Testimony of Russell A. Rau, NASA Assistant Inspector General for Auditing before the House Science Committee

Mr. Chairman and Members of the Committee,

Thank you for the opportunity to be here today to discuss NASA’s management of the International Space Station (ISS) Program. The NASA Office
of Inspector General (OIG) regularly conducts reviews and audits of the ISS and related Human Space Flight[1] programs and has made
numerous recommendations to improve cost, schedule, and technical performance. In today’s testimony, we will highlight major challenges to
the ISS Program with particular emphasis on contract and program management.

INTRODUCTION

The ISS Program is one of the largest and most complex international scientific projects ever undertaken. The Program’s mission is to build and
operate the ISS, a world-class orbital research facility. ISS assembly in orbit began with the launch of the U.S.-owned, Russian-built Zarya
control module on a Russian Proton rocket in November 1998. The launch of the Space Shuttle Endeavor carrying the U.S.-built Unity
connecting module followed in December 1998. Further, Space Shuttle and Russian launches have resulted in the deployment of the Zvezda
Service Module and Destiny Laboratory Module, among other components. The first ISS three-member crew was launched in October 2000 on a
Russian Soyuz Rocket, and a replacement crew was launched on the Space Shuttle Discovery (STS?102) in March 2001.

The NASA Inspector General has identified the ISS as one of the Top 10 management challenges at NASA. Specifically, the NASA Inspector
General has identified the keys to an effective ISS Program as:

• Managing the political, financial, technical, and safety challenges presented by an international partnership.

• Overcoming technical challenges inherent in manufacturing, assembling, testing and integrating in space, complex hardware and
  software components provided by different nations.

• Safely maintaining, upgrading, and operating a structure as complicated as the ISS.

• Maximizing the beneficial use of the ISS for scientific research and technology development.

Based on a recent ongoing internal assessment of the ISS Program, NASA determined that significant revisions were required to continue the
Program in accordance with the funding profile outlined in the FY 2001 President’s Budget. In total, the assessment identified that $11.2 billion
was needed for Program requirements of which more than $4 billion[2] (56 percent) was in excess of the FY 2001 President’s Budget funding
profile for the outyears FY 2002 through 2006.[3] NASA has stated its commitment to execute the ISS Program in accordance with the funding
profile in the President’s Budget and related

statutory cost caps[4] and has identified a number of options for consideration in order to meet this commitment. These options include the
canceling of the U.S. Propulsion Module,[5] a restructured approach to providing habitation and crew return capabilities, and rephasing research
activities.

In summary, the NASA strategy will focus on:

• Deferring capabilities, incorporating management reforms, and refocusing the workforce to build the ISS and maintain commitments to
  international partners within budget.

• Identifying the path to achieving a six-person crew capability to maximize research activity.

• Seeking additional partner contributions.

• Prioritizing science to increase funding of research.

NASA estimates that statutory cost caps on ISS costs will not be exceeded prior to substantial completion of the ISS,[6] and no contingency
funding[7] will be required, although certain contingencies are anticipated. The contingencies will be funded within the existing budget. NASA is
continuing its review of options to meet the FY 2002 and beyond funding profile and expects to complete this review in June 2001.

BACKGROUND

On January 13, 1995, NASA awarded the ISS prime contract (NAS 15-10000) to The Boeing Company (Boeing) Space and Communications
Group for a total cost-plus-award fee/fixed fee/incentive fee amount of $5.638 billion.[8] The contract requires Boeing to design, develop,
manufacture, integrate, test, verify, and deliver to NASA the U.S. on-orbit segment of the ISS including ground support equipment and to provide
ground and orbital support operations. Boeing is also required to provide technical support and data for NASA’s operation and utilization of the
ISS. Since January 1995, costs have increased significantly. The total award value is now $9.598 billion — a 70-percent increase over the original
contract value. This cost growth includes new work added to the ISS prime contract, reflecting maturity in the program, such as integration and
operation of on-orbit segments and cost overruns.

NASA has made significant revisions to the requirements for ISS components. For example, in August 1999, the ISS prime contract was modified
to eliminate the Habitation Module,[9] which Boeing forecasted would overrun budget even before substantive work started. In some cases, these
revisions occurred due to uncertainty concerning the performance of international partners. In October 2000, NASA halted further development on
the Interim Control Module (ICM)[10] after deployment of the Service Module[11] reduced the risk associated with the total loss of Russian
propulsion capability. Subsequently, in March 2001, NASA canceled the U.S. Propulsion Module due to budget concerns and the reduced risk of a
near-term Russian propulsion shortfall.

In December 1999, NASA modified the fee structure of the ISS contract[12] and resolved numerous outstanding and potential contractor claims as
part of a global settlement[13] that included an increase in contract cost of $404 million. A significant change involved the Government’s ability to
recoup award fee if on?orbit performance is unsatisfactory.[14] The restructure enables Boeing to earn up to 11 percent technical and cost award
fees on new work added to the contract [15] (other than spares which have a separate fee arrangement). The technical award fee on new work is
not subject to Government recoupment based on on-orbit performance problems. NASA accepted all of the contractor claims in the settlement at
the amounts estimated by the contractor. Additionally, the entire $404 million amount was applied to increase the contract target cost, which is
subject to award fee.

