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entitled 'Business Modernization: Disciplined Processes Needed to 
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Report to the Committee on Commerce, Science, and Transportation, 
U.S. Senate, and the Committee on Science, House of Representatives:

United States General Accounting Office:

GAO:

November 2003:

Business Modernization:

Disciplined Processes Needed to Better Manage NASA's Integrated 
Financial Management Program:

Business Modernization:

GAO-04-118:

GAO Highlights:

Highlights of GAO-04-118, a report to the Senate Committee on 
Commerce, Science, and Transportation, and the House Committee on 
Science

Why GAO Did This Study:

The National Aeronautics and Space Administration (NASA) has struggled 
to implement a fully integrated financial management system. The lack 
of such a system has affected the agency’s ability to control program 
costs, raising concerns about the management of its most costly 
programs, including the space shuttle program and the International 
Space Station.

In April 2000 NASA initiated the Integrated Financial Management 
Program (IFMP)—its third effort to improve the agencywide management 
of its resources. Implementation is expected by fiscal year 2006 with 
an estimated life-cycle cost of nearly $1 billion.

This report (1) assesses NASA’s methodology for preparing the current 
life-cycle cost estimate for implementing IFMP, (2) determines 
whether NASA’s current schedule is reasonable, and (3) evaluates 
NASA’s processes for ensuring adequate cost contingencies.

What GAO Found:

The uncertain reliability of cost estimates, optimistic schedules, 
and insufficient processes for ensuring adequate funding reserves 
have put NASA’s latest financial management modernization effort at 
risk. Over the past several years, IFMP’s life-cycle cost estimates 
have fluctuated, and NASA’s current estimate is 14 percent greater 
than the previous estimate. The reliability of these estimates is 
uncertain because disciplined cost-estimating processes required by 
NASA and recognized as best practices were not used in preparing 
them. For example, IFMP’s current life-cycle cost estimate did not 
include the full cost likely to be incurred during the life of the 
program, including certain operations costs and costs to retire the 
system. In addition, NASA did not consistently use breakdowns of work 
in preparing the cost estimate, as recommended by NASA guidance. In 
cases where work breakdowns were used, the agency did not always show 
the connection between the work breakdown estimates and the official 
program cost estimate. This has been a weakness since the inception.

Although more than half of the IFMP modules have been implemented—
including the Core Financial module, which is considered the backbone 
of IFMP—the system may not be fully implemented by the end of fiscal 
year 2006 as planned. Efforts to complete the integrated system as 
quickly as possible might have resulted in schedule margins that are 
insufficient to manage program challenges—such as personnel 
shortages, uncertainties about software availability, and Office of 
Management and Budget (OMB) initiatives to implement electronic 
systems for agency business processes governmentwide. These OMB 
initiatives have put IFMP in a reactive mode and are already 
affecting planning for the payroll, procurement, and travel 
components of the integrated system, which could result in additional 
schedule delays and cost growth. 

Finally, reserve funding for IFMP contingencies may be insufficient, 
which is particularly problematic, given the program’s unreliable 
cost estimates and optimistic schedule. One module—Budget Formulation—
is already experiencing potential shortfalls in its reserves, and 
project officials expressed concerns that the module’s functionality 
may have to be reduced. Yet the program continues to establish 
funding reserves based on reserve levels set by other high-risk NASA 
programs, such as NASA’s space flight program—not on analyses of the 
potential cost impact of risks and unknowns specific to IFMP, as 
required by NASA guidance. Moreover, the program did not quantify the 
cost impact of high-criticality risks—also required by NASA—or link 
its risks to funding reserves to help IFMP develop realistic budget 
estimates.

What GAO Recommends:

GAO is recommending that IFMP follow best practices and NASA guidance 
in preparing and updating the life-cycle cost estimate and establish 
additional processes that would enable the agency to more accurately 
estimate program cost and predict the impact of possible undesired 
events. NASA concurred with GAO’s recommendations for corrective 
action.

www.gao.gov/cgi-bin/getrpt?GAO-04-118.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Allen Li at (202) 
512-4841 or lia@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Reliability of IFMP's Current Life-Cycle Cost Estimate Is Uncertain 
Owing to a Lack of Disciplined Processes:

Program Schedule May Be Optimistic:

Processes Insufficient to Ensure Adequate Funding Set Aside 
for Contingencies:

Conclusion:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Scope and Methodology:

Appendix I: Comments from the National Aeronautics and 
Space Administration:

Appendix II: GAO Contact and Staff Acknowledgments:

Tables:

Table 1: IFMP's System Modules and Their Status:

Table 2: IFMP's Cost Estimates for Life Cycle:

Table 3: IFMP's and NSSC's Share of Life-Cycle Costs in the May 2003 
Budget for Fiscal Years 1999-2010:

Figure:

Figure 1: IFMP's Life-Cycle Cost Estimate Trend:

Abbreviations:

GAO: General Accounting Office:

IFMP: Integrated Financial Management Program:

NASA: National Aeronautics and Space Administration:

NSSC: NASA Shared Services Center:

OMB: Office of Management and Budget:

SAP: System Applications and Products:

SEI: Software Engineering Institute:

WBS: Work Breakdown Structure:

United States General Accounting Office:

Washington, DC 20548:

November 21, 2003:

The Honorable John McCain: 
Chairman: 
The Honorable Ernest F. Hollings: 
Ranking Minority Member: 
Committee on Commerce, Science, and Transportation: 
United States Senate:

The Honorable Sherwood L. Boehlert: 
Chairman: 
The Honorable Ralph M. Hall: 
Ranking Minority Member: 
Committee on Science: 
House of Representatives:

About 90 percent of the National Aeronautics and Space Administration's 
(NASA) annual budget is spent on contractors. Yet since 1990 we have 
identified NASA's contract management as a high-risk area--in part, 
because the agency has failed to implement a modern, fully integrated 
financial management system. As we reported in January 2003, the lack 
of such a system has hampered NASA's ability to oversee contracts; 
control program costs; and ensure an effective human capital management 
strategy, raising serious concerns about NASA's management of its 
largest and most costly programs, including the space shuttle program 
and the International Space Station.[Footnote 1]

In April 2000 NASA initiated its third and most recent effort to 
implement a modernized financial management system: the Integrated 
Financial Management Program (IFMP).[Footnote 2] Through IFMP, NASA 
plans to employ multiple software applications to improve the 
agencywide management of its financial, physical, and human resources. 
NASA expects to complete IFMP's implementation in fiscal year 2006 with 
an estimated life-cycle cost totaling nearly $1 billion, including 
operations and maintenance costs. However, several of the system's 
modules remain to be developed, and the program faces significant 
challenges in completing them as planned. Given its previous failures, 
NASA is under tremendous pressure to ensure that IFMP is implemented 
quickly and can achieve its goals.

