ES, IG-00-007, Review of Performance Management of the International Space Station Contract

REVIEW OF PERFORMANCE MANAGEMENT OF THE
INTERNATIONAL SPACE STATION CONTRACT
IG-00-007

Executive Summary

Background

In late March 1999, The Boeing Company (Boeing) announced to senior NASA management that the total of actual and projected cost overruns on the International Space Station (ISS) prime contract⁽⁵⁾ had grown by $203 million, from $783 million to $986 million. This was the third major increase in 2 years in reported cost overruns for a total increase of $708 million in actual and projected cost overruns. Boeing attributed part of the cost overrun to unexpected increases in indirect cost rates⁽⁶⁾ due to recent reorganization activities, including the merger with McDonnell Douglas Corporation (McDonnell Douglas) and the acquisition of Rockwell International Corporation (Rockwell). The Boeing announcement came shortly after the March 1999 congressional hearings on the NASA fiscal year (FY) 2000 budget where the NASA Administrator addressed the ISS Program, specifically the magnitude of cost overruns.⁽⁷⁾ In response to Boeing's announcement, senior NASA management requested that the NASA Office of Inspector General review performance management of the ISS prime contract and assess the indirect cost rate increases Boeing had proposed for the ISS and related NASA contracts.

Objectives

The overall objective of the review was to evaluate performance management of the ISS prime contract with Boeing. Appendix A contains a detailed description of our objectives, scope, and methodology.

Results of Review

Performance management of the ISS prime contract needs improvement. Specifically, Boeing reported to NASA management unrealistically low estimates of projected cost overruns on the ISS prime contract from October 1998 through February 1999 and presented the cost data to indicate that no additional cost overrun would occur. Boeing did not revise its reported $783 million variance at completion (cost overrun)⁽⁸⁾ until late March 1999. The ISS Program Office (Program Office) had a fundamentally sound process for assessing contractor performance, identifying risk, and reporting its assessment to senior NASA management. Further, both the Program Office and Boeing had informed senior NASA management that further cost overruns were likely. However, although the Program Office was aware and had evidence of cost overruns and schedule slippages, it did not effectively challenge the contractor's estimate or sufficiently emphasize estimates of the cost overrun at monthly Station Development and Operations Meetings. As a result, corrective action was not taken and Boeing received incentive fees totaling $16 million that it had not earned and benefited financially from those fees (Finding A).
Neither Boeing nor its Space and Communications Group (S&C Group) promptly notified NASA about the potential cost increases due to Boeing's reorganization. Of the S&C Group's estimated increased costs of about $153 million for calendar year (CY) 1999, NASA will be charged an estimated $82 million, including $21 million for the ISS Program. Also, the ISS Program will be additionally charged an estimated $14 million through contract completion. As a result, NASA may be paying higher costs than necessary before the Government completes its review and negotiation of the proposed pricing and billing rates (Finding B).

Recommendations

The Program Office should strengthen policies and procedures to ensure that Program cost estimates are realistic. The performance management of the contract can be improved through discussion of Boeing's cost performance and, in particular, cost overruns, at regularly scheduled meetings with senior NASA management. For more realistic estimates, Boeing should identify known risks included in its estimate at completion and known risks outside its estimate at completion and ensure that risk mitigation plans are in place. NASA's budget requirements should be reassessed based on new estimates provided by the Defense Contract Management Command (DCMC) and the Monte Carlo analysis. Boeing's cost overrun proposals should be expeditiously definitized and an integrated baseline review should be conducted after definitization of the ISS contract modification. NASA's interests can further be protected by terminating the Memorandum of Agreement for Program reserve funds; identifying alternatives to Boeing reporting a negative management reserve⁽⁹⁾ status; and considering a higher weighting for Cost Management in future award fee evaluations on ISS-related contracts (Finding A).
NASA needs to monitor Boeing's reorganization cost and savings performance and ensure that Boeing applies the savings requirements to the ISS Program. To protect NASA from paying higher costs than necessary, Boeing should submit estimated net cost increases of reorganization activity. NASA should monitor Boeing's cost and savings performance on the external restructuring activities and direct Boeing to ensure that the cost and savings requirements of the Defense Federal Acquisition Regulation Supplement (DFARS) are equally applied to the external restructuring costs and savings attributable to the ISS Program. As an additional precaution to protecting NASA, significant issues should be coordinated with DCMC to ensure that NASA is advised of contract increases and that ISS Program interests are adequately protected (Finding B).
Based on a meeting with management after issuance of the draft report, we revised two recommendations. A detailed listing of recommendations for corrective action can be found in Appendix B.