At the time of the global settlement, the cost overrun reported by Boeing was $986 million, the amount first formally reported by Boeing in March 1999. Currently,
Boeing is continuing to report the same overrun ($986 million[16]) while at the same time indicating that it will submit claims for at least an additional $200 million.

The ISS Program Office estimates that prime contract activities are about $2.1 billion (26 percent) of the total new obligation authority of $8.0 billion provided in the FY
2001 President’s Budget (FY 2001 through 2005). These amounts reflect the completion of design, development, test and evaluation (DDT&E) activities and an increase
in research, launch, payload ground operations and other

“non-prime” activities. These “non-prime” activities total $5.9 billion over the same 5?year period. As of December 2000, Boeing reported that the DDT&E portion
of the ISS prime contract[17] was more than 90 percent complete.

CONTRACT MANAGEMENT

The prime contract for the ISS Program requires an Earned-Value Management (EVM)[18] System for cost and schedule reporting. EVM systems track variances from
budgeted costs and schedules. These variances can be used to estimate future performance. Our work going back to 1996 (see Appendix A) shows continuing,
significant understatement by Boeing of the cost estimates to complete work on the ISS prime contract. We found Boeing has not adequately used EVM data to identify
negative variances nor designed and implemented timely corrective action plans to mitigate the problems causing adverse cost and schedule impacts. Additionally, we
found that NASA management did not use cost and schedule data from the contractor’s EVM system to effectively challenge Boeing on its understated estimates.

In February 2000, we issued a report on performance management of the ISS contract.[19] We conducted the review resulting in this report at the
request of the NASA Administrator following the disclosure of a large overrun in the ISS prime contract. Boeing announced in late March 1999 that
the total of actual and projected cost overruns on the ISS prime contract had increased by $203 million, from $783 million to $986 million.[20] This
was the third major increase in cost overrun that Boeing reported in 2 years. Boeing attributed part of the cost overrun to unexpected increases in
indirect cost rates due to reorganizations, including the merger with McDonnell Douglas Corporation and the acquisition of Rockwell International
Corporation.

We concluded that management of the ISS prime contract needed improvement. Specifically, we found:

• Boeing reported to NASA unrealistically low estimates of projected cost overruns on the ISS prime contract.
  

• NASA did not act to effectively challenge understated contractor estimates. NASA paid (and later recouped) $16 million in unearned incentive fee based on
  understated estimates.[21]

• NASA and Boeing did not sufficiently emphasize cost management at monthly meetings held to discuss the status of the ISS.

• Boeing extensively delayed negotiating major cost overrun modifications by submitting late proposals.

• NASA did not act to promptly definitize (that is, incorporate into the contract by a modification) cost overrun proposals submitted by Boeing. The delays in
  definitizing the overruns negatively impacted performance measurement by limiting variance analysis to top-level estimates rather than to the detailed
  distribution to the work breakdown structure.[22]

• Boeing used “negative” management reserves[23] to accumulate cost overruns that should have been distributed to the specific work performed.
  

• NASA had not routinely performed independent estimates to complete the ISS contract using EVM data.[24]

• NASA made optimistic award fee evaluations during a period of significantly understated contractor cost overruns.

• Boeing had not developed mitigation plans for known cost risks.

• NASA paid insufficient attention to Boeing’s reorganization and restructuring activities due to mergers and acquisitions and related cost impacts on the ISS
  and other NASA contracts (see Appendix B for a discussion of the related NASA OIG audit of Boeing restructuring costs).

• NASA had not structured award fee provisions[25] of the ISS prime contract to provide sufficient weight (and, therefore, incentive) to the cost management
  area to ensure reporting of realistic cost estimates. Consequently, even unsatisfactory ratings in this area reduced the award fee by only a minimal amount.

• NASA had not required that monthly status reports on Boeing cost, schedule, and technical performance from the Defense Contract Management Command
  (DCMC)[26] be summarized at the ISS prime contract level. These reports provide valuable insight into emerging issues, particularly those with cost and
  schedule impacts, such that corrective action can be taken to mitigate these adverse consequences.

We made numerous recommendations to improve ISS contract and performance management. NASA generally concurred with our
recommendations.[27]

PROGRAM MANAGEMENT

Our oversight of the ISS has found that NASA could make many improvements in program management. Some of NASA’s ISS management
practices were inconsistent with the high-risk, technologically complex environment of the ISS Program. The international aspects of the program
also compound the challenges facing NASA management (see Appendix C for a discussion of NASA OIG reviews related to ISS Program
management and the risks associated with

international partnerships). We will discuss two particular areas of concern: the need for periodic, independent life-cycle cost estimates and
Independent Annual Reviews (IARs)[28] of the ISS Program.

