Satellite Acquisitions: Agencies May Recover a Limited Portion of Contract Value When Satellites Fail
Published: 2017-06-09T00:00:00

Fast Facts:
What if a $2 billion government satellite just stopped working?
DOD, NASA, and NOAA each spend billions of dollars on satellites. But, unlike ships and aircraft that the government purchases, the quality of a satellite can only be determined after it's been launched into space. At that stage, repairing defects can be next to impossible, and a mission can fail due to a single malfunction. We looked at what a contractor would be financially responsible for in the case of a catastrophic satellite failure. We found that in most cases, the government's financial recourse is limited relative to the overall satellite investment.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Acquiring and fielding satellites are high stakes endeavors. Each year, DOD, NASA, and NOAA spend billions of dollars acquiring satellites. Unlike with other major acquisitions, such as ships or aircraft, an agency can only determine the quality of a satellite after it is launched. That means any defects that occur may be impossible to repair, and in space, a single failure can be catastrophic for a mission's success.
As a result, contractor performance is critical to a program's success, and contract incentives can be particularly important in aligning government and contractor interests—both in achieving mission success and ensuring responsible financial management.
This report addresses (1) the types of contracts DOD, NASA, and NOAA use to develop satellites, (2) how selected programs structure on-orbit incentives, and (3) what recourse, if any, the government has in the event of satellite failure or underperformance. To conduct this work, GAO analyzed contract obligations data and documentation for 19 current satellite programs; reviewed policies and guidance regarding contact types and incentives; selected 12 case studies to determine incentive structures and recourse options; and interviewed program and contracting officials at each agency, as well as commercial representatives and industry experts.
section_title: What GAO Found
paragraphs: Given high development risks and uncertain requirements in satellite programs, most government satellite acquisitions use cost-reimbursement contracts. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies used firm-fixed-price contracts. Overall, across 19 programs GAO reviewed at the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), about $43.1 billion of $52.1 billion was obligated on cost-reimbursement contracts and orders, while the remaining $9 billion were on firm-fixed-price and fixed-price incentive contracts and orders.
Most of the 12 selected programs that GAO reviewed contained an on-orbit incentive—incentives based on successful performance in space; however, they varied widely in terms of the amount at-risk for the contractor and the timing of payments. For example, the on-orbit incentives included on the contracts and orders for the 12 selected programs ranged from no on-orbit incentive to approximately 10 percent of the contract value. GAO also found variation in how the at-risk amount was spread out over a satellite's mission life. For example, some contracts included on-orbit incentives that covered a satellite's entire mission life while other contracts covered only a portion of the mission life.
The government's recourse in the event of a catastrophic satellite failure is limited, relative to its overall investment. Given the small on-orbit incentive amounts included in contracts, the government's maximum financial recovery potential is modest. This is by design, however, as on-orbit incentives are not intended to make the government whole in the event of total failure. The government accepts this level of risk, in part because such failures are rare, according to government and industry experts. Also, it is unclear whether larger on-orbit incentives would reduce on-orbit failures given numerous other factors that affect a program's success, including requirements stability, design maturity and contractor experience. As a result, the most cost effective way to limit the government's loss in the rare case of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as GAO has previously recommended.
section_title: What GAO Recommends
paragraphs: GAO is not making any recommendations in this report.

section_title: Letter
paragraphs: The Department of Defense (DOD), National Aeronautics and Space  Administration (NASA), and the Department of Commerce’s National  Oceanic and Atmospheric Administration (NOAA) spend billions of dollars  each year on major satellite acquisition programs to satisfy a diverse set  of missions, from protected communications and global positioning, to  weather and deep space observations. Satellite acquisitions are unique  because, unlike other types of acquisitions, such as for ships or aircraft,  testing in an operational environment—space—is extremely difficult.  Moreover, satellites, each of which can cost over $1 billion, are  purchased in limited quantities; defects likely cannot be fixed once a  satellite has been launched; and a single failure can be catastrophic to  the mission. As a result, when satellites fail prematurely or do not meet  mission requirements once they are on-orbit, the government can lose  billions of dollars in investments, years of technology development and  production, and opportunities to utilize advanced capabilities to conduct  important undertakings, such as scientific research and national defense.  For example, in 2015, a NASA science mission experienced a partial  satellite failure on-orbit; while the value of the failed instrument was in the  tens of millions of dollars, NASA estimated the loss of investment to the  mission in the hundreds of millions of dollars.
With so much at stake, especially at a time when more resources may be  needed to protect space systems and to recapitalize the space portfolio,  the government places great emphasis on mission success during the  satellite acquisition process. Many factors can affect a program’s  success, including, for example, requirements and funding stability,  technology and design maturity, government and contractor experience,  and launch vehicle reliability. Contractor performance is also critical for  program success. When contracting for satellite programs, the  government weighs the use of various contract types and incentive  structures to motivate optimal contractor performance and achieve  mission success while at the same time, controlling costs and meeting  schedule milestones. Contract terms such as on-orbit incentives, which  are incentives based on successful on-orbit performance, can be  important for aligning the interests of the government and contractors,  and for achieving mission success while ensuring responsible financial  management. We have reported on how the government shares risk with  contractors for space acquisitions for many years.
To assess DOD, NASA, and NOAA’s contract and incentive structures,  under the authority of the Comptroller General to conduct evaluations on  his own initiative, we examined (1) the types of contracts and incentive  structures government satellite programs use to develop satellites and  why, (2) how selected programs structure on-orbit incentives, and (3)  government options for recourse, if any, when a satellite fails or  underperforms.
