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. 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. 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. 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.