In 1998, the General Accounting Office (GAO)[29] completed a life-cycle cost estimate of the ISS Program that totaled about $96 billion, but NASA
had not developed its own estimate against which the GAO amount could be compared. NASA has not done an independent life-cycle cost
estimate of the ISS, although the Agency has requested at least one major external review of ISS costs.[30] Periodic independent life-cycle cost
estimates are a key program management tool for determining and assessing budgets and identifying and quantifying areas of program risk.

The ISS Program was not subjected to an IAR in 2000 or to-date in 2001.[31] The NASA Independent Program Assessment Office reported the results of the last IAR
of the ISS Program in May 1999. That review was comprehensive and provided clear warning of cost, schedule, and technical problems that required management
attention. Concerning the ISS prime contract with Boeing, the IAR concluded that cost overruns were likely to continue to grow because Boeing had not improved its
cost performance since the prior (1998) IAR. Also, the IAR forecasted that similar poor cost performance could be expected in post-development activities such as
sustaining engineering. The 1999 IAR did not independently estimate ISS Program life-cycle costs or the cost to complete the ISS prime contract with Boeing. The
1999 review followed up on recommendations made in the 1998 IAR of the ISS Program.

In our February 2000 report, we indicated that independent estimates of ISS contract costs were not routinely performed by an activity outside the program management
chain of command. The ISS Program Office does not conduct truly independent assessments given its management responsibilities for the Program. We recommended
that such independent estimates be performed, and NASA agreed to obtain them as part of the IAR process. Since that time, however, NASA has not performed an IAR.

Independent cost estimates of both the ISS Program and its contracts serve NASA management as well as the Congress and OMB by providing a “nonadvocate”
perspective on cost estimating assumptions and methodologies used to develop cost, budget, and other financial information.

CONCLUSION

In summary, NASA can use the framework established by the National Aeronautics and Space Administration Authorization Act of 2000 to
accurately report ISS costs. In addition, improvements to existing contract and program management guidance can strengthen oversight of the
ISS Program.

The combination of the following actions will help ensure the most current status of the ISS Program is reported to the Congress, OMB, and NASA
management:

• annual accounting for, and GAO verification of, statutory funding limitations as required by the National Aeronautics and Space
  Administration Authorization Act of 2000;

• review by the NASA OIG of NASA notifications, if any, of changes in ISS costs that require contingency funding above the statutory caps
  as required by the National Aeronautics and Space Administration Authorization Act of 2000;

• improved use of EVM systems and data for monitoring contractor performance;

• periodic independent life-cycle cost estimates;

• regular performance of IARs that include independent estimates of costs to complete ISS contracts; and

• timely implementation of actions agreed upon in response to independent reviews.

  
  

In addition, we plan to continue our emphasis on oversight of the ISS Program as one of our Top 10 NASA management challenges.

If you are interested in learning more about the activities or reports referenced in this testimony, you can find the full text of most of our reports on
the NASA OIG homepage, at http://www.hq.nasa.gov/office/oig/hq, or contact our office at (202) 358-2061.

Thank you, and I would be pleased to answer any questions.

APPENDIX A: EARLIER NASA OFFICE OF INSPECTOR

MANAGEMENT

In 1996, we reported that Boeing was not revising its monthly performance measurement reports on the ISS prime contract to reflect a reasonable
estimate of cost to complete the ISS.[32] Boeing’s performance management system required that the company review monthly its estimate at
completion and update the estimate at least annually. Boeing was reporting a variance at completion of about $13 million. However, based on
our review of Boeing cost performance, we estimated that the variance at completion could be more than $140 million — $127 million more than
Boeing was then reporting to NASA.

We concluded that NASA did not have a reliable estimate at completion to manage future funding requirements. We stated that the ISS Program
may have to fund overruns in FY 1996 through 2003 in order to build the ISS. As a result, we recommended that NASA require Boeing to better
analyze and report estimate-at-completion data. NASA agreed with our recommendation.

In 1997, based on concerns that Boeing was continuing to report unrealistic cost estimates on the ISS prime contract, we performed a follow-up to
our prior audit.[33] Our 1997 audit again found that Boeing did not report in its monthly performance measurement reports, reasonable cost
estimates for completing work. The estimates were not realistic because Boeing reduced the monthly estimates provided by major
subcontractors under the prime contract and thus reported a smaller cost overrun. Boeing stated that it used these reduced estimates as a
management tool to encourage managers to reduce costs. In fact, the reduced estimates did not decrease costs. Instead, they limited visibility
into expected cost overruns.

In February 1997, Boeing’s variance at completion–the expected cost overrun–was $278 million. At this same time, NASA estimated the overrun
to be $425 million–$147 million, or about 53 percent, more than the Boeing estimate. In June 1997 (after our follow-up audit began), Boeing
increased its estimated variance at completion from $278 million to $600 million.

To increase the reliability of Boeing’s cost estimates, we recommended that NASA require Boeing to prepare detailed support for adjustments to

subcontractor estimates. We also recommended that the ISS Program Office monitor Boeing’s adjustments to subcontractor estimates. NASA
agreed with our recommendations.