To determine the types of contracts and incentive structures government  satellite programs use to develop satellites and the reasons why, we  analyzed contract obligations data from the Federal Procurement Data  System-Next Generation (FPDS-NG) for 19 programs, comprising all  current major satellite programs across DOD, NASA, and NOAA. To  assess the reliability of the FPDS-NG data, we reviewed relevant internal  control documents and data quality summaries. We determined that the  FPDS-NG data were sufficiently reliable for the purposes of this  engagement. For DOD, we included major defense acquisition programs,  and at NASA and NOAA, we included programs with a life-cycle cost  greater than $250 million. See appendix I for a description of the  missions, costs, and quantities for each program in our review. For our  analysis, we included each program’s development and production  contracts and orders for the spacecraft and instruments and generally  excluded contracts and orders related to launch, ground systems,  maintenance, operations, and support services if they were separate  contracts and orders. If these items or services were included within the  development and production contract or order, we included them in our  analysis. For each contract and order, we determined the predominant  contract type for the design, development, and production of the satellites  on the contract. We also reviewed DOD, NASA, and NOAA policies and  guidance on contracting and incentives, and Federal Acquisition  Regulation (FAR) and agencies’ FAR supplements for regulations and  procedures on contracting.
To determine the range of on-orbit incentive structures and government  options for recourse should a satellite fail or underperform, of the 19  major satellite programs in our review, we selected 12 programs as case  studies for more in-depth review based on program size, contract type,  contractor, mission, or notable on-orbit performance characteristics. Our  selected case study programs included:
Global Positioning System (GPS) IIF,
Mobile User Objective System (MUOS),
Space Based Infrared System (SBIRS), and
Wideband Global SATCOM (WGS) Blocks I, II, and II Follow-On;  Ice, Cloud, and Land Elevation Satellite-2 (ICESat-2),  James Webb Space Telescope (JWST),
Soil Moisture Active and Passive (SMAP),
Tracking and Data Relay Satellite (TDRS) K, L, M, and
Transiting Exoplanet Survey Satellite (TESS);
Geostationary Operational Environmental Satellite (GOES)-R series  (GOES R, S, T, U) and  Joint Polar Satellite System (JPSS).
Across the 12 case study programs, there were 23 contracts or orders  and 56 space vehicles. For each case study, we analyzed contract files  and conducted interviews with program and contracting officials at DOD,  NASA, and NOAA to discuss contract types and incentive structures,  rationale for the use of specific contract types and incentive structures,  on-orbit performance, and programmatic outcomes.
In addition to the case studies above, we reviewed the Defense  Meteorological Satellite Program 19 (DMSP-19) because of its recent on- orbit failure. We reviewed DMSP-19’s follow-on storage, maintenance,  and support contracts. These contracts contained information on the on- orbit incentives and relevant options for government recourse after the  on-orbit failure occurred.
For the seven remaining satellite programs at DOD and NASA that were  not included in our case studies, we developed agency-specific data  collection instruments (DCI) that we pre-tested, administered, and from  which we analyzed the information collected. We tailored the DCIs to  each agency based on agency policies and guidelines for contracting to  obtain program-specific contract details, values, obligations to-date,  special clauses used, incentive structures, and performance periods. The  seven programs for which we used the DCIs to collect information  included:
Advanced Extremely High Frequency (AEHF);
Global Precipitation Measurement (GPM) Mission,
Gravity Recovery and Climate Experiment Follow-On (GRACE-FO),
Landsat Data Continuity Mission (LDCM),
Magnetospheric Multiscale (MMS),
Orbiting Carbon Observatory 2 (OCO-2), and
Surface Water and Ocean Topography (SWOT).
We also interviewed officials from a nongeneralizable sample of  commercial companies: Ball Aerospace, DigitalGlobe, IntelSat, Lockheed  Martin, and ViaSat to identify how selected commercial companies use  on-orbit incentives and how commercial satellite acquisitions differ from  government satellite acquisitions. In addition to commercial satellite  companies, we also consulted satellite insurance brokers and one  underwriter, to obtain information on the likelihood of satellite failures in  the commercial and government markets, the general capacity of the  commercial satellite insurance market, and the dollar amounts associated  with insuring commercial satellites. We reviewed Aerospace Corporation  studies and briefings and interviewed Aerospace Corporation officials to  identify the point during the life of a satellite in which most satellite failures  occur, the frequency of government satellite failures, and to identify the  various categories of satellite failures. See appendix II for additional  details on our scope and methodology.
We conducted this performance audit from March 2016 to June 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: In any acquisition, the contract type provides the foundation for  incentivizing a contractor’s performance and is just one element of the  contract, which may also include performance, cost, or delivery  incentives, and other contract terms and conditions that incentivize  performance. The type of contract used for any given acquisition  inherently determines how risk will be distributed between the  government and the contractor. Since the contract type and the contract  price are interrelated, they must be considered together. The  government’s objective is to negotiate a contract type and price (including  cost and the contractor’s fee or profit) that will result in an acceptable  level of risk to the contractor, while also providing the contractor with the  greatest incentive for effective and efficient performance.
Incentive contracts, which include award fee contracts, are designed to  attain specific acquisition objectives by including incentive arrangements  that (1) motivate contractor efforts that might not otherwise be  emphasized, and (2) discourage contractor inefficiency and waste. One of  the main characteristics of award fees and other incentives is how they  are administered in the contract. Award fees are generally subjectively  determined and incentive fees are generally objectively determined.  When incentive arrangements are done properly, the contractor has profit  motive to keep costs low, deliver a product on time, and make decisions  that help ensure the quality of the product. Our prior work has shown,  however, that incentives are not always effective tools for achieving  desired acquisition outcomes and that, in some cases, there are  significant disconnects between program results and incentives paid.  Additionally, we have repeatedly found that some agencies did not have  methods to evaluate the effectiveness of award fees. More recently, in  March 2017, we found that fixed-price incentive shipbuilding contracts did  not always lead to desired outcomes, and that the Navy had not assessed  whether adding incentives improved contractor performance. We made  recommendations to the Navy, including that it conduct a portfolio-wide  assessment of its use of additional incentives on fixed-price incentive  contracts across its shipbuilding programs. DOD agreed with our  recommendations.
Numerous contract types are available to the government to provide  flexibility in acquiring the supplies and services agencies need, including  satellite acquisitions. Table 1 provides an overview of typical contract  types and how they may be used to acquire satellites.
When determining the contract and incentive structure for satellite  acquisitions, the government may consider a number of factors:
Where the satellite is in the acquisition phase. Satellite contracts  can include design, development, integration, and testing, and can  cover more than 15 years. The government can tailor the contract  type and fees to meet the specific circumstances of the acquisition, for  example, the phase of the acquisition cycle. Figure 1 shows the  notional acquisition phases for a satellite.
