Summary: NASA Office of Inspector General: Audit of Restructuring of the International Space Station Contract

November 8, 2001

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Audit of Restructuring of the International Space Station
Contract

Report Number IG-02-002

The NASA Office of Inspector General has completed an audit of the Restructuring of the
International Space Station (ISS) Contract. We found that NASA did not sufficiently justify the
restructuring of the ISS contract. Specifically, Johnson Space Center (Johnson) settled The Boeing
Company’s (Boeing’s) requests for equitable adjustments

¹
(RFEA’s) and other potential claims
without performing a sufficient analysis to show that Boeing’s proposed costs were fair and
reasonable. Also, Johnson did not adequately support the justification it prepared for waiving the
Federal Acquisition Regulation (FAR) requirement for the contractor to submit certified cost or
pricing data.
²
As a result, NASA has little assurance that Boeing did not overstate the value of
RFEA’s and potential claims totaling $404 million. In addition, the NASA Office of Procurement
did not exercise adequate oversight of the restructuring, even though this was one of the most
significant noncompetitive awards in fiscal year (FY) 2000. As a result, the Office of Procurement
did not know that Johnson had not performed cost or price analyses of the RFEA’s.

Also, Johnson inappropriately modified the fee structure of the ISS contract by eliminating the
Agency’s option to recoup provisional fees paid to Boeing if the contractor’s technical and cost
performance is ultimately unsatisfactory. As a result, NASA could pay Boeing as much as
$69.4 million in fees³

Background

In December 1999, Johnson and Boeing restructured the ISS contract. The purpose of this
restructuring was to definitize a global settlement on 38 RFEA issues and other potential claims
valued at more than $404 million, change the contract type, and address other contract actions.
Johnson claimed these changes would facilitate and provide an incentive for efficient, high quality
performance for the remaining work under the contract.
This restructuring also created two new award fee pools and a base fee pool relative to on-ground
contract changes definitized or authorized after October 1, 1999. The fee pools relate to technical
performance, cost performance, and base fee. Unlike the on-ground award fee pool for the original
contract, the new pools are not subject to repayment provisions.
⁴

Recommendations

We recommended that Johnson perform an adequate price analysis and properly support
justifications for waivers on future modifications of the ISS contract and that the Office of
Procurement perform adequate oversight of major procurement actions for the ISS contract. These
actions would ensure that NASA has a sound basis for negotiating as much as $330 million of future
claims by Boeing and that NASA follows procurement regulations for major procurement actions.
We also recommended that Johnson ensure that the fee pools for the ISS contract are measurable
and consistent with Agency criteria or obtain a waiver for not doing so. This action would ensure
that Johnson does not violate procurement regulations by paying Boeing as much as $69.4 million in
fees for cost performance that cannot be measured and for unsatisfactory technical performance on
orbit.

Management’s Response

Although we provided Johnson with a working copy of the draft report in May, Johnson decided
not to discuss it with us. Also, Johnson did not respond to our offer to discuss the draft report after
we issued it in August. Johnson last met with us to discuss our findings in March. Nonetheless, we
believe we have fairly presented Johnson’s positions in this report and have modified the report
where appropriate.
Johnson did not concur with the recommendations. Johnson stated it followed applicable
regulations and policies during the restructuring activity. Johnson also stated that the revisions to the fee structure did not give up existing rights with regard to on-orbit performance.
The only thing the restructuring did was limit the maximum possible fee loss, due to on-orbit
performance, to $202 million.

In contrast to Johnson, the Office of Procurement concurred with the recommendation. While
acknowledging that more rigorous adherence to the established Master Buy Plan procedures would
have been appropriate in managing changes to the ISS program, the Office of Procurement
maintained that sufficient insight into those changes was afforded by the ongoing communications
between the Center ISS procurement personnel and procurement analysts responsible for the ISS
Program within the Office of Procurement. Therefore, the Office of Procurement was confident that
Johnson performed sufficient analyses, albeit not traditional cost or price analyses, of the RFEA’s
and related fee adjustment to assure an equitable settlement between Boeing and NASA.

OIG Evaluation of Management’s Response

Johnson’s comments are not responsive to either the findings or the recommendations. While the
restructuring may have facilitated the Program’s ability to focus on the challenging work ahead,
Johnson could not provide analytical support for its statement that the global settlement avoided
significant costs associated with individual proposal settlements. Consequently, there is no
assurance NASA received a fair and reasonable price for the RFEA’s or saved costs on the global
settlement.