In 1999, we reported additional problems related to oversight of Boeing’s Earned Value Management System.[34] We found that NASA had not
ensured that the DCMC, its agent at Boeing’s Huntington Beach facility,[35] accomplished Government surveillance of Boeing’s EVM System, as
required by the contract administration delegation and the DCMC surveillance plan. As a result, the ISS Program had not benefited from the
intended early identification of Program risks and oversight of corrective actions.

In this same audit, we also found that Boeing had not resolved an earlier identified weakness in the preparation and submission of the Variance
Analysis Report.[36] In 1997, the ISS Program Office notified Boeing that the Variance Analysis Report elements, including recovery plans for
negative variances, were inadequate and out of date. However, deficiencies still existed in the June 1998 Variance Analysis Report. NASA
concurred with our recommendations to ensure effective surveillance of the EVM System and to direct Boeing to improve the quality of its Variance
Analysis Reports.

APPENDIX B: DISCUSSION OF BOEING RESTRUCTURING

COSTS

In our February 2000 report on performance management of the ISS contract, we found that Boeing proposed to charge NASA significant costs
related to the company’s reorganization at the same time that Boeing’s military and commercial customers would receive net savings as a result
of the reorganization. To determine the cost impact on the ISS and other Agency programs, we performed an audit of the effects of the Boeing
restructuring on NASA.[37]

On December 17, 1999, Boeing entered into an advance agreement[38] with the DCMA acting on behalf of the Department of Defense (DoD),
NASA, and other U.S. Government customers of Boeing. The advance agreement allowed Boeing to claim costs to reorganize and restructure as
a result of its previous acquisitions and mergers, with the expectation that future savings to the Government would be at least twice the amount of
the restructuring costs incurred and charged to Government contracts. NASA did not benefit from Boeing’s restructuring and its advance
agreement with DCMA. Boeing estimated that its DoD customers could realize potential net savings of $276 million and that NASA could incur as
much as $115 million[39] in additional costs resulting from Boeing’s acquisition of the Rockwell International Corporation Aerospace and
Defense Units (Rockwell) and its merger with the McDonnell Douglas Corporation (McDonnell Douglas). NASA did not have legislation and
regulations[40] comparable to those of the DoD regarding external business restructuring costs. Also, NASA was not closely involved in reviewing
and negotiating Boeing’s restructuring proposal and related accounting changes. We concluded that NASA has an opportunity to recover about
$64.7 million[41] on the ISS and other Boeing contracts through a more equitable distribution of future contract cost reductions.

We recommended that NASA seek legislation for NASA similar to that provided to DoD regarding business restructuring costs and participate in
negotiations between DCMA and Boeing to protect NASA interests. NASA has proposed alternative corrective actions that are potentially
responsive to our recommendations, including the modification of acquisition regulations to ensure NASA receives a fair share of future
restructuring savings. We are awaiting implementation of the corrective actions.

APPENDIX C: RELATED NASA OFFICE OF INSPECTOR

MANAGEMENT

The following are summaries of NASA OIG reviews that illustrate the need for increased management attention on various aspects of the ISS
Program.

RISK MANAGEMENT

In a recent inspection, we found several problems with the ISS Portable Computer System (PCS) and the displays developed for the PCS.[42] The
on?board PCS is the crew’s primary interface for command and control of the ISS and provides the crew with caution and warning
information.[43] We determined that the ISS Program was not using an integrated product team in the PCS display development process. An
integrated product team would enhance coordination between the various organizations responsible for display development. The lack of an
integrated approach resulted in a communication breakdown between organizations responsible for PCS display development and the design of
procedures for its use.

We also found that the ISS Program had no independent verification (evaluation and validation) of PCS displays or of the display development
process, primarily due to schedule and personnel constraints. An independent verification process would help detect and correct errors and
enhance utility at an earlier stage in the display development process. In addition, we found several usability issues that may impact safety, cost,
and schedule. The issues include the display of inaccurate information, inconsistent application of commands, and cumbersome navigation.
Finally, our assessment determined that the ISS Program does not have a coordinated, well-defined process for software engineering and
software management. In some cases, ISS crew members did not have an opportunity to see the software until they were trained in its use,
which was so late in the process that changes were difficult to make. We made several recommendations to improve development of the PCS.
NASA either concurred or partially concurred with our recommendations.

For the X-38/Crew Return Vehicle (CRV) Project, NASA was using a “rapid prototyping”[44] strategy. Rapid prototyping is one of the methodologies
used to respond to the NASA Administrator’s challenge of performing projects “faster, better, and cheaper.” Under rapid prototyping, the X-38/CRV
project was relying on a high degree of concurrency among design, development, test, and engineering/evaluation activities, assuming an
optimistic schedule to accomplish development and production of the CRV. While this approach offers potential high payoff, we found that under
the more likely ISS scenarios, the approach negatively affects NASA’s ability to accurately adhere to project schedule and cost, thus increasing
risk.[45] We recommended the Project focus attention on risk and performance management, including the use of documented performance
metrics and criteria needed to enter and exit from each Project phase. NASA agreed with our recommendations to develop and document major
characteristics, criteria, and strategies for progressing though the major Project phases.