During the design and development phase, when technology risks are  higher, the government typically uses cost-reimbursement contracts.  When the government is acquiring a “production-model” satellite, or a  copy of a satellite with a proven design and build, a fixed-price contract  may be used. In addition, for the on-orbit phase, the government typically  negotiates with the contractor regarding the amount of incentives related  to successful on-orbit performance.
Which satellite component is being acquired. Satellites are  generally comprised of the bus and the instruments or payloads. The  bus is the body of the satellite. It carries the payload and is composed  of a number of subsystems, like the power supply, antennas,  telemetry and tracking, and mechanical and thermal control  subsystems. The bus provides electrical power, stability, and  propulsion for the entire satellite. The payload of a satellite, which is  carried by the bus, refers to all the devices or instruments a satellite  needs to perform its mission, and can differ for each type of satellite.  Some examples include cameras to take pictures of cloud formations  for a weather satellite, and transponders to relay television signals for  a communications satellite. Generally, developing payloads is riskier  than developing buses.
Number of contracts used to acquire satellite components. The  government can choose to award one contract for the development  and production of the satellite bus and all associated payloads, or it  can award separate contracts for the development and production of  the bus and each individual instrument. In the contracts we reviewed,  DOD typically awarded a single contract to a prime contractor for the  development of the bus and payloads, and according to officials, the  prime contractor often awards contracts to subcontractors to provide  the various instruments and parts. In contrast, for the NASA contracts  and orders we reviewed, NASA typically awarded separate contracts  and orders to multiple contractors to develop the bus and each  instrument.
Number of space vehicles being acquired on a contract. The  government can acquire a single satellite or multiple satellites under  one contract, and one contract may also include components for  multiple satellites. Further, depending on the mission, an agency may  buy a single satellite (such as for scientific discovery) or blocks of  satellites (such as for global communications).
subsections: section_title: On-Orbit Performance Incentives
paragraphs: The quality and performance of a satellite—including whether it meets on- orbit requirements—usually cannot be determined until after it launches  and reaches its intended orbit. Satellite development and production  contracts may include on-orbit performance incentives aimed at ensuring  that the satellite will meet performance requirements. Because the  incentive is not earned until a satellite successfully demonstrates its  performance on-orbit, an on-orbit performance incentive can be thought  of as the dollar amount at risk if the contractor fails to meet the  performance requirements specified in the contract (see figure 2).
On-orbit incentives are typically documented in a satellite contract’s fee  plans or in contract clauses. There are generally three mechanisms for  on-orbit performance incentives: negative incentives, positive incentives,  and withholding of milestone payments. Agencies can use a combination  of these when designing on-orbit incentives, which are generally tied to  objective performance criteria, such as successfully getting into the right  orbit and achieving critical performance parameters once there.
When using negative incentives, the government generally pays the  contractor incentives as the contractor completes work during the  development or production phase. The contractor would have to pay back  some or all of the incentives if the satellite fails to meet on-orbit  performance parameters. With positive incentives, the government  assesses satellite performance in any given period, such as 6 or 12  months, to determine how much the contractor earns for that period. The  amount at risk for the contractor could be the same for a positive  incentive or a negative incentive.
Firm-fixed-price contracts for satellite programs may have progress or  performance-based payment plans that require fixed payments to be  made upon successful completion of milestones, such as preliminary  design review, final system test, and successful on-orbit check-out. If a  satellite fails prior to check-out, the government may withhold the final  milestone payment from the contractor.
Because satellite acquisitions are unlike other acquisitions, the Air  Force’s Space and Missile Systems Center (SMC) and NASA have  tailored guidance on space acquisitions, and each specifically addresses  on-orbit performance incentives.
SMC’s March 2007 incentives guide states that on-orbit incentives  should be clearly written to ensure enforceability, and require fully  demonstrable performance in order to earn fee. The guidance also  specifies that the contract should contain specific descriptions as to  the rights of the parties in the event of a failure, caused either by the  contractor or by the government. One senior SMC contracting official  stated that their contracting directorate maintains a repository of on- orbit incentive plans and contract clauses that have been  implemented. These incentives arrangements can be used as guides  for SMC programs as they develop new contracts.
NASA’s FAR supplement generally requires certain contracts for  hardware deliverables worth more than $25 million to include  performance incentives. In the case of satellite acquisitions, the on- orbit incentives serve as performance incentives. In addition, NASA’s  FAR supplement requires that for cost-plus-award-fee contracts for  end items, where the true quality of contractor performance cannot be  measured until the end of the contract, only the last evaluation is  final. This allows NASA to evaluate the contractor’s total  performance—after the end item is delivered—against the award fee  plan to determine the total earned award fee from the contract award  fee pool. In other words, under this “re-look provision,” the total award  fee is not earned until the satellite has demonstrated its performance  on-orbit.
In addition to on-orbit performance incentives, it is important to  acknowledge the totality of the incentives and other terms in satellite  contracts that are designed to motivate contractors to achieve the cost,  schedule, and performance goals of the program. In many cases, multiple  incentives are used to achieve such goals. The FAR provides that when  multiple incentives are used, a balance must be achieved in which no  incentive is either so insignificant that it offers little reward for the  contractor, or so large that it overshadows other areas and neutralizes  their motivational effect. In addition, it requires all multiple incentive  contracts to include a cost incentive that precludes rewarding a contractor  for superior technical performance when their cost outweighs their value.  For satellite programs, achievement of full mission performance is the  primary objective, but cost and schedule goals also play key roles in a  program’s success. Our body of prior work has shown that most major  government satellite programs experience significant cost growth and  schedule delays due to unmatched resources and requirements,  immature technologies at program start, and inconsistent application of  knowledge-based practices throughout the life of a program. As a result,  although some programs may have successful on-orbit performance, they  may also have had major cost overruns and schedule delays along the  way.
section_title: Satellite Failure Definitions and Causes
paragraphs: There are many nuances when it comes to satellite failures. These can be  especially important when considering government opportunities for  recourse should a satellite fail or underperform. The Aerospace  Corporation (Aerospace), a federally funded research and development  center (FFRDC) that provides engineering and technical support to  national security space programs, categorizes satellite anomalies based  on the criticality or severity of the anomaly and distinguishes them based  on their impact on the mission. For the purposes of this report, a  catastrophic failure results in the total loss of a satellite, or a satellite that  will never meet any of its mission requirements; a partial failure results in  a satellite that fails to meet some of its mission requirements or that loses  a redundant system.