Management's Response

Management concurred or partially concurred with all the recommendations. Management agreed to discuss Boeing's cost performance at regularly scheduled meetings. In addition, the ISS Business Manager now prepares a monthly written report to senior NASA management that includes overrun status and a range of variance at completion estimates. Management has requested Boeing to identify risks that are both included and outside its estimate at completion. The ISS Program considers several independent estimates including DCMC's in arriving at its budget estimate for cost growth. Management definitized the cost overrun proposals through a contract modification and has met the intent of an integrated baseline review with a functional equivalent, quarterly estimate at completion reviews. Management has agreed to protect its interests by terminating the Memorandum of Agreement in February 2000, identifying options associated with Boeing not reporting a negative management reserve, and improving the award fee structure to put more emphasis on cost performance (Finding A).
Management also agreed to work more closely with the DCMC Defense Corporate Executive to monitor Boeing's performance on reorganization activities, external restructuring activities, and other significant issues that could affect the Program on an ongoing basis (Finding B).
A copy of management's response is in Appendix M.

Evaluation of Management's Response

The actions taken or planned by management are responsive to the recommendations. However, six recommendations will remain undispositioned and open until agreed-to corrections are completed.

FOOTNOTES

5. NAS15-10000 is the contract number for the ISS prime contract with Boeing.

6. An example of an indirect rate cost would be the rent on a building where work is performed on more than one contract. A Glossary at the end of the report defines this and other terms used in the report.

7. On March 18, 1999, the NASA Administrator and the Senate Subcommittee on VA, HUD, and Independent Agencies, Senate Committee on Appropriations discussed the FY 2000 NASA budget. On March 23, 1999, the NASA Administrator discussed the FY 2000 NASA budget with the House Subcommittee on VA, HUD, and Independent Agencies, House Committee on Appropriations.

8. A variance at completion could mean a cost overrun or underrun. It is the mathematical difference between the budget at completion and the estimate at completion. In this report, a variance at completion implies a cost overrun.

9. Negative management reserve occurs when a contractor's estimate at completion is higher than its budget for management reserve. This condition results in a negative projected cost overrun at contract completion.

View Complete Report.