INTERNATIONAL PARTICIPATION

We reviewed the planned acquisition of the Propulsion Module and have issued a draft report to NASA on our findings and recommendations.
The purpose of the Propulsion Module Project was to develop a U.S. propulsion capability to mitigate the risk of a Russian failure to deliver critical
elements or provide support to the ISS. NASA began the Project in October 1998 and selected a design called the U.S. Propulsion Module
(USPM) in February 1999. In May 2000, NASA canceled one of two major elements of the USPM because of unacceptable safety, technical, and
cost risks.[46] In September 2000, NASA selected a new design called the U.S. Propulsion System (USPS) that was intended to be simpler and
safer than the USPM. The Project Office estimated that the cost to complete the USPS would be $675 million. However, NASA canceled the USPS
in March 2001 because of budgetary concerns and the reduced risk of a near-term shortfall in Russian propulsion capability due to the
deployment of the Service Module in July 2000.

In relation to managing the risks of international participation, we also reported that the ISS Program Office had not effectively transferred lessons
learned to subsequent phases of the program for experiences gained in other long-duration space flights and in working with international
partners.[47] In another review, we found that the ISS Program Office had not developed an integrated and comprehensive contingency plan to
address risks to the successful assembly of the ISS by the possible delay or default of the international partners.[48] The contingency plan did not
contain or clearly identify several critical elements for effective risk management, as required by Agency guidance. Specifically, the Program
contingency plan did not contain cost and schedule impacts and did not clearly identify risk mitigation measures and primary consequences of
the contingencies. In addition, certain Agency actions being planned and implemented to prevent additional schedule delays caused by problems
in Russian participation had not been incorporated into the contingency plan because the plan was not kept current. NASA cannot assess the
feasibility of the proposed contingency responses or determine the budgetary impacts without current and complete contingency plans. NASA
basically agreed to establish procedures to ensure the ISS Program contingency plan complies with Agency guidance for effective risk
management and to establish a process to ensure the plan is kept current.

Another area of risk involving international partners is common operations offsets or “bartering” agreements intended for NASA and its
international partners to make exchanges in furtherance of their individual and collective interests. For example, in response to a request by the
Chairman, House Committee on Science, we conducted an assessment of a barter arrangement between NASA and Japan and its National
Space Development Agency.[49] We found that NASA already had operational contingency plans and partnership agreements in place to meet
current emergency crew medical transport requirements and that the Agency’s decision to proceed to acquire an aircraft through a barter
arrangement was based on an incomplete analysis, did not consider all reasonable alternatives, and cannot be clearly linked to overall crew
medical requirements.

Because barter agreements lack the structure and visibility that would otherwise be provided by contractual actions requiring appropriated funds,
we recently announced a review of these arrangements to determine whether NASA is receiving reasonable consideration for launch services and
other “bartered” items identified in the related agreements with international partners.

APPENDIX D: PRIOR NASA OFFICE OF INSPECTOR

ASSESSMENT PROCESS

NASA’s ability to provide accurate and credible cost assessments for its projects has been a concern for many years. The 1990 Report of the
Advisory Committee on the future of the U.S. Space Program recommended NASA for an independent cost analysis group made up of about 20
“top-notch specialized personnel” to advise the Administrator on significant cost estimates provided to the OMB and Congress. In 1992, the GAO
emphasized that “estimates and analysis provided to the Administrator by the cost analysis group need to be independent in fact and
appearance.”

In 1996, we reported on the organizational location of NASA’s independent program evaluation and assessment function.[50] At the time of our
review, the Office of the Chief Financial Officer at NASA Headquarters performed the function. NASA planned to transfer the function from
Headquarters to the Langley Research Center (Langley).

We concluded that locating the independent assessment and cost estimation function in a subordinate organization (that is, Langley) placed the
function’s independence and impartiality at risk. True independence and impartiality require that the function reside with officials without any
stake in the competition for limited resources. Moreover, accessibility of the function’s analysts to both top management officials and key program
and project staff at Headquarters and in the field was a significant issue and was fundamental to the function’s success. A staff at Headquarters
would have ready access to key counterparts at GAO, DoD, and other Federal agencies. Staff at the Langley Research Center would not have this
same access.

We recommended that NASA locate a core staff at Headquarters capable of managing and overseeing the independent assessment and cost
estimation function. Assistance could be provided by personnel located at Langley but functionally assigned to Headquarters. Management
established the Independent Program Assessment Office at Langley but did not locate a core staff at Headquarters.