In April 2003 we issued an interim report on IFMP,[Footnote 3] which 
found that NASA was not following key best practices for acquiring and 
implementing IFMP. As agreed, we continued our review in three areas: 
(1) whether NASA is acquiring and implementing IFMP in the context of 
an enterprise architecture, (2) the extent to which the Core Financial 
module will address NASA's external reporting requirements, and 
(3) NASA's life-cycle cost estimate and schedule for IFMP. We are 
responding to the first two issues in separate reports.[Footnote 4] 
This report addresses the third issue--IFMP's life-cycle cost estimate 
and schedule. Specifically, you asked that we (1) assess the 
reliability of NASA's methodology for preparing the current cost 
estimate for implementing IFMP, (2) determine whether NASA's current 
schedule is reasonable in terms of progress to date and available 
resources, and (3) evaluate NASA's processes for ensuring the adequacy 
of reserve funding for contingencies to mitigate the potential impact 
of identified program risks and unknowns. In addition, we have 
summarized our findings on the three areas previously cited in a 
separate report.[Footnote 5]

Results in Brief:

The uncertain reliability of cost estimates, optimistic schedules, and 
insufficient processes for ensuring the adequacy of funding reserves 
have put NASA's latest financial management modernization effort at 
risk of schedule delays and cost growth. The reliability of the current 
estimate--which is 14 percent greater than the previous estimate 
established in February 2002--is uncertain because disciplined cost-
estimating processes required by NASA and recognized as best practices 
were not used in preparing the estimate. Specifically, IFMP's life-
cycle cost[Footnote 6] estimate did not include the full cost of all 
resources likely to be incurred during the life of the program. In 
addition, NASA did not consistently use breakdowns of the work to be 
performed in preparing the cost estimate, as recommended by NASA 
guidance. Without using the work breakdowns to prepare the cost 
estimate, NASA cannot ensure that all costs are accounted for. In cases 
where work breakdowns were used, the agency did not always provide a 
clear audit trail between the work breakdown estimates and the 
program's life-cycle cost estimate.

IFMP is scheduled for completion at the end of fiscal year 2006. 
However, efforts to complete the integrated system as quickly as 
possible might have resulted in schedule margins that are insufficient 
to manage program challenges--such as personnel shortages and 
uncertainties about software's availability. In addition, Office of 
Management and Budget (OMB) initiatives to implement electronic systems 
for agency business processes---which are expected to improve agency 
operations governmentwide--are affecting planning for the payroll, 
procurement, and travel modules of the integrated system, which could 
result in additional schedule delays and cost growth.

Finally, reserve funding for IFMP contingencies may be insufficient--
which is particularly problematic, given the uncertain reliability of 
cost estimates and optimistic schedule for the program--because the 
program did not consistently perform in-depth analyses of the potential 
cost impact of risks and unknowns specific to IFMP, as required by 
NASA's guidance. Instead, the program established funding reserves on 
the basis of reserve levels set by other high-risk NASA programs. 
Moreover, the program did not quantify the cost impact of identified 
risks or link its risks to funding reserves.

To help decision makers better assess all costs associated with 
operating and implementing IFMP, we are recommending that the program 
use current processes dictated by best practices and NASA guidance for 
preparing and updating the life-cycle cost estimate as well as 
establish additional disciplined processes to better ensure that the 
agency more accurately estimate program cost, predict the impact of 
possible undesired events, and plan accordingly.

In written comments on a draft of this report, NASA's Deputy 
Administrator concurred with our recommendations for corrective action 
but noted that all IFMP projects completed to date stayed within 
budget, were completed ahead of schedule, and delivered the committed 
scope. We do not agree that this is the case for the Core Financial 
module, which NASA describes as the "backbone" of the program. When 
NASA announced the implementation of the Core Financial module at all 
of its centers, only about two-thirds of the financial events needed 
for day-to-day financial operations and external reporting had been 
implemented. In addition, we found that NASA deferred the 
implementation of other key Core Financial module capabilities and 
created new problems in recording certain financial 
transactions.[Footnote 7] Thus, full functionality of the system has 
been deferred, increasing the risk of additional costs and potentially 
affecting the implementation of future modules. NASA's detailed 
comments also noted that the program used a business case methodology 
and professional cost estimators to perform cost and risk assessments. 
As discussed in this report, the audit trail from these assessments to 
the program's cost estimates required by NASA guidance and best 
practices is not clear. NASA's detailed comments are included as 
appendix I.

Background:

For more than a decade, we have reported that the lack of a modern 
integrated financial management system to produce accurate and reliable 
information has hampered NASA's ability to oversee contracts and 
develop good cost estimates for NASA's programs. In 1990 NASA's lack of 
effective systems and processes for overseeing contractor's activities 
prompted us to identify NASA's contract management as a high-risk area. 
In July 2002 we reported that the accuracy of NASA's $5 billion cost 
growth estimate for the International Space Station was questionable 
and that the agency might have difficulty preparing a reliable life-
cycle cost estimate because a modern integrated financial management 
system was not available to track and maintain the data needed for 
estimating and controlling costs. [Footnote 8] NASA's lack of a fully 
integrated financial management system has also hurt the agency's 
ability to collect, maintain, and report the full cost of its projects 
and programs. For example, in March 2002 we testified that NASA was 
unable to provide us with detailed support for the amounts that it 
reported to the Congress as obligated against space station and related 
shuttle program cost limits as required by the National Aeronautics and 
Space Administration Authorization Act of 2000.[Footnote 9]

IFMP is designed as an integrated system to replace the separate 
and incompatible financial management systems used by NASA's 
10 centers.[Footnote 10] According to the IFMP Program Director, the 
new system will provide better decision data, consistent information 
across centers, and improved functionality.

