Space Station: Cost Control Problems Continue to Worsen (Testimony,
06/18/97, GAO/T-NSIAD-97-177).

GAO discussed its current work on the International Space Station
program, focusing on an update of information reported in July 1996 on
the: (1) status of the program's financial reserves; and (2) prime
contract's cost and schedule variances and estimates at completion.

GAO noted that: (1) in GAO's report and subsequent testimony before the
Senate Subcommittee on Science, Technology, and Space in 1996, GAO
pointed out the deterioration in the prime contractor's cost and
schedule performance and noted that the station's near-term funding
included only limited financial reserves; (2) GAO also identified what
was, at that time, an emerging risk to the program, which were
indications of problems in the Russian government's ability to meet its
commitment to furnish a Service Module providing power, control, and
habitation capability for the International Space Station; (3) GAO
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, the National Aeronautics and Space
Administration (NASA) would either have to exceed its funding limitation
to cope with the increased costs or defer or rephase activities, which
could delay the space station's schedule and would likely increase its
overall cost; (4) since GAO's report and testimony in 1996, the risks to
the space station's cost and schedule have in fact increased; (5) the
Russian government has not been able to meet its financial
responsibilities to the International Space Station, resulting in a
currently projected 8-month delay in launching the Service Module; (6)
cost control problems under the station prime contract have also
steadily worsened; (7) since April 1996, the cost overrun has more than
tripled to $291 million and the estimated cost to get the contact back
on schedule has increased by almost 50 percent to $129 million; (8) the
station's financial reserves have also deteriorated significantly; (9)
NASA has taken several steps to avoid exceeding its annual and assembly
completion funding limitation and to replenish its financial reserves;
(10) such efforts have included transferring work to others, rephasing
or deferring work, redefining the "assembly completion" milestone, and
keeping additional funding outside the capped portion of the program;
(11) in addition to the adverse cost and schedule impacts of the Service
Module delay recently announced by NASA, considerable further cost and
schedule problems could occur if the Russian government continues to be
unable to fulfill its partnership commitment to the International Space
Station; (12) if further problems do materialize, GAO believes a congre*

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

 REPORTNUM:  T-NSIAD-97-177
     TITLE:  Space Station: Cost Control Problems Continue to Worsen
      DATE:  06/18/97
   SUBJECT:  Federal procurement
             Contract costs
             Contractor performance
             International relations
             Satellites
             Cost control
             Foreign governments
             Space exploration
             Future budget projections
             Budgetary reserves
IDENTIFIER:  Russia
             NASA International Space Station Alpha Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Science, Technology, and Space, Committee
on Commerce, Science, and Transportation, U.S.  Senate

For Release on Delivery
Expected at
2:00 a.m., EDT
Wednesday,
June 18, 1997

SPACE STATION - COST CONTROL
PROBLEMS CONTINUE TO WORSEN

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

GAO/T-NSIAD-97-177

GAO/NSIAD-97-177T

Space Station

(707266)


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

  NASA - National Aeronautics and Space Administration

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

Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss our current work on the
International Space Station program.  Earlier this year, Senator
Bumpers and Representative Dingell asked us to update information we
reported in July 1996 on the status of the program's financial
reserves and the prime contract's cost and schedule variances and
estimates at completion.\1 They also asked that we identify the
National Aeronautics and Space Administration's (NASA) actions to
maintain the program within its funding limitation.\2 Our testimony
today is based on our work on this request. 


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

\2 The limitation is NASA's self-imposed ceiling not to exceed $2.1
billion annually for the Space Station and $17.4 billion through the
completion of its assembly. 


   SUMMARY
---------------------------------------------------------- Chapter 0:1

In our report and subsequent testimony before this Subcommittee last
year,\3 we pointed out the deterioration in the prime contractor's
cost and schedule performance and noted that the station's near-term
funding included only limited financial reserves.\4 We also
identified what was, at that time, 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 power,
control, and habitation capability for the International Space
Station.  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 to cope with the increased
costs or defer or rephase activities, which could delay the space
station's schedule and would likely increase its overall cost. 

Since our report and testimony last year, the risks to the space
station's cost and schedule have in fact increased.  The Russian
government has not been able to meet its financial responsibilities
to the International Space Station, resulting in a currently
projected 8-month delay in launching the Service Module.  Cost
control problems under the station prime contract have also steadily
worsened.  Since April 1996, the cost overrun has more than tripled
to $291 million and the estimated cost to get the contract back on
schedule has increased by almost 50 percent to $129 million. 

The station's financial reserves have also deteriorated
significantly.  NASA has taken several steps to avoid exceeding its
annual and assembly completion funding limitation and to replenish
its financial reserves.  Such efforts have included transferring work
to others, rephasing or deferring work, redefining the "assembly
completion" milestone, and keeping additional funding outside the
capped portion of the program. 