When satellites fail, they often do so in the first few months they are in  orbit. Aerospace reported in 2012 that mission-impacting anomalies—or  failures—that occur during the first 120 days of a satellite’s on-orbit life  account for approximately 40 percent of all such failures that occur during  the first 3 years of operation. Causes of failure during a satellite’s first 3  years of operation varied according to Aerospace, but the top three  reasons identified were issues related to a satellite’s design, parts, and  software.
section_title: Agencies Generally Use Cost- Reimbursement Contracts with Incentives for Satellite Acquisitions
paragraphs: Given high development risks and the likelihood of requirements changes  in satellite programs, most government satellite acquisitions use cost- reimbursement contracts. New technologies and unstable requirements  mean satellite program officials are unlikely to accurately predict  development costs and schedules, making cost-reimbursement contracts  a prudent choice. When lower-risk items are being acquired, such as  standard spacecraft and communications satellites, agencies are more  likely to use firm-fixed-price contracts. In both cases, agencies tend to  use incentives in their contracts to help achieve cost, schedule and  performance goals.
subsections: section_title: Agencies Primarily Used Cost-Reimbursement Contracts to Acquire Satellites Given Development Risk
paragraphs: Across the 19 programs we reviewed at DOD, NASA and NOAA, about  $43.1 billion of $52.1 billion (83 percent) was obligated on cost- reimbursement contracts and orders, while the remaining $9 billion (17  percent) of obligations were on firm-fixed-price and fixed-price incentive  contracts and orders. DOD satellite obligations comprised nearly 80  percent of the government satellite acquisitions in our review (see figure  3).
Government satellite programs are often designed to develop and  incorporate innovative technologies unavailable in the commercial  market. We reported in 2010 that DOD accepts greater technology and  development risks with space acquisitions, and as such, costs associated  with technology invention are difficult to estimate.
For our 12 in-depth case study programs, 15 of the 23 contracts and  orders we reviewed were cost-reimbursement type contracts (see  appendix III for more detailed information on the contract types for our  case study programs). Several of the contract files for these programs  cited technical complexity leading to uncertainties in cost performance or  uncertain requirements as reasons their program used cost- reimbursement contracts. According to one program’s contract files, a  firm-fixed-price contract would not be appropriate for the design and  development of the satellite’s primary instrument because of the  program’s aggressive performance goals and flexible launch dates. In  2010, we reported that firm-fixed-price contracting normally does not work  for DOD space systems because programs tend to start with many  unknowns about the technologies and costs needed to develop  satellites. Since our 2010 report, however, DOD has begun to consider  acquisition approaches that might be more productive using fixed-price  contracts such as disaggregating large satellites and advancing  technology incrementally. One senior SMC contracting official noted that  in recent years, SMC has acquired a number of satellite programs on a  fixed-price basis. In these instances, once the programs matured the  technologies and reduced risks, the programs were able to shift to a  production-type state and use fixed-price contracts.
Five of the 23 case study contracts and orders used firm-fixed-price type  contracts, mostly to acquire lower-risk items. These included standard  spacecraft buses (meaning, those with proven designs) and  communications satellites, both of which have relatively lower technical  risks. For example, some NASA and NOAA programs we reviewed used  firm-fixed-price orders to acquire spacecraft buses from the NASA  “catalog,” which contains proven designs from multiple contractors. In  some cases, such as communication satellites, the commercial market  produces satellites that government programs can use with only minor  modifications. These satellites have typically been used in a commercial  market—lowering technical risk—and may also have adequate pricing  data available to accurately estimate costs, both of which lend  themselves to firm-fixed-price contracting.
The remaining three of the 23 case study contracts and orders we  reviewed used fixed-price-incentive contracts to acquire additional  satellites in production. For instance, DOD’s SBIRS program bought its  first four satellites under cost-reimbursement contracts, but bought the  next two satellites with a fixed-price-incentive contract. According to the  SBIRS contract file, program officials deemed the fixed-price incentive  contract type the most appropriate because, given the maturity of the  satellite vehicle design, they believed they could assess a fair and  equitable ceiling price for the acquisition. Fixed-price incentive contracts  can be complex, as noted in SMC’s guide to structuring incentives for  fixed-price contracts, issued in November 2012. For example, how risk  is apportioned on a fixed-price-incentive contract may resemble that of a  cost-reimbursable contract or a firm-fixed-price contract, depending on  the share ratio—a calculation which represents the allocation of cost risk  between the government and the contractor—and the ceiling price. The  guide also notes that fixed-price-incentive contracts can lead to  unintended, negative outcomes if structured poorly or managed  improperly.
section_title: Satellite Acquisition Programs Generally Used Incentives to Help Achieve Cost, Schedule, and Performance Goals
paragraphs: All of our 12 case study programs used incentives—including award fees,  incentive fees, or some combination of the incentives—to motivate  contractors to achieve cost, schedule, or performance goals. Program  officials told us they used award fees during the development phase to  incentivize the contractor to achieve specific, short-term goals. With each  award fee determination, which, for example, may occur every 6 months,  the government can focus the contractor on specific tasks or areas.  Program officials also said that award fee determinations can be effective  in changing contractor behavior. For example, one NASA program official stated that during a particular award fee period, they informed the  contractor that it needed to address planning for a complicated spacecraft  thermal vacuum test that was behind schedule. The official said that  after program officials documented their concerns in award fee letters,  contractor performance improved, resolving the issue. Table 2 provides  examples of how the government tied incentives to cost, schedule, and  performance objectives for selected case studies.