Unlike NASA's previous efforts to modernize its financial management 
system, IFMP does not rely on a single contractor. NASA selected System 
Applications and Products (SAP) to provide its "best of suite" 
software[Footnote 11] and contracted for implementation services under 
a separate contract. NASA has also broken the project into modules that 
will be implemented individually--instead of all at once--on the basis 
of the availability of proven commercial-off-the-shelf software 
products. IFMP initially segmented implementation into 14 modules but 
has since reorganized the program into 9. Some of these modules may be 
further broken out and others added, depending on the scope of OMB's e-
Government initiatives[Footnote 12] and other considerations. Table 1 
describes the modules that currently comprise the system and their 
status.

Table 1: IFMP's System Modules and Their Status:

Module: Position Description Management; Description: Web-based tool 
that enables the generation and classification of job descriptions and 
automatic generation of associated documents; NASA-reported status: 
Implemented September 2002.

Module: Resume Management; Description: Web-based application that 
allows applicants to apply for jobs online; NASA-reported status: 
Implemented November 2001.

Module: Erasmus; Description: Web-based system providing financial 
performance information on NASA's programs and projects in a 
standardized format; NASA-reported status: Implemented November 
2002.

Module: Travel Management; Description: Comprehensive system to 
streamline and unify the NASA employee travel system and to improve 
traveler and vendor reimbursement; NASA-reported status: Implemented 
April 2003.

Module: Core Financial; Description: Accounting and financial reporting 
system that serves as the "backbone" to the integrated system; NASA-
reported status: Implemented June 2003.

Module: Budget Formulation; Description: Web-based tool to formulate 
project, program, institutional, enterprise, and agency-level budget 
requirements; NASA-reported status: Planned completion of February 
2004.

Module: Integrated Asset Management; Description: System to manage 
NASA's physical assets through functions such as physical inventory and 
financial reporting; NASA-reported status: To begin in late 2003.

Module: Contract Administration; Description: Comprehensive tool to 
support procurement, receiving, invoicing, and payment of materials for 
NASA; NASA-reported status: To begin in late 2004.

Module: Human Resources Management; Description: System allowing 
managers to fill positions with staff that possess the appropriate 
skill sets and career goals; NASA-reported status: To begin in late 
2004.

Source: NASA.

[End of table]

When NASA announced in June 2003 that the Core Financial module had 
been implemented at all of its centers, only about two-thirds of the 
financial events needed for day-to-day financial operations and 
external reporting had been implemented. In addition, we found that 
NASA deferred implementation of other key core financial module 
capabilities and created new problems in recording certain financial 
transactions.[Footnote 13] Thus, full functionality of the system has 
been deferred, increasing the risk of additional costs and potentially 
affecting the implementation of future modules.

As we reported in April 2003, NASA is not following key best practices 
for acquiring and implementing IFMP. For example, NASA has not analyzed 
the interdependencies between selected and proposed IFMP components, 
and it does not have a methodology for doing so. By acquiring IFMP 
components without first understanding system component relationships, 
NASA has increased its risk of implementing a system that will not 
optimize mission performance and will cost more and take longer to 
implement than necessary. In addition, in implementing the Core 
Financial module, NASA faces risks in the areas of user needs and 
requirements management because the agency did not consider the 
information needs of key system users and is relying on a requirements 
management process that does not require the documentation of detailed 
system requirements prior to system implementation and testing.

Reliability of IFMP's Current Life-Cycle Cost Estimate Is Uncertain 
Owing to a Lack of Disciplined Processes:

The reliability of the current life-cycle cost estimate--which has 
fluctuated since the initial estimate and is 14 percent greater than 
the previous estimate established in February 2002--is uncertain 
because disciplined cost-estimating processes required by NASA and 
recognized as best practices were not used in preparing the estimate. 
Specifically, IFMP's life-cycle cost estimate did not include the full 
cost likely to be incurred during the life of the program. In addition, 
breakdowns of work to be performed--or Work Breakdown Structure 
(WBS)[Footnote 14]--were not consistently used in preparing the cost 
estimate. In cases where work breakdowns were used to prepare the 
estimate, the agency did not always provide a clear audit trail. NASA 
has made some improvements in the program's financial management, such 
as hiring personnel to provide oversight and consistency for the cost-
estimating process. However, until NASA uses more disciplined processes 
such as breakdowns of work in preparing the program's cost estimate, 
the reliability of the life-cycle cost estimate will be uncertain and 
the program will have difficulty with controlling costs.

IFMP's Life-Cycle Cost Estimates Show Overall Increase:

Since the program began, cost estimates for IFMP's 10-year life cycle-
-fiscal years 2001 through 2010--have fluctuated and increased overall, 
as shown in figure 1.

Figure 1: IFMP's Life-Cycle Cost Estimate Trend:

[See PDF for image]

[End of figure]

NASA's current IFMP life-cycle cost estimate totals $982.7 million--an 
increase of $121.8 million, or 14 percent, over the previous IFMP life-
cycle cost estimate. The estimate comprises IFMP direct program costs, 
NASA's enterprise support,[Footnote 15] and civil service salaries/
benefits. (See table 2.):

Table 2: IFMP's Cost Estimates for Life Cycle:

Dollars in millions of then-year dollars.

Direct program; Feb. 2002 estimate: $644.8; May 2003 estimate: $635.3; 
Change in dollars: $(9.5); Percent change: (1.5).

Enterprise support; Feb. 2002 estimate: 164.8; May 2003 estimate: 
189.4; Change in dollars: 24.6; Percent change: 15.0.

Civil Service salaries/benefits; Feb. 2002 estimate: 51.3; May 2003 
estimate: 158.0; Change in dollars: 106.7; Percent change: 208.0.

Total life-cycle cost; Feb. 2002 estimate: $860.9; May 2003 estimate: 
$982.7; Change in dollars: $121.8; Percent change: 14.1.

Sources: NASA (data); GAO (analysis).

