated that a small reserve surplus is possible in fiscal year 1997, but concerns are growing regarding the adequacy of fiscal year 1998 reserves.
NASA has already identified threats to financial reserves in future years that, if realized, would outstrip the remaining reserves. For example, program reserves have been identified to cover additional cost overruns; crew rescue vehicle acquisition; hardware costs, in the event that ongoing negotiations with partners are unsuccessful; and additional authorized technical changes. Thus, with up to 6 years remaining until on-orbit assembly of the station is completed, NASA has already identified actual and potential resource demands that exceed the station’s remaining financial reserves. Unless these demands lessen and are not replaced by other demands of equal or greater value, or NASA is able to find offsets and efficiencies of sufficient value to replenish the program’s reserves, the space station will require additional funding.
section_title: NASA Acts to Stay Within Funding Limitations and Replenish Its Financial Reserves
paragraphs: NASA has been able to consistently report compliance with funding limitations and avoid exceeding its financial reserves, despite significant programmatic changes and impacts that have increased station costs. To enable it to do so, NASA has implemented or initiated a variety of actions, including those summarized below:
The space station program is negotiating with ESA, Canada, and Brazil to provide station hardware. Under proposed offset arrangements, the ISS partners—ESA and Canada—would build hardware associated with the U.S. commitment in return for launch services or other considerations. Under a cooperative arrangement, Brazil would receive a small allocation of the station’s research capacity in return for any U.S. equipment it would agree to build. NASA estimates that $116 million in U.S. station development costs could be saved through these arrangements. Space station officials have scheduled a threat of $100 million against the program’s financial reserves in case the negotiations are unsuccessful. However, according to program officials, most of the negotiations are nearly completed.
NASA dropped the centrifuge from the station budget and opened negotiations with the Japanese government to provide it. Also, the space station’s content at the assembly completion milestone was revised to exclude the centrifuge. This change enabled NASA to maintain the then-current June 2002 assembly completion milestone, even though the centrifuge and related equipment would not be put on the station until after that date.
NASA transferred $462 million from its science funding to the space station development funding in fiscal years 1996 through 1998. NASA has scheduled the payback of $350 million—$112 million less than the amount borrowed—through fiscal year 2002. NASA is also planning to transfer another $70 million in fiscal year 1999. All of these funding transfers are within the $17.4 billion funding limitation through assembly completion.
NASA transferred $200 million in fiscal year 1997 funding to the station program from other NASA programs to cover costs incurred due to Russian manufacturing delays. Congressional action is pending on the transfer of another $100 million in fiscal year 1998. These funds will be accounted for outside the portion of the program subject to the funding limitations.
NASA uses actual and planned reductions in its fiscal year funding requirements to help restore and preserve its actual and prospective financial reserves. Typically, these actions involve rephasing or deferring activities to future fiscal years. For example, the agency’s current reserve posture includes actions such as moving $20 million in spares procurement from fiscal years 1997 to 1999 and $26 million in nonprime efforts from fiscal year 1997 to various future fiscal years.
section_title: Additional Costs and Cost Threats Are Not Yet Estimated
paragraphs: The cost impact of the schedule delay associated with step 1 of the Russian recovery plan is not yet fully understood. During congressional testimony in June 1997, the NASA Administrator stated that NASA was assessing the cost effects of a later assembly completion date. Any delay in completing the space station assembly would increase the program’s costs through the completion of assembly because some costs would continue to accumulate over a longer period. When NASA redesigned the station in 1993, it estimated that Russia’s inclusion as a partner would reduce program costs by $1.6 billion because the station’s assembly would be completed by June 2002—15 months earlier than previously scheduled.NASA has recently acknowledged that the completion of the station’s assembly will slip into 2003, but it has not yet scheduled the revised assembly completion milestone. If the scope and capability of the program under the June 2002 assembly completion milestone remain the same, the new milestone date will be set for the latter part of 2003. Consequently, most, if not all, of the reduced costs claimed by accelerating the schedule would be lost.
NASA estimated the additional hardware costs associated with step 1 of the Russian recovery plan at $250 million. When the estimate was made, the specific costs of many of the components of the plan were not known. For example, NASA’s initial estimate includes $100 million for the Interim Control Module, but NASA now estimates that the module will cost $113 million. The total of $300 million in additional funding for the space station program in fiscal years 1997 and 1998 includes financial reserves. The most recent cost estimate for the Interim Control Module already indicates threats to those reserves.
NASA plans to use the extra time created by the schedule slip to perform integration testing of early assembly flight hardware at the Kennedy Space Center. As of June 1997, the cost of this testing had not been fully estimated. However, NASA is currently budgeting $15 million in reserves for the effort.
If NASA initiates further steps in the recovery plan, new or refined cost estimates would be required. Step 2 provides for the development of a permanent propulsion/reboost capability and modifications to the U.S.
Laboratory to provide habitation. According to the NASA Administrator, the effort under this step could be funded incrementally, thus limiting the up-front commitment. NASA’s initial cost estimate for step 2 is $750 million.