However, in addition to the 12 in-depth case study programs, several of  the NASA programs in our review included contracts or orders with  FFRDCs, academic institutions, or non-profit organizations that did not  include incentives. In most of these cases, NASA awarded cost-plus- fixed-fee or cost with no fee contracts or orders. For example, several  programs used cost-plus-fixed-fee orders issued from an indefinite  delivery / indefinite quantity contract between NASA and the California  Institute of Technology, a private nonprofit educational institution, which  establishes the relationship for the operation of the Jet Propulsion  Laboratory (JPL), an FFRDC. The contract includes both service and  product deliverables and encompasses a large number of discrete  programs and projects. According to NASA procurement officials, the  desired program outcomes or objectives and performance requirements  are defined in task orders issued under the contract. NASA officials stated  that when there are no fees to pay or withhold from a contractor, NASA  still has tools available to motivate contractor performance. In these  instances, agencies rely on non-fee incentives, such as providing positive  or negative evaluations of contractors in the Contractor Performance  Assessment Reporting System (CPARS). The CPARS evaluations may  affect the ability of FFRDCs and academic institutions to secure future  contracts. Officials also stated the general reputation of contractors are  important in winning future contracts. NASA officials also stated that with  science missions, the academic institutions are self-motivated because  they are interested in the data that satellites are collecting and within the  science community, there is a sense of pride to be associated with a  successful NASA mission.
section_title: On-Orbit Incentives Varied among Selected Programs
paragraphs: Eleven of the 12 selected in-depth case study programs we reviewed  used contract incentives tied to on-orbit performance on at least one  contract. We found, however, that the characteristics of the on-orbit  incentives—such as the amounts at risk or the timing of the incentive  payments—varied widely. In one instance, a satellite program held the  contractor’s entire fee at risk pending demonstration of satellite  performance, but in other cases, the at-risk amount was a portion of the  total fee or profit on the contract. Timing of payments also differed on a  program-by-program basis, and in some cases, satellites within the same  program had distinctive incentives. When asked how they developed on- orbit incentives for their respective contracts, program officials cited  considerations such as other incentives in the contract, agency  acquisition preferences, and past history.
subsections: section_title: Selected Programs Had Diverse On-Orbit Incentive Amounts and Payment Timing
paragraphs: On-orbit incentives varied widely across our 12 case study programs and  in some cases, incentives varied between satellites under the same  contract. To compare on-orbit incentives across these programs, we  identified the two key characteristics that define each set of incentives— specifically, the amount and timing of the incentives.
On-orbit incentive amount. Based on our analysis of 23 contracts and  orders representing our 12 case study programs, we found that the  amount of on-orbit incentives relative to the overall contract value varied  widely (see figure 4).
On-orbit incentives included on the contracts and orders for our 12 case  study programs ranged from no on-orbit incentive to approximately 10  percent of the contract value (see appendix III for more information on the  on-orbit incentive amounts by contract). In some cases, on-orbit  incentives were only a portion of the contractor’s expected fee or profit.  For one contract we reviewed, the contractor’s full fee was contingent  upon successfully demonstrating that the satellite met on-orbit  performance requirements. Most of the contracts and orders we reviewed  included multiple satellite vehicles, and the on-orbit incentive could vary  by vehicle. For example, in one DOD contract we reviewed, the at-risk  amount for the entire contract was 7 percent, but the at-risk amount for  individual vehicles ranged from 5 percent to 13 percent.
The at-risk amount for individual satellites can also change depending on  contractor performance during satellite development. Several contracts  we reviewed define the potential on-orbit incentive amount as a  percentage of the total award fee available, rather than a specific dollar  amount. This means that poor contractor performance during the satellite  development phase could reduce the amount of the on-orbit incentive.  For example, if the total award fee for a contract is $100, and the on-orbit  incentive is defined as 50 percent of the available award fee, the  contractor could potentially earn $50 for on-orbit performance. If,  however, the contractor loses $30 in potential award fee during the  satellite development phase due to poor performance, the most the  contractor could earn for on-orbit performance falls to $35 (50 percent of  $70). Similarly, in one contract we reviewed, the at-risk amount on-orbit  was capped as the lesser of 50 percent of the contractor’s realized profit  or 50 percent of the target profit. In this case, if the contractor’s realized  profit was zero dollars, there would be no payback to the government in  the event of a failure.
Because on-orbit incentives are realized near the end of a contract  performance period, they can grow in importance to the contractor,  relative to other incentives. For example, a contracting officer for one of  our case study programs said that his program’s contract placed an equal  priority on both on-orbit performance and cost and schedule incentives, but the contractor lost most of the cost incentives due to cost overruns.  The contracting officer said that the on-orbit incentive was the largest  remaining incentive available to the contractor, so in this case, the  contractor was more intent on earning the on-orbit incentive and less  focused on controlling costs—a potentially bad situation for the program.
Incentive timing. The timing of an on-orbit incentive represents how the  at-risk amount is spread out over a satellite’s mission life. For some of the  contracts and orders we reviewed for selected case study programs, the  on-orbit incentives covered a satellite’s entire mission life. There were  some contracts and orders, however, for which the on-orbit incentives  covered only a portion of the mission life. Given that when satellites fail, it  is usually early in their mission life, three of the five firm-fixed-price  satellite contracts or orders in our case study programs had milestone  payment plans that ended once the on-orbit vehicle completed its check- out. Under this arrangement, depending on the terms of the contract, the  government could potentially withhold the last milestone incentive  payment if a catastrophic failure occurred prior to check-out, but would  not have on-orbit incentives that lasted the remainder of the mission life.  In these cases, the government assumes all of the risk once the vehicles  complete check-out. Similarly, the on-orbit incentives for one of the  SBIRS contracts covered the first 4 years of the satellite’s mission life.
The WGS Block II and Block II follow-on contracts have a unique on-orbit  incentive structure that includes a 10-year negative incentive followed by  a 4-year positive incentive for the satellite’s 14-year mission life. The  negative incentive includes calculations to determine how much money  the contractor has to pay the government if its satellite fails to meet  performance requirements during the first 10 years. The positive  incentive, starting at year 11 of the satellite’s mission life, allows the  contractor to offset any negative incentives assessed during that  satellite’s first 10 years. At the end of 14 years, the government adds up  the positive and negative incentive amounts to determine what, if  anything, the contractor has to pay back.