[End of table]

Although direct program costs decreased by $9.5 million, these costs 
were shifted to the enterprise support component of the estimate with 
the program's decision to fund only 1 year's worth of operations and 
maintenance, rather than 2 years' worth from the direct program budget. 
In addition, NASA anticipates that operations costs for fiscal years 
2007 through 2010--estimated at $137.8 million--will be funded by the 
NASA Shared Services Center (NSSC), a planned initiative to consolidate 
various agency services such as purchasing and human resources. (See 
table 3.) As a result, the fiscal year 2004 budget for the IFMP direct 
program portion of implementing the system is $497.5 million.

Table 3: IFMP's and NSSC's Share of Life-Cycle Costs in the May 2003 
Budget for Fiscal Years 1999-2010:

IFMP estimate component: Direct program; Development and implementation 
(IFMP's share, FY 1999-2006): $497.5; Operations and maintenance 
(NSSC's share, FY 2007-2010): $137.8; Total: $635.3.

IFMP estimate component: Enterprise support; Development and 
implementation (IFMP's share, FY 1999-2006): 133.2; Operations and 
maintenance (NSSC's share, FY 2007-2010): 56.2; Total: 189.4.

IFMP estimate component: Civil Service salaries/benefits; Development 
and implementation (IFMP's share, FY 1999-2006): 125.3; Operations and 
maintenance (NSSC's share, FY 2007-2010): 32.7[A]; Total: 158.0.

IFMP estimate component: Total life-cycle cost; Development and 
implementation (IFMP's share, FY 1999-2006): $756.0; Operations and 
maintenance (NSSC's share, FY 2007-2010): $226.7; Total: $982.7.

Source: NASA.

[A] This number is not final and is still being reviewed by NASA.

[End of table]

In March 2003 an independent cost estimate team concluded that there is 
an 85 percent confidence level that the direct program portion can be 
successfully completed with the available funding of $497.5 million. 
However, the direct program portion represents only about half of the 
total life-cycle cost estimate. In addition, the team's conclusion was 
contingent on two optimistic assumptions: that there would be no 
schedule disruptions and no increase in requirements.

Disciplined Processes Required by NASA Were Not Used in Preparing 
IFMP's Cost Estimates:

Reflecting OMB guidance[Footnote 16] and the best practices of 
government and industry leaders, NASA requires that life-cycle cost 
estimates be prepared on a full-cost basis, that estimates be 
summarized according to the current breakdown of work to be performed, 
and that major changes be tracked to the life-cycle cost. OMB guidance 
calls for a disciplined budget process to ensure that performance goals 
are met with the least risk and the lowest life-cycle cost, which 
includes direct and indirect costs, operations and maintenance, and 
disposal. The Software Engineering Institute (SEI)[Footnote 17] echoes 
the need for reliable cost-estimating processes in managing software 
implementations--identifying tasks to be estimated, mapping the 
estimates to the breakdown of work to be performed, and having a clear 
audit trail are among SEI's requisites for producing reliable cost 
estimates.

Despite NASA requirements and OMB and SEI guidance, IFMP did not 
prepare a full life-cycle cost estimate--that is, all direct and 
indirect costs for planning, procurement, operations and maintenance, 
and disposal were not included. For example, the life-cycle cost 
estimate does not include the following:

* the cost to operate and maintain the system beyond 2010;[Footnote 18]

* the cost of retiring the system;

* enterprise travel costs, which are provided monthly by the NASA 
centers; and:

* the cost of nonleased NASA facilities for housing IFMP.

In addition, IFMP did not prepare WBS estimates for active modules--
that is, those currently being implemented. According to NASA guidance, 
breaking down work into smaller units helps facilitate cost estimating 
and project and contract management, and helps ensure that relevant 
costs are not omitted. The guidance also states that the WBS should 
encompass both in-house and contractor efforts. According to the IFMP 
Deputy Program Director, WBS estimates are not prepared for active 
modules because information such as contract task orders can be used to 
prepare the cost estimates. However, there is not one overriding 
contract where each module is considered a deliverable at a fixed 
price. Rather, numerous contracts at both the project and center level 
for a module's implementation--many of which can be awarded for a level 
of effort at agreed-upon fixed rates at various phases in the 
implementation. Without a WBS estimate for the project as a whole, NASA 
cannot ensure that all relevant contractor costs are included in the 
cost estimate. In addition, using contract task orders to prepare the 
cost estimate would not ensure that government in-house costs are 
included in the life-cycle cost estimate.

Finally, for modules in the planning phase, the program utilized NASA's 
subject matter experts and professional cost estimators to prepare 
business case analyses. However, although these analyses contained WBS 
cost estimates, the audit trail from the WBS estimate to the program's 
life-cycle cost estimate was not always clear. Without a clear audit 
trail, it is difficult to determine whether the differences between the 
detailed WBS estimates and the official program cost estimate are 
appropriate. The lack of a clear audit trail has been a weakness since 
the inception of the program. For example, IFMP was unable to provide 
us with traceable support for its baseline cost estimate for direct 
program costs.

NASA has made some improvements that should help the program prepare 
better cost estimates. In May 2002 the NASA Administrator appointed an 
executive to provide leadership and accountability in the direction and 
operation of the system. The NASA headquarters program office also 
hired a business manager to oversee and provide consistency for the 
cost-estimating process and provide an analyst to review enterprise 
support costs.

Program Schedule May Be Optimistic:

Although NASA guidance requires sufficient program schedule margins 
to manage risks, efforts to complete the integrated system as quickly 
as possible might have resulted in a schedule that is too compressed to 
accommodate program challenges, such as personnel shortages and 
uncertainties about software's availability. If the program schedule 
margin is too compressed, the program could incur additional risks, 
including added cost growth as well as failure to meet IFMP's schedule 
objectives. OMB's e-Government initiatives--which aim to streamline 
agency business processes and eliminate redundant systems 
governmentwide--could also provide challenges for NASA's IFMP planning. 
As a result, the program schedule may be optimistic.