Johnson wanted a fee structure that would positively motivate future cost performance and offer an
opportunity for the contractor to earn a fair return for high quality, cost-efficient performance for
future work on this challenging contract. Unfortunately, the new fee structure eliminated all negative
incentive after the restructuring by not requiring provisional fees to be repaid to NASA for hardware
failures on orbit. Such an arrangement does not protect the Government’s interests. Also, Johnson
claims that the new structure allows for Boeing to potentially lose more fee for poor performance.
However, that outcome is improbable because unlike the incentive fee evaluations, which were
objective and directly affected by overruns, the award fee evaluations are subjective.
Because Johnson has not changed its position since we discussed the findings with management in
March, we believe that requesting additional comments will not be productive. Therefore, we will
forward the recommendations to the NASA Audit Followup Official for final resolution.

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Restructuring of the International Space Station Contract

November 8, 2001

TO: H/Associate Administrator for Procurement

M/Associate Administrator for Space Flight

AA/Acting Director, Lyndon B. Johnson Space Center

FROM: W/Assistant Inspector General for Audits

SUBJECT: Final Report on Audit of Restructuring of the International Space
Station Contract

Assignment Number A-00-055-00

Report Number IG-02-002

The subject final report is provided for your use and comment. Please refer to the Executive
Summary for the overall audit results. Our evaluation of your response has been incorporated into
the body of the report. In response to management’s comments, we revised draft recommendation
2, deleted draft recommendation 3, and renumbered draft recommendation 4 as recommendation 3.
In addition to revising the recommendations, we modified appropriate sections of the report as
necessary to be consistent with the recommendations. We request management comments by
January 7, 2002, on the revised recommendation. Please notify us when actions have been
completed on the recommendation, including the extent of testing performed to ensure corrective
actions are effective. The final report distribution is in Appendix I.

With respect to management’s nonconcurrence with recommendations 1 and 3, we are forwarding
the recommendations to the NASA Audit Followup Official for final resolution. Recommendations
1 and 3 are unresolved and will remain open for reporting purposes until final resolution.

If you have questions concerning the report, please contact Mr. Dennis E. Coldren, Program
Director, Space Flight Audits, at (281) 483-4773, or Mrs. Loretta Garza, Auditor-in-Charge, at
(281) 483-0483.

[original signed by]

Alan J. Lamoreaux

Enclosure

cc:

AI/Associate Deputy Administrator;

AB/Associate Deputy Administrator for Institutions;

B/Acting Chief Financial Officer;

B/Comptroller;

BF/Director, Financial Management Division;

G/General Counsel;

JM/Director, Management Assessment Division

bcc:

AIGA Chron;

W/L. Ball;

K. Carson;

D. Coldren;

L. Garza;

B. Skalsky;

D. Fraiser;

N. Cipolla;

P. Shawcross;

HK/Audit Liaison Representative;

MX/Audit Liaison Representative;

JSC-BD5/Audit Liaison Representative

Background. In January 1995, Johnson signed a $5.638 billion contract with Boeing for the ISS.
⁵
The original contract was a cost-plus-award fee/incentive fee/fixed fee contract that included design,
development, manufacture, integration, test, verification, and delivery to NASA of the U.S. On-Orbit
Segment,
⁶
including ground support equipment and support for ground and orbital operations.
(Appendix B contains overall contract details.)

During 1999, Boeing estimated the ISS contract overrun at $986 million.
⁷
Because of the large
overrun, Boeing could not feasibly earn more than the minimum 2 percent incentive fee for the
remainder of the contract (December 31, 2003). (Appendix C contains details on the fee structure
of the contract.) However, Johnson wanted to keep the contractor motivated to produce quality
work for the ISS Program. Also, the contract statement of work required revisions to reflect a shift
in Program focus from development to operations. In addition, there were other changes,
⁸
ongoing
negotiations, and likely target cost increases. Therefore, in December 1999, Johnson and Boeing
restructured the ISS contract to reflect that the parties reached a global settlement of Boeing’s
RFEA’s, settled the remaining overrun amount, reorganized the statement of work, and changed the
contract type to cost-plus-award fee/fixed fee.

Objectives. The overall objective was to evaluate NASA’s December 1999 restructuring of the
ISS contract. Specifically, we determined whether the global settlement of the contractor’s RFEA’s
was appropriately justified and executed and whether the fee structure was appropriate.
Appendix A contains a detailed description of our objectives, scope, and methodology.