In 2000, we conducted a review to assess NASA’s current and planned ability to develop independent cost estimates[51] in support of the
Agency’s program and project management processes. We found that NASA was taking positive steps to improve its cost estimating capability by
establishing a System Management Office (SMO)[52] at each Center and by adding cost estimators in the Independent Program Assessment
Office at Langley. However, we found that the organizational structures for the independent cost estimating function at the Independent Program
Assessment Office and SMO did not provide for independent reporting of findings directly to the approving official who is designated depending on
the nature of the individual program or project. Also, the Independent Program Assessment Office and SMO are funded through the Centers — a
process that may hinder their independence. Consequently, NASA has less assurance that the opinions, conclusions, and recommendations
made to the Administrator or other approval authority on acquisitions for Agency programs and projects are independent in fact and appearance.

We made recommendations to improve the independence of the cost estimating function and revise Agency policy to require an independent cost
estimate at major milestone reviews. NASA agreed to make the policy changes. Management stated that the Agency conducts cost
assessments annually as part of the IAR process. NASA policy also requires that an independent cost estimate be performed during a
Non-Advocate Review.[53] In response to our recommendation, management agreed to require another independent cost estimate after the
Critical Design Review.[54] However, NASA has not implemented our recommendations to enhance the independence of the cost estimating
function.

[1] NASA was appropriated $5.46 billion in FY 2001 for Human Space Flight.

[2] This overrun accounts for planned program content in accordance with the most current ISS assembly sequence. The FY 2001 President’s Budget provided a
funding profile for FY 2002 through 2006 totaling $7.2 billion, and the ISS assessment concluded $11.2 billion was required, a difference of about $4 billion. Primary
areas of cost growth included mission operations and production and integration of hardware and software, the Habitation and Propulsion Modules, and avionics.

[3] On February 28, 2001, the President signed “A Blueprint for New Beginnings.” The Blueprint states: “To address this unprecedented cost growth and ensure the
program remains within the five-year budget plan, the President’s 2002 Budget will include important decisions regarding the funding and management of the (ISS)
program while preserving the highest priority goals: permanent human presence in space, world class research in space, and accommodation of international partner
elements. Thus, the U.S. core will be complete once the Space Station is ready to accept major international hardware elements.”

[4] The National Aeronautics and Space Administration Authorization Act of 2000 establishes a funding limitation on the ISS Program of $25 billion. The statutory cost cap is not associated with a
specific set of requirements or configuration of the ISS. The Act provides that, with each annual budget request and as otherwise deemed necessary, the Administrator will provide a written notice and
analysis of funding required in excess of the limitation. The notice is required prior to obligating any funding in excess of the limitation, and the NASA Office of Inspector General is required to
review the notice and supporting analysis and report to the Congress. The Act limits this contingency funding in excess of the limitation to $5 billion and to certain listed contingencies. The Act
also requires that NASA submit an accounting for the funding limitations as part of the annual budget request and arrange with the General Accounting Office (GAO) to perform a verification of the
accounting.

[5] In March 2001, NASA canceled the Propulsion Module, which was intended to provide a backup U.S. propulsion capability to the Russian Service Module.

[6] The Act states substantial completion of the ISS occurs when the development costs comprise 5 percent or less of the total ISS costs for the fiscal year. Based on
this provision, NASA estimates that substantial completion will occur in FY 2005 and that the cumulative ISS budget will exceed $25 billion in FY 2006, when the
funding limitation is no longer applicable.

[7] Contingencies identified in the Act include (a) the lack of performance or the termination of participation of any of the international countries that are party to the
Intergovernmental Agreement, (b) the loss or failure of a U.S.-provided element during launch or on-orbit, (c) on-orbit assembly problems, (d) new technologies or
training to improve safety on the ISS, and (e) the need to launch a Space Shuttle to ensure the safety of the crew or to maintain the integrity of the station.

[8] Boeing initially proposed a contract price of $6.6 billion but reached agreement with NASA on August 31, 1994, at a “not-to-exceed” price of $6.2 billion. On
January 13, 1995, NASA and Boeing agreed to the $5.638 billion award. At the time of the contract award, NASA and Boeing entered into a Memorandum of
Understanding that Boeing officials stated reflected an understanding that the $600 million difference between the prior agreement and negotiated price would be added
to the contract target cost, if needed. We found that Boeing expected the $600 million reduction in contract price negotiated in January 1995 to be added to the contract
target cost, if needed. NASA disagreed with this interpretation. In February 2000, we recommended the agreement be rescinded, and NASA agreed.

[9] The Habitation Module was intended to provide crew quarters including a galley, wardroom and eating area, exercise equipment, and crew cleansing compartment.

[10] The ICM was intended to provide a low-cost capability to ensure ISS guidance and navigation control, attitude control, and reboost for at least a year to bridge a
potential gap between the end of the useful service life of the Russian-built Control Module and the deployment of the Russian Service Module. After the Service
Module became operational, the ICM would have been a short-term solution to delays or shortages in Russian Progress resupply vehicles. The Naval Research
Laboratory was performing the work on the ICM.

[11] The Service Module, which Russia successfully delivered to the ISS in July 2000, provides attitude and reboost control, communications, electrical power generation,
life support supplies and storage, crew systems, and mechanism control.