Step 3 of the plan would result in the greatest overall cost impact on NASA because it assumes that Russia would no longer be a partner and that NASA, along with its remaining partners, would have to provide the services now expected from Russia. For its share of the mission resupply role, NASA would have to use the space shuttle or purchase those services from Russia or others. In addition, the United States would have to purchase Soyuz vehicles from Russia or accelerate the development of the six-person permanent crew return vehicle. NASA has not officially estimated the cost of step 3, but it clearly would be very expensive: the potential cost of shuttle launches or purchased launch services alone over the station’s 10-year operational life would be in the billions of dollars. NASA expects to have more refined cost estimates for the contingency plan later this year.
section_title: Conclusions and Recommendation
paragraphs: Some of NASA’s actions to reinforce its financial reserves and keep the program within its funding limitations have involved redefining the portion of the program subject to the limitations. Such actions make the value of the current limitations as a funding control mechanism questionable. Therefore, we recommend that the NASA Administrator, with the concurrence of the Office of Management and Budget, direct the space station program to discontinue the use of the current funding limitations.
section_title: Matters for Congressional Consideration
paragraphs: More complete estimates of the cost and schedule impacts of ongoing and planned changes to the program will be available later this year. This information will help provide a more complete and current picture of the cost and schedule status of the program and clarify some of the major future cost risk it faces. After this information is available, the Congress may wish to consider reviewing the program. This review could focus on reaching agreement with the executive branch on the future scope and cost level for a station program that merits continued U.S. government support. In view of the expected availability of revised cost estimates, the first opportunity for such a review would be in conjunction with NASA’s fiscal year 1999 budget request.
At the end of the review, if the Congress decides to continue the space station program, it may wish to consider, after consultation with NASA, reestablishing funding limitations that include firm criteria for measuring compliance.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, NASA said that the report was a good representation of the program’s performance and remaining major challenges, but NASA was concerned that the report did not provide sufficient detail for the reader to appreciate the progress the space station program has made or understand the factors that have influenced the decisions already made and those that will be made in the future.
NASA agreed with our recommendation. NASA said that it had consistently taken the position that the flat funding cap, while a fiscal necessity, was inconsistent with a normal funding curve for a developmental program. NASA added that the flat funding profile resulted in the deferral of substantial reserves to later years, instead of being available in the program’s middle years.
NASA said that the station’s financial reserves were not intended to cover the unanticipated costs of the Russian contingency activities, but rather were largely intended to protect against U.S. development uncertainty.
In response to NASA’s comments, we added more information to the report, including information on the status of the program and the origin of the funding caps. However, the question of what the station’s financial reserves were largely intended to cover is not relevant to our assessment, which focused on whether the funding cap was an effective cost control mechanism. Moreover, the central theme of our report is that funding requirements have been rising and additional funds may be needed. We do not suggest what the source of those funds should be.
section_title: Scope and Methodology
paragraphs: To obtain information for this report, we interviewed officials in the ISS and space shuttle program offices at the Johnson Space Center, Houston, Texas, and NASA Headquarters, Washington, D.C. We also interviewed contractor and DCMC personnel in Huntsville, Alabama, and Houston. We reviewed pertinent documents, including the prime contract between NASA and Boeing, contractor performance measurement system reports, DCMC surveillance reports, program reviews, international partner agreements, independent assessment reports, and reports by NASA’s Office of Safety and Mission Assurance.
We performed our work from January to July 1997 in accordance with generally accepted government auditing standards.
We are sending copies of this report to the NASA Administrator; the Director, Office of Management and Budget; and appropriate congressional committees. We will also make copies available to other interested parties on request.
Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are Thomas Schulz, Frank Degnan, John Gilchrist, and Fred Felder.
section_title: Comments From the National Aeronautics and Space Administration
paragraphs: The following are GAO’s comments on the National Aeronautics and Space Administration’s (NASA) letter dated September 8, 1997.
subsections: section_title: GAO Comments
paragraphs: 1. We have modified the report based on NASA’s comments. 2. The purpose and use of financial reserves is not the relevant issue. Our focus was on whether or not funding caps could be effective cost control mechanisms under circumstances where program content subject to the controls can be flexibly defined. In the past, NASA claimed the benefits of Russian participation on the program’s cost and schedule, but now that Russian participation is having negative cost and schedule effects, NASA argues that the additional funding needed should be accounted for outside the portion of the program subject to the funding limitation. Doing so dilutes the cost control ability of a funding limitation. 3. NASA’s claimed cost savings from including Russia as a partner was based mainly on a 15-month acceleration of the station’s assembly completion milestone. Our purpose was to point out that the delay in the assembly completion date means that NASA will incur additional costs during the station’s developmental period. Only the amount remains to be determined. In this report, we do not evaluate any of the claimed benefits, including cost reductions, of Russian participation in the program as a partner. 4. NASA correctly points out that the negative schedule variance under the prime contract is growing at a much slower rate than the negative cost variance, as shown by the slope of the lines in figure 1. 5. Figure 1 in the report accurately reflects cost and schedule variance changes and is directly relevant to supporting our point that NASA could experience additional cost growth if the deteriorating trend was not reversed or at least slowed because the final actual cost growth could exceed expected cost growth. After we completed our fieldwork on this assignment, the prime contractor reported that its estimate of the cost overrun at completion had more than doubled, from $278 million to $600 million. 6. NASA correctly notes that the centrifuge was not included in the development program when it was initially capped at $17.4 billion. However, NASA subsequently budgeted the centrifuge within the program and scheduled it for launch before the June 2002 assembly completion milestone. The centrifuge was later removed from the budget and NASA began negotiations with the Japanese to provide it. At that time, it was rescheduled for launch after the June 2002 assembly completion date. The centrifuge example helps to illustrate the leeway NASA has to change the content of the station program within the current cap. Such leeway undermines the cap’s value as a cost control mechanism. 7. We were asked to identify those methods NASA had used to stay within its funding limitations, not to evaluate NASA’s use of “no-exchange-of-funds” or “negotiated offset” arrangements.
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