Satellite or component storage on the ground may also affect on-orbit  incentives. For example, the GPS IIF contract reduces the on-orbit  performance period by 25 percent if any of the first six vehicles is stored  on the ground for 4 years; more if stored longer.
section_title: Contracting Officials across Selected Programs Cited Several Considerations in Developing On-Orbit Incentives
paragraphs: DOD, NASA, and NOAA officials cited several factors when developing  on-orbit incentives for their respective programs, including the other  incentives in the contract, agency acquisition preferences, and individual  program history.
The overall contract. Program officials do not view on-orbit  incentives in isolation, but rather as part of the larger negotiated  agreement with the contractor. Officials told us that during contract  negotiations, they may be willing to reduce the amount of fee on-orbit  or alter the timing of on-orbit incentives, in return for contractor  concessions in other areas. Programs negotiated overall incentives  for a contract as well as how the incentives were spread out over the  contract, including how much was tied to on-orbit performance.  Officials said contractors generally prefer front-loaded incentives,  whereas agencies may tend to prefer placing incentives at the end of  the contract. The resulting contract and incentive structure depends  on what the government and the contractor can agree to.
Acquisition philosophy. Program officials told us on-orbit incentives  reflect the acquisition policies, leadership preferences, and prevailing  agency practices at the time the contract is being drafted. For  example, DOD promotes the use of incentive fees, where possible,  over award fees, to encourage greater use of objective fee criteria.  Program officials also said they typically look at other satellite  program contracts in their respective agencies, explaining that  incentives for new programs may be structured based on what other  programs have agreed to.
Program history, staff, and contractor experience. Program history  can affect incentive structures in different ways. In the case of WGS,  the on-orbit incentives for the Block II follow-on contracts were  modeled after the incentives in the Block II contract. Further, program  officials said they also modified past incentives or established new  incentives based on their own contracting experience. They told us  that prior experience executing specific incentive structures lends  itself to structuring incentives the same way again. Similarly, they said  that contractors may seek to negotiate incentive provisions based on  their company’s past experience.
section_title: Government’s Recourse Is Limited When a Satellite Fails
paragraphs: The government’s recourse in the event of a catastrophic satellite failure  on-orbit is generally limited to recovery of a portion of the on-orbit  incentive. As discussed above, the on-orbit incentive amount on any  given satellite contract can vary widely but is uniformly less than 10  percent of the total satellite contract value. In all likelihood, the amount  retained by or paid back to the government would be even less, as what  the government may actually recoup depends on the circumstances of  the failure. For example, if a contract includes no-fault provisions, when  one contractor is at fault for the total loss of a satellite, the government  may still be responsible for paying fees to the remaining contractors— whose products were not to blame for the failure. By design, on-orbit  incentives are only a portion of the total contract value and therefore will  not make the government whole in the event of total failure.  Overemphasizing on-orbit incentives could result in the contractor losing  sight of cost and schedule goals. Further, the government accepts more  of the on-orbit risk than the contractor, in part because catastrophic  failures are rare, according to satellite studies and industry experts we  spoke to.
subsections: section_title: Modest Payback to Government When Satellites Fail
paragraphs: For our 12 case study programs, we found that the aggregate on-orbit  incentive amount at risk is around 4 percent of the aggregate contract  value. This means that in a worst-case scenario in which all of the  satellites failed prior to checkout, the maximum amount the government  could recoup or withhold from the contractors is 4 percent of the total  contract value. What the government could actually recoup or withhold  depends on the terms of the contract and the circumstances of the failure,  such as the extent to which technical parameters are met, the timing of  the failure, and whether the contractor is found to be at fault.
Two satellites among the programs we reviewed experienced  catastrophic or partial failures—DMSP-19 and SMAP. Program officials  said the DMSP-19 spacecraft contractor repaid $2.7 million plus interest  to the government as a result of the failure, but there was no repayment  or payments withheld in the case of SMAP.
DMSP-19 suffered a catastrophic failure in the second year of its 5- year mission life when the Air Force lost the ability to control the  satellite. There were two prime contractors on the DMSP  contracts—one for the spacecraft and one for the sensors. According  to program officials, the spacecraft contractor was found to be at fault  for the failure, and had to reimburse $2.7 million in fee plus interest.  Program officials stated that the sensor contractor was not  responsible for the failure and therefore did not have to repay any fee.
SMAP experienced a partial failure. One of SMAP’s two primary  sensors—the radar—failed, while the other—the radiometer—is  operating as intended. NASA was unable to identify the exact cause,  but determined that the failure was related to the radar’s high- powered amplifier power supply. According to NASA’s SMAP mishap  investigation report, without the radar, SMAP will not be able to meet  mission requirements because the radiometer alone cannot meet  resolution requirements. Because JPL built SMAP under a task order  with no on-orbit incentives, the government had no monetary recourse  when the radar sensor failed. The mishap investigation report  estimated that the SMAP radar failure resulted in more than $550  million in losses, though the cost of the radar accounted for only 11  percent of that amount. Most of the estimated losses were related to  investments in the science of the mission. However, NASA officials  told us that the total science value of the shortfall in capability is highly  uncertain. These officials noted that although not operating to its full  resolution, SMAP provides higher resolution and more accurate soil  moisture and sea surface salinity data than any prior NASA missions.
No-fault provisions can have implications for satellites with multiple prime  contractors, as mentioned in the DMSP example. If one contractor is at  fault for the total loss of a satellite, the government may still be  responsible for paying fees to the remaining contractors—whose products  were not to blame for the failure—even though the satellite on which their  products were riding was a total loss.