Results of Audit. NASA did not sufficiently justify the restructuring of the ISS contract.
Specifically, regarding the global settlement of the RFEA’s, Johnson did not perform a sufficient
analysis to show that Boeing’s proposed costs were fair and reasonable and did not adequately
support the justification Johnson prepared for waiving the FAR requirement for the contractor to
submit certified cost or pricing data
⁹
(Finding A). Furthermore, the Office of Procurement did not
exercise adequate oversight of the restructuring, even though this was one of the most significant
noncompetitive awards in FY 2000 (Finding B). As a result, NASA has little assurance that the
contractor did not overstate the value of potential claims totaling $404 million.

Also, Johnson inappropriately modified the fee structure of the ISS contract by eliminating the
Agency’s option to recoup provisional fees paid to Boeing if the contractor’s technical and cost
performance is ultimately unsatisfactory. As a result, NASA could pay Boeing as much as
$69.4 million in fees
¹⁰
even if the Agency’s final evaluation of the contractor’s on-orbit performance
is unsatisfactory (Finding C).

Other Matters of Interest. During our review of the contract fee structure, we found errors in
the on-orbit award fee calculations for Milestone Flight 2R.
¹¹
The ISS Contracting Officer
acknowledged that ISS Program Office personnel performed the calculations incorrectly and took
appropriate action to correct the error by issuing a contract modification. These errors could have
resulted in an under-refund by Boeing of about $1.4 million to NASA. The correction of the errors
will preclude a future overpayment of about $1.4 million to Boeing (see Appendix D).

Recommendations. Johnson should perform an adequate price analysis, properly support
justifications for waivers on future modifications of the ISS contract, and ensure that the fee pools
for the ISS contract are measurable and consistent with Agency criteria. The Office of Procurement
should perform adequate oversight of major procurement actions for the ISS contract.

Management’s Response. Johnson nonconcurred with the recommendations to perform a price
or cost analysis with proper justifications on future ISS contract modifications and to ensure that fee
pools are measurable and consistent with Agency criteria. The Office of Procurement concurred
with the draft recommendation to establish procedures to ensure adequate oversight but stated that
its insight and Johnson’s analysis were sufficient. Management also provided general comments on
our findings. The complete text of management’s response is in Appendix G.

Evaluation of Management’s Response

We consider Johnson’s comments not responsive and maintain our position on the related
recommendations. Because we believe that requesting additional management comments will not be
productive,
¹²
we will forward the recommendations to the NASA Audit Followup Official for final
resolution. Based on the Office of Procurement’s comments, we revised the recommendation
regarding adequate oversight to focus on performing adequate oversight rather than on establishing
additional procedures. Therefore, we request full management comments on the revised
recommendation. Our additional comments in response to management’s position on the findings
are in Appendix H.

Footnotes

1. A request for equitable adjustment occurs when the Government’s conduct results in a change to the contract as alleged by
   the contractor, causing an increase or decrease in the contractor’s cost of, or the time required for, performance of any part of
   the work under the contract.

2. FAR 15.401 defines cost or pricing data as all facts that, as of the date of price agreement, prudent buyers and sellers would
   reasonably expect to affect price negotiations significantly. Cost or pricing data are factual, not judgmental, and are
   verifiable.

3. The fee pool was $69.4 million as of October 19, 2001, but the pool will increase as NASA definitizes work on the
   contract.

4. The original contract fee provisions included a negative performance incentive in the on-orbit performance evaluation
   whereby a poor on-orbit performance could cause a repayment of any on-ground award fee provisionally earned by Boeing.

5. NAS15-10000 is the contract number for the ISS prime contract with Boeing. The contract’s value was $9.1 billion at the
   time of the restructuring modification, which was signed on December 21, 1999. As of October 19, 2001, the contract value
   was more than $9.7 billion.

6. The U.S. On-Orbit Segment of the ISS includes U.S. elements that have been deployed and that will be deployed.

7. As of March 2001, Boeing was still reporting an overrun of $986 million.

8. The other changes included, for example, modified facilities requirements, failure of Node 1 struts to meet pressure test
   requirements, and retention of critical skills for sustaining engineering.

9. FAR 15.401 defines cost or pricing data as all facts that, as of the date of price agreement, prudent buyers and sellers would
   reasonably expect to affect price negotiations significantly. Cost or pricing data are factual, not judgmental, and are
   verifiable.

10. The fee pool was $69.4 million as of October 19, 2001, but the pool will increase as NASA definitizes work on the
    contract.

11. ISS Milestone Flight 2R, October 31, 2000, was the flight that carried the first long-term habitation crew to the ISS. The
    launch vehicle was a Russian Soyuz rocket.

12. Although we provided Johnson with a working copy of the draft report in May 2001, Johnson decided not to discuss it
    with us. Also, Johnson did not respond to our offer to discuss the draft report after we issued it in August 2001. Johnson
    last met with us to discuss our findings in March 2001.