In addition to the adverse cost and schedule impacts of the Service
Module delay recently announced by NASA, considerable further cost
and schedule problems could occur if the Russian government continues
to be unable to fulfill its partnership commitment to the
International Space Station.  If further problems do materialize, we
believe a congressional review of the entire program would be needed. 
Such a review should focus on obtaining congressional and
administration agreement on the future scope and cost level for a
station program that merits continued U.S.  government support. 


--------------------
\3 Space Station:  Cost Control Difficulties Continue
(GAO/T-NSIAD-96-210, July 24, 1996). 

\4 Financial reserves are used to fund unexpected contingencies, such
as cost growth, schedule delays, or changes in project objectives or
scope. 


   RUSSIAN PERFORMANCE PROBLEMS
---------------------------------------------------------- Chapter 0:2

In 1993, NASA and its international partners agreed to significant
changes in the space station to bring the Russian government into the
program as a full partner.  NASA claimed that Russian participation
would enable the cost of the station, through completion of assembly,
to be $17.4 billion--a $2 billion savings from the projected $19.4
billion cost of the existing design at that time.  Of the expected
savings, $1.6 billion was to be achieved by completing the station's
assembly 15 months earlier than planned--by June 2002 instead of late
2003.  We reported in 1994 that Russian participation in the program
did not result in $2 billion in savings and that NASA would have to
find other savings to accelerate assembly completion by the 15 months
and reduce the station's cost by the $2 billion that was to have
resulted from the Russian's participation.\5

Because of the recently recognized problem with the Russian
government's ability to provide the Service Module on schedule, NASA
has begun to implement a three step recovery plan.  Step 1, which is
now underway, 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 step 1
activities include delaying the launch of station components that are
to precede the Service Module into orbit and building a stand-by
temporary replacement for the Service Module's propulsion capability. 
The cost of step 1 activities through fiscal year 1998 is estimated
at $250 million to $300 million. 

Step 2 is NASA's contingency plan for dealing with more delay or the
Russian government's failure to deliver the Service Module.  Step 2
could result in permanently replacing the Service Module's power,
control, and habitation capabilities.  NASA's initial cost estimate
for step 2 is $750 million.  Under step 3, the United States and its
other international partners would have to pick up all or most of the
financial and operational responsibilities the Russian government
would have had, such as station resupply missions.  The cost of step
3 has not been estimated. 

In addition to directly affecting space station development
activities, the recovery plan places additional requirements on the
space shuttle program.  However, the full impact of the recovery plan
on the space shuttle program is not yet known. 

The space station program's overall costs will likely increase by
billions of dollars if the full recovery plan is implemented.  NASA's
decision on the need to begin step 2 is currently scheduled for later
this year.  This time frame will not allow the impact of NASA's
recovery plan to be fully understood before the Congress finishes its
deliberations on NASA's fiscal year 1998 budget.  If NASA decides to
initiate step 2, we believe a thorough congressional review of the
total program would be warranted.  Such a review should focus on
evaluating the scope and cost of the station program that the
Congress and the administration can agree upon in light of current
circumstances.  To support such a review, NASA should provide its
best estimates of the additional resources required to execute its
recovery plan. 


--------------------
\5 Space Station:  Update on the Impact of the Expanded Russian Role
(GAO/NSIAD-94-248, July 29, 1994).  Also, see Space Station:  Impact
of the Expanded Russian Role on Funding and Research
(GAO/NSIAD-94-220, June 21, 1994). 


   WORSENING COST AND SCHEDULE
   PERFORMANCE
---------------------------------------------------------- Chapter 0:3

NASA recently told the Congress that the performance of the space
station's prime contractor had not improved as much as planned.  In
fact, the station prime contractor's cost and schedule performance,
which showed signs of deterioration last year, has continued to
decline virtually unabated.  The prime contract's cost and schedule
variances have steadily worsened since April 1996, with the cost
overrun more than tripling and the schedule slippage increasing by
almost 50 percent.  Figure 1 shows the cost and schedule variances
from January 1995 to April 1997.\6

   Figure 1:  Cost and Schedule
   Variances on the Space Station
   Prime Contract From January
   1995 to April 1997
   (Dollars in millions)

   (See figure in printed
   edition.)

Note:  The zero line represents meeting planned cost and schedule. 

Between January 1995 and April 1997, the schedule slippage increased
from a value of $43 million to $129 million--the estimated amount
that it would cost to do the work required to get the contract back
on schedule.  During that same period, the prime contract moved from
a cost underrun of $27 million to a cost overrun of $291 million.  So
far, the prime contractor has not been able to moderate or reverse
the continued decline.  Unless the deteriorating cost trend is
moderated, overall cost growth at the completion of the prime
contract may end up substantially higher than the cost growth
currently factored into the station's budget. 


--------------------
\6 Cost variances are the difference between actual costs to complete
specific work 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 negative schedule variances can become cost
variances as additional work in the form of overtime is often
required to regain schedule. 