While implementing the Core Financial module (see table 1), IFMP has 
faced human resource challenges, and the program continues to face 
these challenges with other modules. For example, personnel shortages 
at Marshall Space Flight Center for several months affected the Core 
Financial project and other projects. In this case, a schedule slip was 
avoided, but during fiscal year 2002, the shortages resulted in nearly 
$400,000 for extra hours worked by center employees. Human resource 
challenges are also affecting the Budget Formulation module. The 
simultaneous implementation of this module with the Core Financial 
module--an action advised against by a contractor conducting a 
lessons-learned study--placed heavy demand on already scarce resources 
and added complexity to the program. As a result the schedule for 
implementing the Budget Formulation module has already slipped. 
Sometimes, relying more on contractor personnel can alleviate 
shortfalls in civil service personnel, but a recent Budget Formulation 
project status report indicated that the implementation contractor 
might also have difficulties acquiring and/or retaining qualified 
personnel. The implementation schedules for the remaining modules 
overlap, putting the program at further risk of schedule slippages.

Uncertainty regarding software availability also puts the program at 
risk for completing the integrated system on schedule. For example, 
complete software solutions and requirements for IFMP's Contract 
Administration module have not yet been determined. Although contract-
document-generation software is available and tailored to meet the 
unique interface and reporting requirements of the federal 
government,[Footnote 19] the "best of suite" software solution--SAP--
does not currently meet these requirements. NASA faces the same 
challenge with IFMP's Human Resources Management module. NASA's monthly 
status reports show that the program is working with SAP to develop a 
software solution for the Human Resources Management module that will 
meet federal government requirements, but the outcome is uncertain. In 
addition, the program could adopt an e-Government solution for its 
Human Resources Management module rather than the SAP solution.

Inserting e-Government solutions into IFMP planning--which calls 
for using "best of suite" software--could create more difficult 
interface development and a less-integrated system, thus interrupting 
the program's cost and schedule. E-Government initiatives are already 
affecting NASA's planning for the payroll, procurement, and travel 
modules in the integrated system. For example, the payroll function, 
which was once part of the Human Resources Management module, will 
likely become a separate module under e-Government. Similarly, the 
Contract Administration module has been split into two components: one 
for procurement document generation, for which software is available 
although requirements are not finalized, and one for the remainder of 
NASA's Contract Administration requirements, for which requirements and 
software are currently unknown. Furthermore, e-Travel could replace the 
Travel Management module, which has already been implemented.

According to the program's fiscal year 2002 Independent Annual Review, 
e-Government initiatives are forcing the program into a reactionary 
mode, thus increasing risk to the program's success. The review 
specifically noted that (1) the benefits of a fully integrated system 
could be lost under e-Government, (2) the scope of IFMP and timing of 
future projects' implementation have become uncertain, and (3) cost 
increases and schedule slippage to accommodate directives may occur.

Processes Insufficient to Ensure Adequate Funding Set Aside 
for Contingencies:

In addition to the uncertain reliability of IFMP's life-cycle cost 
estimates and optimistic schedules, NASA cannot ensure that the funding 
set aside for program contingencies is sufficient because the program 
did not consistently perform in-depth analyses of the potential cost 
impact of risks and unknowns specific to IFMP, as required by NASA 
guidance. Moreover, the program did not quantify the cost impact of 
identified risks, link its risks to funding reserves, or consistently 
set aside cost contingencies for these risks.

In-Depth Analysis Not Performed in Establishing Cost Contingencies:

NASA guidance stipulates that programs incorporate financial reserves, 
schedule margins, and technical performance margins to provide the 
flexibility needed to manage risks. According to the guidance, 
financial reserves are to be established and maintained commensurate 
with programmatic, technical, cost, and schedule risks. In other words, 
cost contingencies should be tailored to the specific risks associated 
with a particular program or project. In addition, NASA guidance 
suggests that tools such as Probabilistic Risk Assessment[Footnote 20] 
can help in analyzing risk.

Although NASA's business case analyses include a risk assessment and 
recommended reserve levels, we found no evidence that these recommended 
levels were used in establishing the actual reserve levels for the IFMP 
module projects. Regardless, the actual levels established did not 
match the recommended levels in the business case analyses in most 
cases. We found that reserves for some IFMP modules--both in the 
planning and active phase--were based not on IFMP-specific risks but on 
reserve levels for other high-risk NASA programs. For example, for a 
number of IFMP modules, reserves were set at levels used for spacecraft 
implementations--typically about 30 percent--because industry 
experience showed that large cost overruns in system implementations 
such as IFMP are common. Yet it is unclear whether this reserve margin 
is adequate for IFMP because the effect of IFMP-specific risks and 
assumptions--such as uncertainties relating to software, schedule, and 
OMB's e-Government initiatives--were not analyzed. In addition, some 
of the enterprises supporting the module projects described their 
method of establishing funding reserves as a combination of rules of 
thumb and guesswork.

The Budget Formulation module has already experienced shortfalls in 
its reserves, and project officials expressed concerns that the 
module's functionality may have to be reduced. As of April 2003, the 
module had expended its baseline reserves, which were established at 
about 20 percent on the basis of the level of risk for space flight 
missions--not on the risks specific to the module. Although the project 
was able to bring its budget back into balance by obtaining an 
agreement with SAP to limit overtime pay to time in excess of 50 hours 
per week, its remaining reserves total only $83,000 to cover all 
contingencies--including those that could require changes to the Budget 
Formulation module.

Cost Impact of Identified Risks Not Quantified or Linked to 
Cost Contingencies:

NASA requires programs to quantify the cost impact of high-criticality 
risks[Footnote 21] and to determine to what extent reserves may be 
exhausted, should the risks become reality. According to SEI, 
estimating the potential cost and schedule impact for all identified 
risks is an element of good estimating practice. Quantifying the cost 
impact of identified risks and clearly and consistently linking the 
risk database to funding reserves helps programs develop realistic 
budget estimates.

While IFMP identifies program risks, analyzes their severity, and plans 
mitigation actions, the program typically does not prepare a cost 
impact analysis for identified risks nor does it consistently link 
identified risks to funding reserves to ensure that funds are 
available, should the risk occur. For example, in February 2003, the 
Travel Management Project found that some components of the Travel 
Management module might not satisfy individual centers, be funded, or 
be technically feasible. However, the cost impact of this risk, as well 
as others, was not quantified. Similarly, in June 2003, the Budget 
Formulation module did not quantify the cost impact of a number of 
identified risks.[Footnote 22] Without estimating the potential cost 
impact of these risks, NASA cannot determine whether it has sufficient 
reserves to cover the risks--which is particularly problematic for 
Budget Formulation, since virtually no reserves remain for this module.

