Space Station: Cost Control Difficulties Continue (Testimony, 07/24/96,
GAO/T-NSIAD-96-210).

GAO discussed the risks involved in controlling the cost and maintaining
the schedule of the National Aeronautics and Space Administration's
(NASA) International Space Station Program. GAO noted that: (1) it will
cost $17.4 billion to develop and operate the international space
station; (2) $6.3 billion of this estimate covers the prime contractor's
costs, $5.5 billion is for development of ground-based and on-orbit
capabilities, $2.6 billion is for development of on-orbit research
facilities and other research, and $3 billion is for financial reserves;
(3) the program has been able to maintain sufficient reserves to fund
additional station costs; (5) NASA did not budget the full amount of its
contract estimates because it believes that it can negotiate authorized
contract changes; (6) as of April 1996, the prime contractor was $89
million over budget and $88 million behind schedule; (7) there are
several instances where the prime contractor's total cost estimates
neglect to recognize over-budget conditions; (8) there is concern
regarding Russia's financial participation in the space program; and (9)
NASA has made progress towards ensuring that its contractors have an
adequate performance measurement system.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-96-210
     TITLE:  Space Station: Cost Control Difficulties Continue
      DATE:  07/24/96
   SUBJECT:  Space exploration
             Research and development costs
             Cost overruns
             International cooperation
             Prime contractors
             Cost control
             Aerospace contracts
             Contractor performance
             Future budget projections
             Contract modifications
IDENTIFIER:  NASA International Space Station Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Before the Subcommittee on Science, Technology, and Space, Committee
on Commerce, Science and Transportation, United States Senate

For Release on Delivery
Expected at
9:30 am, EDT
Wednesday,
July 24, 1996

SPACE STATION - COST CONTROL
DIFFICULTIES CONTINUE

Statement of Thomas J.  Schulz, Associate Director, Defense
Acquisitions Issues, National Security and International Affairs
Division

GAO/T-NSIAD-96-210

GAO/NSIAD-96-210T


(707193)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss some of the risks involved
in controlling the cost and maintaining the schedule of the National
Aeronautics and Space Administration's (NASA) International Space
Station program.  The testimony today is principally based on our
recent report on the program's continuing cost control
difficulties.\1 The report is being released today by Representative
John D.  Dingell, who requested that we review the station's cost and
performance reporting system when he was Chairman of the former House
Committee on Energy and Commerce, Subcommittee on Oversight and
Investigations.  With your permission,
Mr.  Chairman, I would like to introduce the report into the record. 

The report identifies a variety of issues that warrant continuing
oversight because of their potential negative impact on the cost and
schedule of the station program.  While NASA has made progress in
developing systems to control costs and track performance,
significant threats to the station's cost and schedule remain.  NASA
also needs to continue implementing effective performance measurement
systems.  In the order discussed in our report, the specific issues
requiring attention include (1) long-standing prime contract changes
that need to be priced; (2) the worsening of the prime contract's
cost and performance trends; (3) performance reports that contain
unrealistic cost estimates at completion, which could be masking
overruns; (4) the decreased level of Russian Space Agency
participation and its implications for the future of the station; and
(5) remaining problems in implementing performance measurement
systems for accurately determining cost and schedule status. 

In a worst case situation, these issues could threaten the future of
the program, especially if they result in significantly higher cost
estimates and substantial schedule delays.  When considering the
sensitivity of the station's budget profile to these risks, followup
to ensure that promised corrective actions are taken in a timely
manner and that recognized problems are effectively resolved, is of
paramount importance. 

As you know, the International Space Station is a major undertaking. 
NASA estimates the development and operations cost of the station at
$17.4 billion from October 1993 through completion of assembly in
space, which is currently scheduled for June 2002.\2

About $6.3 billion of this estimate is intended to cover the
activities of the prime contractor.  Also, over $5.5 billion is for a
large number of smaller contracts to develop the ground-based and
on-orbit capability to use and operate the station, about $2.6
billion is for other contracts to develop on-orbit research
facilities and conduct research, and more than $3 billion is for
financial reserves.\3 In mid-1993, a $2.1 billion annual funding
limitation was imposed on the program. 

The program started producing flight hardware in 1993 and the prime
contract is about 45-percent complete.  However, the program
continues to face cost and schedule threats to its already limited
financial reserves for completing the program within its $17.4
billion total and $2.1 billion annual budget.  We do acknowledge that
the program has been able to maintain sufficient reserves to fund
additional costs that have occurred so far.  We also note that
station managers have identified cost savings and deferrals that
bolstered the fiscal year 1996 reserves, and anticipate that there
will be an unused balance to carryover and augment the expected
fiscal
year 1997 reserve level.  However, despite these efforts, we are
still concerned that identified contingencies could use up most of
these funds, especially over the next several years.  This situation
would be exacerbated if additional continuing threats discussed in
our report are realized.  Program managers would then have to either
exceed the annual funding limitation or defer or rephase other
activities, thus possibly delaying the station's schedule and likely
increasing its overall cost. 

