In late 1997, the National Aeronautics and Space Administration (NASA) is scheduled to begin assembling the International Space Station (ISS). The facility is scheduled to be completely assembled in orbit by June 2002, and NASA is planning a 10-year operational life following its assembly. Its current configuration (see fig 1.1) is the result of the program’s last redesign, conducted in 1993 to compensate for additional funding cuts and to bring Russia into the program as a full partner along with Japan, Canada, the European Space Agency, and the United States. NASA’s cost estimate for ISS development and operation is $17.4 billion from October 1993 through the planned completion of assembly in space in June 2002. NASA’s $17.4 billion program includes a prime contract effort to develop the U.S. portion of ISS, nonprime efforts involving a large number of smaller contracts to develop the ground-based and on-orbit capability to use and operate it, and NASA headquarters-managed contracts to develop on-orbit research facilities and conduct research. In its fiscal year 1996 budget, NASA estimated the price of the prime contractor’s activities at approximately $6.3 billion; the nonprime efforts, $5.6 billion; research capability effort, $2.6 billion; and about $3.1 billion in financial reserves for the remaining 7 years of development. Figure 1.2 shows the percentage distribution of the ISS development budget. In mid-1993, a $2.1-billion annual funding limitation was imposed by the administration on the program to prevent it from consuming increasingly larger portions of NASA’s research and development budget. In November 1993, NASA signed a letter contract with the Boeing Company for the prime development effort. The prime effort encompassed the work previously under separate contracts with the former Space Station Freedom work package contractors. Under this prime contract, the former work package contractors—McDonnell Douglas, Rocketdyne, and Boeing-Huntsville—became major product group subcontractors to Boeing. Product group subcontracts account for over 80 percent of the total estimated cost of the prime contract. In 1994, the Defense Contract Audit Agency identified a number of cost reporting weaknesses by NASA contractors at the Johnson Space Center, including some contractors that had worked on the Freedom version of the space station. These weaknesses, which led to misleading reporting of the program’s true cost status, including underreporting of potential overruns, were the focus of a July 1994 hearing before the Subcommittee on Oversight and Investigations of the House Committee on Energy and Commerce. In responding to these audit findings, NASA required its major space station contractors and product group subcontractors to establish detailed contract budgets and baselines, and to report periodic cost and schedule performance status using validated performance measurement systems. NASA also stipulated that (1) the performance measurement baseline would be changed only by formal modifications to the contract for scope of work changes, (2) cost growth on the contract would be proposed by the contractor and authorized by NASA before the additional costs were incurred, (3) an estimate to complete work would be evaluated on a monthly basis, and (4) the contract would include an incentive fee feature to encourage and motivate contractor cost performance. The Chairman of the Subcommittee on Investigations and Oversight, House Commerce Committee, asked us to review the program’s cost and schedule status and NASA’s actions to improve cost reporting. To accomplish these objectives, we interviewed ISS program office and contractor personnel and reviewed pertinent documents, including the prime contract between NASA and Boeing, contractor performance measurement system reports, the prime contractor’s management system plan, and surveillance reports prepared by the Department of Defense’s (DOD) Defense Plant Representative Office personnel at product group subcontractor locations. We also interviewed NASA officials at the Johnson Space Center and the Marshall Space Flight Center, observed reviews conducted by NASA and Boeing personnel to verify that the prime and the major product group subcontractors had implemented valid cost and schedule control systems, and identified the program’s cost and schedule trends over time using performance measurement data. We did not review the portion of the estimated development budget representing the $2.6 billion for research capability. We performed our review from August 1995 to April 1996 in accordance with generally accepted government auditing standards. The ISS program has been producing flight hardware since 1993. However, it continues to face cost and schedule issues that threaten the already limited financial reserves available to complete the station within its $17.4-billion total and $2.1-billion annual budget, including (1) the large number of authorized unpriced changes to the prime development contract, (2) unfavorable cost and schedule trends, and (3) potentially understated cost estimates at completion. Further, NASA’s ability to complete the station program on schedule and within budget is potentially threatened by the risk of the Russian Space Agency (RSA) not totally or substantially meeting its commitments. In our June 1995 report, we noted