   DWINDLING FINANCIAL RESERVES
---------------------------------------------------------- Chapter 0:4

To fund cost overruns and other requirements, NASA has been using the
space station program's financial reserves at a substantial rate. 
Over the last 16 months, the program's financial reserves have
decreased significantly--from almost $3 billion to under $2.2
billion.  NASA estimates that its total remaining reserves by the end
of fiscal 1997 will be reduced further to just over $1.4 billion,
with almost $500 million in estimated future reserve uses (threats)
listed against that balance.\7 Table 1 summarizes NASA's current
estimate of its fiscal year 1997 reserves and threats to them. 



                                Table 1
                
                  Space Station Financial Reserves and
                Threats to Reserves for Fiscal Year 1997

                         (Dollars in millions)

                                                                Amount
--------------------------------------------------  ------------------
FY 1997 reserve level identified in FY 1998 budget                $180
 request
Minus: approved and anticipated uses of reserves                 (319)
 in
 FY 1997
Plus: estimated value of actual and planned                        150
 reductions in FY 1997 funding requirements
Equals: net estimated FY 1997 reserves at the end                   12
 of
 FY 1997
Minus: estimated FY 1997 impact of currently                      (19)
 recognized threats to reserves
Equals: estimated value of required additions to                   (7)
 FY 1997 financial reserves if the recognized
 threats materialize
----------------------------------------------------------------------
Note:  Table does not add due to rounding. 

NASA uses actual and planned reductions in its fiscal year funding
requirements to help restore and preserve its financial reserves. 
Typically, these actions involve the rephasing or deferral of
activities from the current year to future years.  For example, the
$150 million figure in table 1 includes moving $20 million in spares
procurement from fiscal year 1997 to 1999, and $26 million in effort
under the nonprime portion of the program from fiscal year 1997 to
future years.\8 If the restoration actions are unsuccessful and the
anticipated threats occur at their estimated values, NASA will need
additional funding in fiscal year 1997, unless it can reduce or
offset its use of reserves in other ways. 

Since 1993, NASA has consistently reported compliance with its
self-imposed funding limitation for the space station of $2.1 billion
annually and $17.4 billion through the completion of assembly.  NASA
has taken or planned some major actions to help it remain within the
program's funding limitation and to replenish and preserve its
financial reserves.  For example: 

  -- NASA dropped the station's centrifuge from the station budget
     and is negotiating with the Japanese government to provide it.\9
     Along with this change, the space station's content at the
     "assembly complete" milestone was revised to exclude the
     centrifuge.  This change enabled NASA to maintain the previous
     June 2002 assembly completion milestone, even though the
     centrifuge and related equipment would not be put on the station
     until after that date. 

  -- NASA moved $462 million from the station science budgets to the
     station development budgets for fiscal years 1996 to 1998.  NASA
     officials told us that further review of the science portion of
     the station's budgets indicated that estimated funding did not
     match station requirements in those years.  They said that these
     funds will be paid back in accordance with the science program's
     needs.  NASA is currently scheduling the payback of $350 million
     through fiscal year 2002. 

  -- NASA is attempting to transfer U.S.  development costs to other
     parties.  The station program office is negotiating with its
     foreign partners and another potential foreign participant to
     build hardware for the United States in return for free or
     reduced-cost access to and use of the station, or other
     consideration.  NASA has estimated that $116 million in U.S. 
     station development costs could be covered by these offset
     arrangements.  Some of the negotiations are further along than
     others, but none are completed.  Recently, NASA recorded a
     threat to its future years' financial reserves totaling $100
     million, based on an assumption that it may not be able to
     successfully negotiate most of these offsets. 

In addition, NASA recently requested permission to provide $200
million more in fiscal year 1997 funding to the station from other
NASA accounts and to reallocate $100 million of its fiscal year 1998
funding request to the station program.\10 These amounts are intended
to fund the first phase of NASA's recovery plan.  NASA intends to
account for these funds in a budget line outside the capped portion
of the station program. 

Space station costs have been increasing substantially and are likely
to continue doing so.  If some of these increased costs are just
placed on another set of "books" and the content of the space station
at "assembly complete" can be revised, we question the value of any
continued reliance on the current funding limitation as a cost
control mechanism. 


--------------------
\7 We do not yet have cost estimates for all the potential uses,
restorations, and threats to financial reserves identified by NASA. 

\8 The nonprime part of the space station program involves a large
number of relatively small contracts for developing the ground-based
and on-orbit capability to use and operate the space station. 

\9 The centrifuge is a crucial piece of research equipment for the
space station.  NASA recently recorded a threat against future years'
reserves based on being unsuccessful in these negotiations.  We do
not yet have information on the value of that threat. 

\10 The House and Senate Appropriations Committees recently approved
the fiscal year 1997 funds.  NASA has not yet determined the exact
amount and source of the fiscal year 1998 funds. 


-------------------------------------------------------- Chapter 0:4.1

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

*** End of document. ***