Representatives from commercial companies we spoke with said they  typically purchase insurance to mitigate their risk in the event of satellite  losses. According to satellite insurance company representatives,  insurance for any one satellite is generally spread across multiple  insurance companies, each of which insures only a portion of the total  value of the satellite. The cost of insuring the launch and full mission life  of a commercial satellite could add 10 to 20 percent of its total contract  value, according to one insurance broker we spoke with, even though  relatively few satellites suffer significant failures. He noted that, at this  time, the small market of satellite insurance providers would not have the  capacity to insure many government satellites, given their high costs to  build and launch.
section_title: Overemphasizing On-Orbit Incentives May Not Benefit Programs
paragraphs: While tying some of a satellite contract’s incentive to on-orbit performance  can help focus a contractor on building a quality satellite,  overemphasizing performance through on-orbit incentives can  unintentionally cause the contractor to lose sight of cost or schedule. For  example, JWST program officials stated that the $56 million on-orbit  incentive fee in the initial JWST contract encouraged the contractor to  exceed performance requirements at the expense of cost and schedule.  In other words, the cost and schedule incentives were relatively less  significant to the contractor than the on-orbit performance incentive. In  December 2014, we found that when the contract was renegotiated in  December 2013, the JWST program and the contractor agreed to replace  the on-orbit incentive with award fees that could be used to incentivize  cost and schedule goals during development. Since that time, JWST  officials told us the renegotiated award fees had contributed to better cost  and schedule outcomes. Further, in another program’s contract  negotiation documents we reviewed, the government was willing to put  less of the contractor’s fee at-risk on-orbit in exchange for lower overall  fees, which would reduce the contract price. Conversely, negotiation  documents reflected that the government considered accepting higher  overall fees in exchange for putting more of the contractor’s fee at-risk.
Also, it is unclear whether increased on-orbit incentives would decrease  the likelihood of on-orbit failures. Program officials expressed a wide  range of views on the relative importance of on-orbit incentives in  achieving successful outcomes. Program officials agreed that poorly  designed incentives might lead to bad program outcomes, but there was  no consensus on the effect of well-designed incentives. Officials we  spoke with believed that on-orbit incentives were important, but the  reasons cited were sometimes more related to how they can used in  negotiations with the contractor—leading up to contract award and, in  some cases, for contract modifications—than achieving successful on- orbit performance. Attributing positive on-orbit performance directly to on- orbit incentives is challenging, given the many factors that contribute to a  satellite program’s success, including requirements and funding stability,  technology maturity, and government and contractor experience. Further,  on-orbit incentives are unlikely to flow down to the workers who actually  build a satellite, or to sub-contractors who produce key parts and  components. On-orbit incentives can span 10 years of performance, so  the people who were directly involved in building a satellite may not even  be with the company when the incentives are paid out.
Although contractors may be motivated to achieve on-orbit performance  through on-orbit incentives, they are also motivated by other factors. For  example, in 2005, we found that various considerations, such as securing  future contracts with the government, can be stronger motivators than  earning additional profit. Officials from agencies and commercial  companies that we spoke to confirmed that this is still true today.  Specifically, program officials we interviewed stated that contractors react  strongly to negative CPARS evaluations, as this could affect their ability  to win future contracts. Officials also noted that contractors take pride in  their work and believe in the missions their satellites support. They  believed that contractors would do their best to succeed even without on- orbit incentives. They said that universities and FFRDCs are also  motivated to do well because they are personally invested in advancing  their scientific pursuits. According to program officials and commercial  company representatives that we spoke to, the commercial satellite  market is small but competitive, and satellite failures generate bad  publicity that could affect a company’s ability to win commercial contracts  and future government business.
Finally, satellite acquisition programs tend to have far more cost and  schedule challenges than performance issues. We have a large body of  work identifying cost growth and schedule delays for space programs,  including some in our case studies, and have made a number of  recommendations to address the causes of these challenges. For  example, we have previously recommended that agencies should  improve their program cost estimates, separate the process of technology  discovery from acquisition, and match resources and requirements at  program start. The cost growth for some of our case study programs is  much larger than their on-orbit incentives. For example, JWST has  experienced more than $3.6 billion in cost growth. That exceeds the  combined on-orbit incentives for all 56 of the satellite vehicles in our case  study programs. Similarly, the first two GPS III satellites have  experienced more than $600 million in cost growth. That is more than  double the entire amount of on-orbit incentives for all 10 GPS III satellites  currently under contract.
A number of government officials and commercial companies we spoke  with did not express concerns about the extent to which satellites  experience catastrophic failures. Studies of satellite reliability vary  depending on the timing and scope of the analysis, but the analyses we  reviewed indicated that between 2 and 4 percent of satellites, including  both government and commercial programs, experience a catastrophic  failure before the end of their mission lives. Aerospace officials we spoke  with said the failure rate for government satellites is around 2 percent,  and that this is somewhat remarkable given that government satellites are  often highly complex. Further, many government satellites utilize new,  unproven technologies which pose more risk than commercial satellites;  commercial satellites tend to use proven designs and rely more on  mature technologies. As a result, it appears the most cost effective way to  limit the government’s loss in the event of a catastrophic failure may be to  reduce cost growth and schedule delays by using best practices during  satellite development, as we have previously recommended.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOD, NASA, and NOAA for their  review and comment. DOD and NOAA provided technical comments,  which we incorporated as appropriate. NASA had no technical or written  comments.
We are sending copies of this report to the appropriate congressional  committees, the Secretaries of Defense and Commerce, and the NASA  Administrator. In addition, the report will be available at no charge on  GAO’s website at http://www.gao.gov.
If you or your staff have questions about this report, please contact me at  (202) 512-4841, or chaplainc@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Descriptions of Missions, Costs, and Quantities for Satellite Programs in GAO Review
paragraphs: The following tables present the missions, original total program costs  and quantities, current total program costs and quantities, and the  number of satellites in orbit as of March 2017 for all 19 of the programs  included in our review. The total acquisition or project costs include  development and production costs of the space vehicles and in some  cases, costs associated with the ground systems, launch vehicles, and  other costs outside of the satellite vehicles. As a result, the total costs for  a given program will be larger than the contracts values discussed in this  report.
section_title: Appendix II: Objectives, Scope, and Methodology
paragraphs: To assess the Department of Defense (DOD), National Aeronautics and  Space Administration (NASA), and the Department of Commerce’s  National Oceanic and Atmospheric Administration’s (NOAA) contract and  incentive structures, under the authority of the Comptroller General to  conduct evaluations on his own initiative, we examined (1) the types of  contracts and incentive structures government satellite programs use to  develop satellites and why, (2) how selected programs structure on-orbit  incentives, and (3) government options for recourse, if any, when a  satellite fails or underperforms.