[12]The Price Negotiation Memorandum for this modification stated: “In January 1999, Boeing notified the Government that the estimated Variance at Completion
(VAC) for contract NAS 15-10000 was $986 million. This additional VAC means that the contractor will now earn the minimum incentive fee (2 percent) specified in
the contract. Therefore, there is no longer either a positive or negative incentive to control costs on existing work. Additionally, the earnings potential of any new work is
penalized by past performance issues. It is important to re-incentivize Boeing’s cost performance.” The prior award fee provisions did not emphasize cost management
because the incentive fee provisions were focused exclusively on cost. Therefore, the previous incentive fee provisions were converted to a fixed fee at the minimum 2
percent, and award fee pools were established for cost and technical management on new work added to the contract. The objective was to incentivize cost management
by enabling the contractor to earn a reasonable return on the new work and not be further penalized by previous poor cost performance.

[13] The Price Negotiation Memorandum referred to the global settlement in the following manner: “The global settlement was negotiated as an integral part of the
overall contract restructure which included moving to a new fee structure and reorganizing the Statement of Work to allow a new management approach for the
Integration and Operations effort. No attempt was made to establish negotiation positions for, or to reach cost or fee agreement on individual issues. . . . The required
result of the global settlement was to reach bottom line agreement on the estimated cost and fixed fee amount to be added to contract value to settle RFEA (Request for
Equitable Adjustment) issues.”

[14] Unearned award fee is also subject to reconsideration that could result in the fee being paid.

[15] In its Master Buy Plan for the ISS as of March 2001, NASA estimates that about $1 billion in additional contract value will be added to the ISS contract through
completion in December 2003 for sustaining engineering, post-production support, and integration and operation activities.

[16] NASA estimates the cost overrun to be $1.14 billion, $154 million more than Boeing’s estimate.

[17] The ISS prime contract with Boeing has performance-based and level-of-effort portions. The performance-based portion includes: DDT&E, the development,
verification, and delivery of hardware and software for the U.S. on-orbit segment of the ISS; the integration and operation of U.S. and other ISS elements; acquisition
and deployment of spare hardware components for ISS maintenance and repair; and development and delivery of hardware and software including ground support
equipment. The level-of-effort portion includes: sustaining engineering, multi-element integrated testing, technical definition, and post-production support.

[18] Earned-value management is a tool that assists in the effective execution, management, and control of contract performance through integrated evaluation of cost,
schedule, and technical performance against a performance measurement baseline. The baseline is an allocation of the contract target cost to specific contract tasks.

[19] The OIG issued Report IG-00-007, “Performance Management of the International Space Station Contract,” on February 16, 2000.

[20] Boeing submitted an “Over –Target Baseline” proposal for a $600 million overrun on February 19, 1999, and a “Delta” proposal for an additional $183 million
on April 15, 1999. Boeing stated in the “Delta” proposal that another proposal would be submitted by June 28, 1999, for additional cost growth. Boeing submitted this
proposal for the remaining $203 million in cost overrun on September 22, 1999, resulting in the $986 million projected overrun.

[21] NASA had previously reduced award fee payments to Boeing due to deficiencies in its cost and schedule performance reporting to the Government.

[22] The work breakdown structure displays and defines the product, or products, to be developed and/or produced. It relates the elements of the work to be
accomplished to each other and to the end product.

[23] Management reserve is an amount of the contract target cost set aside for management control purposes that is not budgeted to accomplish specific contract tasks.
“Negative” management reserves represent cost overruns that have been identified but not allocated to specific contract work. As a result, the cost overrun for that work
is understated.

[24] Periodic independent assessments performed by an entity independent of the Program Office would help ensure that the Government has a reliable basis for (1) challenging unrealistically low
contractor cost estimates, (2) adjusting fee payments based on cost performance, and (3) budgeting sufficient funds to complete the contract. See the discussion starting on page 9 concerning
independent assessments of costs to complete the contract.

[25] Award fee is an element of a contract that provides for a fee consisting of (1) a base amount fixed at inception of the contract and (2) an award amount that the
contractor may earn in whole or in part during performance and that is sufficient to provide motivation for excellence in such areas as quality, timeliness, technical
ingenuity, and cost-effective management.

[26] The Defense Contract Management Command was the predecessor to the present Defense Contract Management Agency (DCMA). NASA generally delegates
numerous contract administration responsibilities to DCMA related to oversight of NASA contracts including surveillance of EVM systems and data.

[27] Although NASA concurred with the recommendation to estimate the cost to complete the ISS contract as part of independent reviews, the Agency has not performed
a review since 1999.

[28] NASA has established an Independent Program Assessment Office that is intended to conduct reviews of programs and projects in support of the NASA program
and project management process. The Assessment Office conducts IARs of major programs and projects, the results of which are presented to the NASA Program
Management Council, which is chaired by the NASA Associate Deputy Administrator. The Council is NASA’s highest level forum for addressing planning,
implementation, and management of NASA programs. (See Appendix D for a discussion of prior OIG reviews on the NASA independent assessment process.)