Furthermore, in its July 2003 monthly status report, the IFMP 
headquarters office identified three high-criticality risks that could 
have a cost impact on the overall program; however, no liens[Footnote 
23] were set aside against reserves for these risks:

* Reductions to out-year budgets could affect the implementation of 
future integrated modules or the ongoing evolution of existing modules.

* An e-Government solution may be adopted for human resources 
management rather than the IFMP solution, resulting in more difficult 
interface development and a less-than-integrated solution.

* E-Government initiatives and policy decisions could disrupt IFMP 
modules, resulting in delays or additional resource impacts.

An independent cost estimate team identified and quantified the impact 
of two IFMP program risks, indicating that the cost and schedule impact 
of a risk on a program or project can be sizeable. First, the team 
identified a high-probability risk that NASA's "full cost requirement"-
-in which all direct and indirect agency costs, including civil service 
personnel costs, are tied to individual programs and projects--could 
affect the Budget Formulation module.[Footnote 24] The team estimated 
this risk at $2 million to $3 million, with a potential schedule slip 
of 3 to 6 months. The Budget Formulation Project is currently trying to 
determine what impact it may have. The second risk identified by the 
independent cost review team--that the Core Financial module may be 
transitioned to operations before all integration points are addressed-
-could be more costly. The team estimated this risk at $10.5 million to 
$20 million, also with a potential 3-to 6-month schedule slip. However, 
the team considered this risk as having a low probability of 
occurrence.

Conclusion:

NASA is at a critical juncture and faces major challenges in improving 
contract management and controlling costs. These challenges seriously 
affect the agency's ability to effectively manage its largest and most 
costly programs. A modern integrated financial management system, as 
envisioned in IFMP, is critical to ensuring that NASA has accurate and 
reliable information to successfully meet these challenges. NASA has 
made some improvements during the past year, such as hiring personnel 
to provide the cost-estimating process with oversight and consistency. 
However, if IFMP continues to ignore disciplined processes in 
estimating program costs and impacts, it is unlikely that the program 
will meet its goals.

Recommendations for Executive Action:

To ensure that IFMP's life-cycle cost estimate conforms to NASA 
guidance and best practices, we recommend that the NASA Administrator 
direct IFMP to do the following:

* Prepare cost estimates by the current Work Breakdown Structure for 
the remaining modules.

* Provide a clear audit trail between detailed WBS estimates and the 
program's cost estimate for the remaining modules.

* Prepare a full life-cycle cost estimate for the entire IFMP that 
meets NASA's life-cycle cost and full cost guidance.

To ensure that contingencies are funded in accordance with NASA 
guidance and best practices, we recommend that the NASA Administrator 
direct IFMP to do the following:

* Utilize a systematic, logical, and comprehensive tool, such as 
Probabilistic Risk Assessment, in establishing the level of financial 
reserves for the remaining module projects and tailor the analysis to 
risks specific to IFMP.

* Quantify the cost impact of at least all risks with a high likelihood 
of occurrence and a high magnitude of impact to facilitate the 
continuing analysis necessary to maintain adequate reserve levels.

* Establish a clear link between the program's risk database and 
financial reserves.

Agency Comments and Our Evaluation:

Although NASA concurred with our recommendations for corrective action, 
NASA indicated that its current processes are adequate for (1) 
preparing WBS cost estimates, (2) estimating life-cycle costs, and (3) 
establishing reserves on the basis of IFMP-specific risks. The agency 
cited its business case analyses as the methodology through which it is 
accomplishing these tasks.

We disagree that NASA's current processes are adequate, and our 
recommendations are aimed at improving these processes. As discussed in 
this report, while NASA prepares WBS cost estimates for IFMP modules in 
the planning phases by using business case analyses, it does not 
prepare WBS cost estimates for active modules. And although IFMP 
indicates that preparing cost estimates by using contract task orders 
is an appropriate methodology, this approach will not ensure that all 
relevant costs, including both contractor and government in-house 
costs, are included in the life-cycle cost estimate. Regarding contract 
costs, there is not one overriding contract where each module is 
considered a deliverable at a fixed price. Rather, there are numerous 
contracts at both the project and center level for implementing 
modules--many of which can be awarded for a level of effort at agreed-
upon fixed rates at various phases in the implementation. Without a WBS 
estimate for the project as a whole, NASA cannot ensure that all 
relevant contractor costs are included in the cost estimate. In 
addition, using contract task orders to prepare the cost estimate would 
not ensure that government in-house costs are included in the life-
cycle cost estimate.

According to NASA, IFMP will improve its business case analyses by 
providing better estimates of operational costs through the expected 
life of the module, retirement costs, and other full life-cycle costs. 
However, as discussed in this report, an audit trail is needed between 
the detailed estimates contained in the business case analyses and the 
program's life-cycle cost estimate to ensure that these improvements 
are reflected in the program's official cost estimate.

Finally, as discussed in this report, although NASA's business case 
analyses include recommended reserve levels, we found no evidence that 
these recommended levels were used in establishing the actual reserve 
levels for the IFMP module projects. Regardless, the actual levels 
established did not match the recommended levels in most cases. We 
found that the program established funding reserves on the basis of 
reserve levels set by other high-risk NASA programs, rather than on 
IFMP-specific risks as required by NASA guidance.

Scope and Methodology:

To assess the reliability of NASA's methodology for preparing the 
current cost estimate for IFMP, we reviewed program and project-level 
documentation to obtain an understanding of NASA's current cost 
estimate and its major components and the methodology used to develop 
the estimate. We also interviewed program and project officials to 
clarify our understanding of the cost estimate and how NASA derived it. 
In addition, we compared the program's cost-estimating methodology with 
SEI best practices, OMB requirements, and NASA's own procedures and 
guidance. Finally, we reviewed internal and independent analyses of the 
cost estimate. We did not attempt to validate NASA's estimate; rather, 
we reviewed NASA's processes for preparing its estimate.