To determine the types of contracts and incentive structures government  satellite programs use to develop satellites and the reasons why, we  analyzed contract obligations data from the Federal Procurement Data  System-Next Generation (FPDS-NG) as of September 2016 for 19  programs, comprising all current major satellite programs across DOD,  NASA, and NOAA. To assess the reliability of the FPDS-NG data, we  reviewed relevant internal control documents and data quality summaries.  We determined that the FPDS-NG data were sufficiently reliable for the  purposes of this engagement. For DOD, we included major defense  acquisition programs, and at NASA and NOAA, we included programs  with a life-cycle cost greater than $250 million. For our analysis, we  included each program’s development and production contracts and  orders for the spacecraft and instruments and generally excluded  contracts and orders related to launch, ground systems, maintenance,  operations, and support services if they were separate contracts and  orders. If these items or services were included within the development  and production contract or order, we included them in our analysis. For  each contract and order, we determined the predominant contract type for  the design, development, and production of the satellites on the contract.  We also reviewed DOD, NASA, and NOAA policies and guidance on  contracting and incentives, and Federal Acquisition Regulation (FAR) and  agencies’ FAR supplements for regulations and procedures on  contracting.
To determine the range of on-orbit incentive structures and government  options for recourse should a satellite fail or underperform, of the 19  major satellite programs in our review, we selected 12 programs for in- depth analysis as case studies based on program size, contract type,  contractor, mission, or notable on-orbit performance. For each case  study, we analyzed contract files and conducted interviews with program  and contracting officials at DOD, NASA, and NOAA to discuss contract  types and incentive structures, rationale for the use of specific contract  types and incentive structures, on-orbit performance and programmatic  outcomes. Across the 12 case study programs, there were 23 contracts  and orders and 56 space vehicles (see table 6).
To determine the at-risk on-orbit incentive amount by contract or order,  we reviewed contract clauses and fee plans for each of the 23 contracts  and orders associated with the 12 case study programs to calculate the  amount of money the contractor would not be paid or would need to pay  back in the case of a catastrophic failure. We calculated the at-risk  amount based on a hypothetical “worst case scenario” for each contract  or order, in which the maximum payback or forgone payment would be  assessed for a complete failure of the satellites. The at-risk amounts  included milestone payments that would be withheld, award and  incentives fees that would not be paid, and amounts that would need to  be paid back by the contractor. These at-risk amounts were divided by  the current value of the contract or order to calculate a percentage of  contract or order value that would be at risk. The contract scope varied  across our case study contracts. For example, some contracts included  costs associated with developing ground systems or sustainment costs  whereas others only included satellite development and production costs.  However, the contract scope did not significantly alter the at-risk  calculations. For all of the contracts and orders we reviewed, regardless  of scope, the at-risk amounts were less than 10 percent of the contract  value.
For the seven remaining satellite programs at DOD and NASA that were  not included in our case studies, we developed agency-specific data  collection instruments (DCI) that we pre-tested, administered, and from  which we analyzed the information collected. We tailored the DCIs to  each agency based on agency policies and guidelines for contracting to  obtain program-specific contract details, values, obligations to-date,  special clauses used, incentive structures, and performance periods. We  determined that the data collected from the DCIs were sufficiently reliable  for the purposes of this engagement. The seven programs for which we  executed DCIs included:
Advanced Extremely High Frequency (AEHF);
Global Precipitation Measurement (GPM) Mission,
Gravity Recovery and Climate Experiment Follow-On (GRACE-FO),
Landsat Data Continuity Mission (LDCM),
Magnetospheric Multiscale (MMS),
Orbiting Carbon Observatory 2 (OCO-2), and
Surface Water and Ocean Topography (SWOT).
In addition to the case studies above, we reviewed the Defense  Meteorological Satellite Program 19 (DMSP-19) because of its recent on- orbit failure. We reviewed DMSP-19’s follow-on storage, maintenance,  and support contracts rather than the development and production  contracts because at the time of the failure, work was being performed  under the follow-on contract. These contracts contained information on  the on-orbit incentives and relevant options for government recourse after  the on-orbit failure occurred.
We also interviewed officials from a nongeneralizable sample of  commercial companies: Ball Aerospace, DigitalGlobe, IntelSat, Lockheed  Martin, and ViaSat to identify how selected commercial companies use  on-orbit incentives and how commercial satellite acquisitions differ from  government satellite acquisitions. We selected the companies based on  the type of satellites they build or acquire. In addition to commercial  satellite companies, we also consulted satellite insurance brokers from  Marsh and one underwriter, XL Catlin, to obtain information on the  likelihood of satellite failures in the commercial and government markets,  the general capacity of the commercial satellite insurance market, and the  dollar amounts associated with insuring commercial satellites. We  reviewed Aerospace Corporation studies and briefings and interviewed  Aerospace Corporation officials to identify the point during the life of a  satellite in which most satellite failures occur, the frequency of  government satellite failures, and to identify the various categories of  satellite failures.
We conducted this performance audit from March 2016 to June 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix III: Contract Type and On-Orbit Incentives At-Risk for GAO Satellite Program Case Studies
paragraphs: The 12 in-depth case study satellite programs we reviewed included 23  contracts and orders. For these contracts and orders, we determined the  predominant contract type for the design, development, and production of  the satellites; and percent of contract value at-risk for on-orbit  performance; which are presented in the tables below. We determined  the percent of contract value at-risk for on-orbit performance for each  contract or order by dividing the maximum dollar amounts the contractor  would not be paid or would have to pay back in the event of a  catastrophic failure by the current contract value.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Rich Horiuchi, Assistant Director; Emily Bond; Brandon Booth;  Claire Buck; Claire Li; Michael Shaughnessy; Roxanna Sun; Jay Tallon;  and Alyssa Weir.