[29] The GAO issued Report NSIAD-98-147, “International Space Station: U.S. Life-Cycle Funding Requirements,” on May 22, 1998. GAO reported that life-cycle
cost is the sum total of direct, indirect, recurring, and nonrecurring cost of a system over its entire life through disposal. GAO concluded the life-cycle cost to develop,
assemble, and operate the ISS to be $96 billion, a $2 billion increase over a similar estimate GAO made in June 1995. NASA did not agree with several key aspects of
the GAO estimates.

[30] In September 1997, the NASA Administrator asked the Chairman of the NASA Advisory Council to establish a Cost Assessment and Validation Task Force,
reporting through the Advisory Committee on the International Space Station (ACISS) to the NASA Advisory Council, for an independent review and assessment of
cost, schedule, and partnership performance on the ISS Program. In April 1998, the Task Force reported its estimates that the overrun on the ISS prime contract could be
$1 billion based on work included in the contract at that time. In addition, the Task Force estimated funding requirements of $24.6 billion through FY 2003 compared to
$20.3 billion in the FY 1999 budget request. This report was a one-time review of ISS costs but did not include a full life-cycle cost estimate and was not a part of an
established independent cost estimating process within NASA.

[31] NASA has advised us that an IAR is now scheduled for July 2001, but the scope has not been defined. The NASA OIG is presently reviewing NASA’s IAR
implementation.

[32] The OIG issued Report JS-96-002, “Space Station Prime Contractor Performance Management,” on June 11, 1996.

[33] The OIG issued Report IG-98-002, “Space Station Performance Measurement Cost Data,” on November 13, 1997.

[34] The OIG issued Report IG-99-007, “Space Station Corrective Action Plans,” on January 28, 1999.

[35] Boeing Huntington Beach is one of the prime contractor’s sites that supports the ISS Program.

[36] Boeing uses the Variance Analysis Reports to identify problems causing negative cost and schedule variances, record corrective action plans, and report progress on
implementing corrective action to NASA.

[37] The OIG issued Report IG-01-006, “Impact of the Boeing Company’s Restructuring on NASA,” on November 27, 2000.

[38] The Federal Acquisition Regulation (FAR) and the Department of Defense Federal Acquisition Regulation Supplement permit contractors to enter into advance
agreements with the Government for the treatment of special or unusual costs.

[39] The amount related to the ISS prime contract could be $30.6 million.

[40] The Defense Federal Acquisition Regulation Supplement (DFARS) is the implementing guidance for DoD concerning contractor restructuring as a result of
legislation provided under Section 8115 of the DoD Appropriations Act of 1997 (Public Law 104-208). This Act is implemented through the DFARS, which states: “. . .
(DoD) must certify that projections of future restructuring savings resulting to DoD from the business combination are based on audited cost data and the audited
projected savings for the DoD will either exceed the costs allowed by a factor of at least 2-to-1 or that the business combination results in the preservation of a critical
capability that might otherwise be lost to DoD.”

[41] NASA agreed to pursue this amount, but the actual settlement has not yet occurred.

[42] We issued Report G-99-01A, “Assessment of the Portable Computer System and the Data Display Process,” on August 11, 2000.

[43] The caution and warning system is designed to warn the crew of conditions that may adversely affect ISS operations. The system consists of hardware and
electronics that provide the crew with both visual and aural cues when a system exceeds predefined operating limits.

[44] Rapid prototyping allows project maturation through fault detection, analysis, and correction during system development rather than after system development.

[45] The OIG issued Report IG-00-005, “X-38/Crew Return Vehicle Project Management,” on February 9, 2000.

[46] The unacceptable risks related to the use of a volatile bipropellant fuel; a complex system of lines, valves, and tanks for transferring the fuel; a permanent weight
increase of about 1,500 pounds to the Space Shuttle Orbiters; and significant cost growth.

[47] The OIG issued Report G-98-012, “Review of International Space Station Phase I Lessons Learned Activity,” on December 23, 1998.

[48] The OIG issued Report IG-99-009, “Space Station Contingency Planning for International Partners,” on March 9, 1999.

[49] The OIG issued a letter (G?00?015) to Hon. James F. Sensenbrenner regarding the Crew Medical Transport on October 6, 2000.

[50] The OIG issued a report on “Assessment of the Relocation of NASA’s Independent Program Evaluation & Assessment Activities to LaRC [Langley Research
Center],” on July 8, 1996.

[51] An independent cost estimate is a cost projection by analysts who are not part of the program/project under review.

[52] The SMOs, which are located at some NASA Centers, provide (1) support and independent evaluation of projects and programs for compliance with and
implementation of NASA guidelines; (2) leadership, consultation services, and technical expertise on system engineering process; and (3) support in forecasting costs for
advanced program/project planning initiatives.

[53] A Non-Advocate Review is an analysis of a proposed program or project by a nonadvocate team comprised of management and technical and budget personnel who
will not participate in the implementation of the proposed program or project. The review provides Agency management with independent assessments of new program
and project starts.

[54] NASA performs a Critical Design Review to determine that the detailed design of a program or project satisfies the performance and engineering requirements of
the development specification.