To determine whether NASA's current schedule is reasonable in terms 
of progress to date and available resources, we reviewed the program's 
schedule objectives and NASA's policies for managing program and 
project schedules. We monitored the schedule and risks to the schedule 
through our review of the program's monthly status reports and internal 
NASA briefings. We interviewed program and project officials to 
ascertain NASA's progress against the schedule.

To evaluate NASA's processes for ensuring the adequacy of cost 
contingencies to mitigate the potential impact of identified program 
risks and unknowns, we reviewed governmentwide and NASA policies and 
SEI best practices for managing risk and establishing cost 
contingencies. We also interviewed program officials at NASA 
headquarters and project managers to obtain an understanding of how 
reserve levels were established and maintained for the program. We then 
compared IFMP's processes for ensuring adequate cost contingencies with 
processes dictated by OMB and NASA guidance and by best practices.

To accomplish our work, we visited NASA headquarters, Washington, D.C; 
Marshall Space Flight Center, Alabama; and Goddard Space Flight Center, 
Maryland. We also contacted officials at Glenn Research Center, Ohio.

We performed our review from April through September 2003 in accordance 
with generally accepted government auditing standards.

As agreed with your offices, unless you announce its contents earlier, 
we will not distribute this report further until 30 days from its date. 
At that time, we will send copies to interested congressional 
committees; the NASA Administrator; and the Director, Office of 
Management and Budget. We will make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at http://www.gao.gov.

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-4841 or lia@gao.gov. Key contributors to this 
report are acknowledged in appendix I.

Allen Li: 
Director: 
Acquisition and Sourcing Management:

Signed by Allen Li: 

[End of section]

Appendix I: Comments from the National Aeronautics and Space 
Administration:

National Aeronautics and Space Administration:

Office of the Administrator Washington, DC 20546-0001:

October 31, 2003:

Mr. Allen Li: 
Director, Acquisition and Sourcing Management Team:  
United States General Accounting Office 
Washington, DC 20548:

Dear Mr. Li:

Thank you for the opportunity to review and comment on the draft report 
entitled, BUSINESS MODERNIZATION: Disciplined Processes Needed to 
Better Manage NASA's Integrated Financial Management Program (GAO-04-
118). We appreciate the General Accounting Office's (GAO) continued 
interest in this vital program and desire to see this undertaking 
successfully completed.

Enclosed are NASA's responses to the draft report. NASA concurs with 
all six of the GAO's recommendations for corrective action. We 
acknowledge that the Integrated Financial Management Program is engaged 
in a high-risk endeavor and that we will continue to improve our 
processes. We respectfully request that the GAO, in producing its final 
report on this matter, also indicate that all five IFMP projects 
completed to date stayed within budget, were completed ahead of 
schedule, and delivered the committed scope. We also ask that the 
report recognize that the program did use a business case methodology 
and professional cost estimators to perform cost and risk assessments 
prior to starting each project. We believe that this process has been a 
key component of our success to date.

My point-of-contact for this matter is Mr. Bobby German, Deputy Program 
Director for NASA's Integrated Financial Management Program. He may be 
contacted by e-mail at bobby. eg rman@nasa.gov, or by telephone at 
(202) 358-2498.

Cordially,

Signed by: 

Frederick D. Gregory: 
Deputy Administrator:

Enclosure:

Enclosure:

NASA Response to Draft General Accounting Office (GAO) Report: BUSINESS 
MODERNIZATION: Disciplined Processes Needed to Better Manage NASA's 
Integrated Financial Management Program (GAO-04-118), dated October 1, 
2003:

1. General Accounting Office (GAO) Recommendation: Prepare cost 
estimates by the current Work Breakdown Structure (WBS) for the 
remaining modules.

NASA Response to GAO Recommendation 1: Concur. The business cases 
developed for every Integrated Financial Management Program (IFMP) 
module have included full-cost estimates by Work Breakdown Structure 
(WBS). NASA will continue to follow this practice. It should be noted, 
however, that once an implementation contractor is selected, the module 
project has the ability to update the work breakdown structure to match 
the finalized implementer methodology. It should be further noted that 
the majority of IFM costs are incurred through fixed-price contracts 
with the module implementers (e.g., Accenture). The methodology for 
cost reporting in a fixed-price contract environment is focused on 
contract deliverable performance rather than work breakdown structure.

2. GAO Recommendation: Provide a clear audit trail between detailed WBS 
estimates and the program cost estimate for the remaining modules.

NASA Response to GAO Recommendation 2: Concur. IFMP will take steps to 
ensure that there is increased documented traceability linking the 
estimates in the business cases to the initial project estimates.

3. GAO Recommendation: Prepare a full life-cycle cost estimate for the 
entire IFM Program that meets NASA's established life-cycle cost and 
full-cost guidance.

NASA Response to GAO Recommendation 3: Concur. For each module project, 
the IFM Program has developed detailed business case analyses (BCA's) 
that included full cost 10-year life-cycle estimates at low levels of 
the work breakdown structure. Although the program did not estimate how 
long each module would be operational, 10-year was option selected to 
ensure that the decision processes for the projects appropriately 
balanced development and operations costs. Nevertheless, the program 
will ensure that future BCA's provide better estimated operational 
costs through the expected life of the module, retirement costs, and 
any other full-life cycle costs, as appropriate. The IFM Program will 
also continue to submit to Office of Management and Budget (OMB) its 
Exhibits 300 and 53 in compliance with Agency and OMB guidance.

4. GAO Recommendation: Use a systematic, logical, and comprehensive 
tool, such as Probabilistic Risk Assessment, in establishing the level 
of financial reserves for the remaining module projects and tailor the 
analysis to risks specific to IFMP.

NASA Response to GAO Recommendation 4: Concur. The IFM Program will 
enhance its risk evaluation methodology as part of each module 
project's business case analysis (BCA). A comprehensive risk assessment 
analysis, using eight different criteria, is currently performed in 
each BCA. Those results are subsequently used to develop individual 
project budgets, inclusive of reserves. The IFM Program will continue 
to enhance this process, which is, nevertheless, currently fully 
compliant with NASA policies in this area. Furthermore the program will 
undertake a review of expenditures against reserves in past projects to 
identify particular areas in which future projects should focus their 
risk identification and quantification efforts.