Background	In late March 1999, The Boeing Company (Boeing) announced to senior NASA management that the total of actual and projected cost overruns on the International Space Station (ISS) prime contract⁽⁵⁾ had grown by $203 million, from $783 million to $986 million. This was the third major increase in 2 years in reported cost overruns for a total increase of $708 million in actual and projected cost overruns. Boeing attributed part of the cost overrun to unexpected increases in indirect cost rates⁽⁶⁾ due to recent reorganization activities, including the merger with McDonnell Douglas Corporation (McDonnell Douglas) and the acquisition of Rockwell International Corporation (Rockwell). The Boeing announcement came shortly after the March 1999 congressional hearings on the NASA fiscal year (FY) 2000 budget where the NASA Administrator addressed the ISS Program, specifically the magnitude of cost overruns.⁽⁷⁾ In response to Boeing's announcement, senior NASA management requested that the NASA Office of Inspector General review performance management of the ISS prime contract and assess the indirect cost rate increases Boeing had proposed for the ISS and related NASA contracts.
Objectives	The overall objective of the review was to evaluate performance management of the ISS prime contract with Boeing. Appendix A contains a detailed description of our objectives, scope, and methodology.
Results of Review	Performance management of the ISS prime contract needs improvement. Specifically, Boeing reported to NASA management unrealistically low estimates of projected cost overruns on the ISS prime contract from October 1998 through February 1999 and presented the cost data to indicate that no additional cost overrun would occur. Boeing did not revise its reported $783 million variance at completion (cost overrun)⁽⁸⁾ until late March 1999. The ISS Program Office (Program Office) had a fundamentally sound process for assessing contractor performance, identifying risk, and reporting its assessment to senior NASA management. Further, both the Program Office and Boeing had informed senior NASA management that further cost overruns were likely. However, although the Program Office was aware and had evidence of cost overruns and schedule slippages, it did not effectively challenge the contractor's estimate or sufficiently emphasize estimates of the cost overrun at monthly Station Development and Operations Meetings. As a result, corrective action was not taken and Boeing received incentive fees totaling $16 million that it had not earned and benefited financially from those fees (Finding A). Neither Boeing nor its Space and Communications Group (S&C Group) promptly notified NASA about the potential cost increases due to Boeing's reorganization. Of the S&C Group's estimated increased costs of about $153 million for calendar year (CY) 1999, NASA will be charged an estimated $82 million, including $21 million for the ISS Program. Also, the ISS Program will be additionally charged an estimated $14 million through contract completion. As a result, NASA may be paying higher costs than necessary before the Government completes its review and negotiation of the proposed pricing and billing rates (Finding B).
Recommendations	The Program Office should strengthen policies and procedures to ensure that Program cost estimates are realistic. The performance management of the contract can be improved through discussion of Boeing's cost performance and, in particular, cost overruns, at regularly scheduled meetings with senior NASA management. For more realistic estimates, Boeing should identify known risks included in its estimate at completion and known risks outside its estimate at completion and ensure that risk mitigation plans are in place. NASA's budget requirements should be reassessed based on new estimates provided by the Defense Contract Management Command (DCMC) and the Monte Carlo analysis. Boeing's cost overrun proposals should be expeditiously definitized and an integrated baseline review should be conducted after definitization of the ISS contract modification. NASA's interests can further be protected by terminating the Memorandum of Agreement for Program reserve funds; identifying alternatives to Boeing reporting a negative management reserve⁽⁹⁾ status; and considering a higher weighting for Cost Management in future award fee evaluations on ISS-related contracts (Finding A). NASA needs to monitor Boeing's reorganization cost and savings performance and ensure that Boeing applies the savings requirements to the ISS Program. To protect NASA from paying higher costs than necessary, Boeing should submit estimated net cost increases of reorganization activity. NASA should monitor Boeing's cost and savings performance on the external restructuring activities and direct Boeing to ensure that the cost and savings requirements of the Defense Federal Acquisition Regulation Supplement (DFARS) are equally applied to the external restructuring costs and savings attributable to the ISS Program. As an additional precaution to protecting NASA, significant issues should be coordinated with DCMC to ensure that NASA is advised of contract increases and that ISS Program interests are adequately protected (Finding B). Based on a meeting with management after issuance of the draft report, we revised two recommendations. A detailed listing of recommendations for corrective action can be found in Appendix B.
Management's Response	Management concurred or partially concurred with all the recommendations. Management agreed to discuss Boeing's cost performance at regularly scheduled meetings. In addition, the ISS Business Manager now prepares a monthly written report to senior NASA management that includes overrun status and a range of variance at completion estimates. Management has requested Boeing to identify risks that are both included and outside its estimate at completion. The ISS Program considers several independent estimates including DCMC's in arriving at its budget estimate for cost growth. Management definitized the cost overrun proposals through a contract modification and has met the intent of an integrated baseline review with a functional equivalent, quarterly estimate at completion reviews. Management has agreed to protect its interests by terminating the Memorandum of Agreement in February 2000, identifying options associated with Boeing not reporting a negative management reserve, and improving the award fee structure to put more emphasis on cost performance (Finding A). Management also agreed to work more closely with the DCMC Defense Corporate Executive to monitor Boeing's performance on reorganization activities, external restructuring activities, and other significant issues that could affect the Program on an ongoing basis (Finding B). A copy of management's response is in Appendix M.
Evaluation of Management's Response	The actions taken or planned by management are responsive to the recommendations. However, six recommendations will remain undispositioned and open until agreed-to corrections are completed.