The first three risks discussed in our report that I mentioned
earlier are the continuing threats to financial reserves.  They
include: 

  -- a large number of unpriced contract changes,

  -- unfavorable cost and schedule trends, and

  -- potentially understated cost estimates. 

Most of the contractor estimates of the value of authorized changes
for which prices had not yet been negotiated are included in the
current budget baseline.  However, NASA did not budget for the full
amount because station personnel believe they can price these changes
for less.  NASA said it would complete the pricing by the end of this
month.  If NASA is unable to negotiate the lower prices it expects,
financial reserves could be further reduced. 

As of April 1996, the performance measurement system showed the
station prime contractor about $89 million over cost and about $88
million behind schedule at the 45-percent completion point.\4

Although these variances are currently within planned future funding
levels, both showed deteriorating trends.  It is our understanding
these trends have continued to worsen. 

The monthly cost performance reports included several instances where
the contractor's total estimate of the cost to complete work did not
recognize over-budget conditions even when the accompanying narrative
included indications that the budget overrun could worsen.  This
omission of potential overruns concerns us, especially since NASA and
the prime contractor identified the lack of realistic estimates of
the cost to complete work as a problem during their initial
assessments of the performance measurement systems.  All the major
subcontractors were expected to update their estimates of the cost to
complete work by this summer. 

An additional cost risk discussed in our report involves the
continued participation by the Russian Space Agency.  This cost risk
does not threaten financial reserves in the same way as those threats
I have previously mentioned.  In a worst case situation resulting in
a complete and sudden withdrawal from the station program by the
Russians, a renegotiation of the total $17.4 billion and annual $2.1
billion development budget could be required.  Only limited changes
in the scope and timing of the Russian participation might be covered
by the financial reserves.  Despite recent statements of confidence
regarding Russia's participation, we are aware of continuing concerns
about its ability to deliver, and we believe this issue would benefit
from continuing congressional oversight. 

Two years ago, at a congressional hearing on cost reporting on
Johnson Space Center contracts involving major parts of an earlier
version of the current station, NASA promised to institute an
improved performance measurement system on station contracts.  This
system would determine the extent that tasks are on schedule and
within budget.  Such systems are intended to provide early warning of
cost and schedule problems so corrective actions can be taken.  At
the time we completed our review, a complete performance measurement
system was not yet in place.  Nevertheless, NASA had made progress,
especially toward ensuring that the station prime contractor and its
major subcontractors had an adequate performance measurement system. 
We considered cost and schedule management as still being at risk,
however, because all the deficiencies identified by NASA and the
station prime contractor during their performance measurement system
reviews were not yet corrected and the overall performance baseline
for measuring cost and schedule progress was not yet completely
established.  In commenting on our report, NASA acknowledged that it
faces many cost control challenges and that not all of the program's
difficulties are behind it.  However, NASA was confident that the
program would continue to perform on schedule and within budget. 

In summary, Mr.  Chairman, there are numerous matters--both major and
minor--which continue to threaten the station program's ability to
stay within cost limits and on its current schedule.  In some cases,
commitments were made by NASA and its contractors to resolve or
complete actions on the issues described in our report.  It would be
useful to the oversight of the station program to update those
commitments and factor their results into a more current assessment
of the program's cost and schedule status.  Also, the possibility
that the Russians might ultimately not be able to meet their
commitments is a key threat to the program's cost and schedule and a
most important one for congressional oversight. 


--------------------
\1 Space Station:  Cost Control Difficulties Continue
(GAO/NSIAD-96-135, July 17, 1996). 

\2 Exclusive of $30.8 billion for funding through fiscal year 1993
and station-related requirements to June 2002.  The total of $48.2
billion is detailed in Space Station:  Estimated Total U.S.  Funding
Requirements (GAO/NSIAD-95-163, June 12, 1995). 

\3 Anticipating and accurately estimating the development and
operations costs of major research and development projects is highly
unlikely.  Accordingly, NASA's cost estimates for such projects
include both a baseline program to fund the costs of known
requirements and allowances for financial reserves to fund unexpected
major contingencies, such as schedule delays or changes in project
objectives or scope. 

\4 Cost variances represent the difference between actual costs to
complete specific work steps and the amounts budgeted for that work. 
Schedule variances are the dollar value of the difference between the
budgeted cost of work planned and work completed.  Cost and schedule
variances are not additive but schedule variances can become cost
variances as additional work, that is, overtime, is often required to
regain schedule. 


-------------------------------------------------------- Chapter 0:0.1

Mr.  Chairman, this concludes my statement.  I would be happy to
answer any questions you or the members of the Subcommittee may have. 


*** End of document. ***