that the station’s financial reserves for fiscal years 1996 and 1997 were low at $102 million and $182 million, respectively. During fiscal year 1995, program managers identified cost savings and deferrals that increased the fiscal year 1996 reserves. If the cost of the currently known threats to financial reserves are realized and station managers are unable to find ways to offset the added cost, the financial reserves will continue to be low over the next several years, as shown in table 2.1. The two largest threats—a crew rescue vehicle ($586 million) and a control module ($250 million)—account for $836 million, or about 59 percent, of the $1.42 billion. Another threat is related to an accounting issue. As initially raised by the prime contractor, NASA would pay an additional $76 million in overhead costs. NASA does not believe the additional costs should be allowed, but has agreed to abide by the decision of the DOD administrative contracting officer. A decision by DOD is pending. Inadequate reserves would hinder program managers’ ability to cope with unanticipated technical problems. If a problem’s solution could not be funded by available reserves, program managers could be faced with either exceeding the annual funding cap or deferring or rephasing other activities, thus possibly delaying the development schedule and likely increasing overall funding requirements. However, program managers believe that it is unlikely that all known contingencies will require funding. They also said that they are continuing their efforts to identify future cost savings and develop other strategies that could be used to offset the potential cost growth threats. Recently, they were able to increase the reserves by negotiating with the Office of Life and Microgravity Sciences to fund some items, such as laboratory support equipment, that were to have been funded by the development budget. Also, ISS managers have challenged the managers of the nonprime efforts to reduce their future costs by 10 percent. If the nonprime managers are successful, reserves would increase. In commenting on a draft of this report, NASA said that, as of April 1996, the financial reserves for fiscal year 1996 totaled $176 million, with $108 million in threats. NASA anticipates that there will be an unused balance of fiscal year 1996 reserves to carryover and augment the expected fiscal year 1997 reserve level. NASA’s current list of potential cost increases does not include some items that could further erode financial reserves. First, contractor estimates of the cost of authorized changes are higher than NASA’s estimates. The higher contractor estimates, if realized, would create a greater use of reserves than NASA anticipates. Second, the prime contractor’s performance measurement status reports show that cost and schedule performance is worsening. Third, the prime contractor’s performance measurement status reports do not appear to present realistic estimates of completion costs on some station elements, thus potentially masking additional overruns. Authorized unpriced changes to the prime contract baseline since January 1995 may increase prime contract costs by over $723 million, or about 14 percent of the original contract amount, according to contractor estimates. About $300 million of this amount is related to the Russian functional energy block, which was added to the prime contract when Boeing agreed to manage the acquisition, and to the accounting change noted above that Boeing wants but NASA is disputing. As of January 1996, the contractor-estimated value of the remaining changes was, therefore, just over $400 million. In April 1996, NASA budgeted funds to accommodate most, but not all, of this amount because ISS program managers expect to negotiate these changes for less than the contractors’ estimates. If program managers are unable to negotiate them at the lower amounts they expect, financial reserves will be further reduced. NASA’s goal for negotiating prices on contract changes, as stated in the NASA Supplement to the Federal Acquisition Regulations, is 180 days. However, as of March 1996, 39 unpriced contract actions with an estimated value of $507.6 million exceeded NASA’s target date for completing negotiations. A major problem has been obtaining initial cost proposals from the prime contractor and product group subcontractors for starting price negotiations. As of early March 1996, contractors had provided proposals covering less than 20 percent of the value of all changes. Program managers recognize the unpriced change orders as a major problem and have implemented a task team to expedite their final pricing. NASA’s strategy includes (1) negotiating older changes for which cost proposals have been received as a lump settlement; (2) requesting immediate contractor preparation and submittal of cost proposals for the top 20 changes, which represent approximately 71 percent of the estimated cost of all changes, and immediately negotiating them; (3) establishing time frames for contractor preparation and submittal of cost proposals and negotiations for the remaining critical changes; and (4) suspending and, perhaps, canceling 10 changes that were determined to be less critical, even though the contractor has already begun work and incurred costs. Table 2.2 shows the status of the prime contract changes in March 1996.