5. GAO Recommendation: Quantify the cost impact of at least all risks 
with a high likelihood of occurrence and a high magnitude of impact to 
facilitate the continuing analysis necessary to maintain adequate 
reserve levels.

NASA Response to GAO Recommendation 5: Concur. The IFM Program will 
update its risk management policies to ensure that the program and its 
individual projects analyze more consistently and better document the 
cost impacts of high severity risks (which are classified as high 
probability and high impact risks). Over the past 3 years, the program 
has already identified and mitigated several hundred risks associated 
with individual projects. Each risk carried a probability assessment 
rating and an impact assessment rating, which were periodically updated 
until the risk was either retired or mitigated. Additionally, detailed 
individual costs assessments were computed for certain risks when it 
became apparent that the mitigation efforts would not be successful in 
fully retiring the risk. In most cases, reserves were used on those 
tasks. Cost estimates are reflected as liens to the reserves or 
application of reserves in the monthly status for the projects and 
program.

6. Establish a clear link between the program's risk database and 
financial reserves.

NASA Response to GAO Recommendation 6: Concur. The IFM Program will 
provide more documentation and traceability on risks and other factors 
that form the basis for cost reserves. Also, see above responses to 
Recommendations 2 and 5.

[End of section]

Appendix II: GAO Contact and Staff Acknowledgments:

GAO Contact:

Allen Li (202) 512-3600:

Acknowledgments:

Staff making key contributions to this report were Jerry Herley, Erin 
Schoening, LaTonya Miller, and Karen Sloan.

FOOTNOTES

[1] See U.S. General Accounting Office, Major Management Challenges and 
Program Risks: National Aeronautics and Space Administration, 
GAO-03-114 (Washington, D.C.: January 2003).

[2] NASA abandoned two earlier efforts after spending about 
$180 million over 12 years.

[3] See U.S. General Accounting Office, Business Modernization: 
Improvements Needed in Management of NASA's Integrated Financial 
Management Program, GAO-03-507 (Washington, D.C.: Apr. 30, 2003).

[4] See U.S. General Accounting Office, Business Modernization: NASA's 
Integrated Financial Management Program Does Not Fully Address Agency's 
External Reporting Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 
2003). Also, see U.S. General Accounting Office, Information 
Technology: Architecture Needed to Guide NASA's Financial Management 
Modernization, GAO-04-43 (Washington, D.C.: Nov. 21, 2003).

[5] See U.S. General Accounting Office, Business Modernization: NASA 
Challenges in Managing Its Integrated Financial Management Program, 
GAO-04-255 (Washington, D.C.: Nov. 21, 2003).

[6] Life-cycle cost is the total of the direct, indirect, recurring, 
nonrecurring, and other related expenses incurred or estimated to be 
incurred in the design, development, verification, production, 
operation, maintenance, support, and retirement of a system over its 
planned life.

[7] See GAO-04-151.

[8] See U.S. General Accounting Office, Space Station: Actions Under 
Way to Manage Cost, but Significant Challenges Remain, GAO-02-735 
(Washington, D.C.: July 17, 2002).

[9] See U.S. General Accounting Office, National Aeronautics and Space 
Administration: Leadership and Systems Needed to Effect Financial 
Management Improvements, GAO-02-551T (Washington, D.C.: Mar. 20, 2002).

[10] NASA is composed of headquarters offices; nine centers located 
around the country; and the Jet Propulsion Laboratory, which is 
operated by the California Institute of Technology. For the purpose of 
this report, we treat the Jet Propulsion Laboratory as a center.

[11] When acquiring and implementing commercial hardware and software 
solutions, organizations can generally pursue one of two basic 
approaches: An organization can opt for a single package of already 
integrated software components, which is referred to as the "best of 
suite" approach, or it can opt for different software components from 
different vendors, which is referred to as the "best of breed" 
approach. "Best of suite" components are easier and less costly to 
integrate.

[12] OMB's Electronic Government--or "e-Government"--initiatives 
advocate the use of Internet-based technologies governmentwide for 
agency business processes, such as payroll, travel management, and 
recruiting. The goal of these initiatives is to eliminate redundant 
systems and improve the government's quality of customer service.

[13] See GAO-04-151.

[14] A WBS is a method of organizing a program into logical 
subdivisions at lower and lower levels of detail.

[15] NASA is organized into six strategic enterprises that function as 
primary business areas for implementing NASA's mission. Each enterprise 
draws on the capabilities of several NASA centers, while each center 
contributes to multiple enterprises. For example, the Space Flight 
Enterprise has oversight over NASA's human space flight program and 
exercises management authority over the Johnson Space Center, Kennedy 
Space Center, Marshall Space Flight Center, and Stennis Space Center.

[16] Planning, Budgeting, Acquisition, and Management of Capital 
Assets, OMB Circular A-11, Part 7 (June 2002).

[17] SEI is a government-funded research organization that is widely 
considered an authority on software implementations.

[18] NASA assumed a 10-year life cycle beginning in fiscal year 2001, 
but the actual retirement date for the system is unknown, according to 
the Deputy Program Director.

[19] For example, according to the current business case analysis, 
NASA's document-generation system would have to meet several federal 
requirements, including providing the General Services 
Administration's Federal Procurement Data System and the National 
Science Foundation's Federal Assistance Awards Data System with data, 
along with reports to the Department of Labor and the Small Business 
Administration.

[20] Probabilistic risk assessment is a method of systematically 
examining complex technical systems to measure both the likelihood that 
an undesired event will occur and the consequences that will result.

[21] Risk criticality is a function of the likelihood that an event 
will occur and the severity of the consequences if the event does 
occur. The criticality of each risk will be identified as low, medium, 
or high. Risks with high criticality are also known as primary risks 
and typically have a high likelihood of occurrence and a high magnitude 
of impact.

[22] A mitigation plan for the Budget Formulation module indicated that 
the project was in the process of assessing the potential cost impact 
of four of its six high-criticality risks, which the project manager 
confirmed.

[23] A lien is a potential cost to a project, direct or indirect, which 
may or may not come to fruition, for which a portion of funding 
reserves is set aside.

[24] NASA was to implement its full cost initiative October 1, 2003.

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