Agencies Generally Use Cost- Reimbursement Contracts with Incentives for Satellite Acquisitions

Given high development risks and the likelihood of requirements changes  in satellite programs, most government satellite acquisitions use cost- reimbursement contracts. When lower-risk items are being acquired, such as  standard spacecraft and communications satellites, agencies are more  likely to use firm-fixed-price contracts. Agencies Primarily Used Cost-Reimbursement Contracts to Acquire Satellites Given Development Risk

Across the 19 programs we reviewed at DOD, NASA and NOAA, about  $43.1 billion of $52.1 billion (83 percent) was obligated on cost- reimbursement contracts and orders, while the remaining $9 billion (17  percent) of obligations were on firm-fixed-price and fixed-price incentive  contracts and orders. Program officials also said that award fee determinations can be effective  in changing contractor behavior. On-orbit incentives included on the contracts and orders for our 12 case  study programs ranged from no on-orbit incentive to approximately 10  percent of the contract value (see appendix III for more information on the  on-orbit incentive amounts by contract). The timing of an on-orbit incentive represents how the  at-risk amount is spread out over a satellite’s mission life. For some of the  contracts and orders we reviewed for selected case study programs, the  on-orbit incentives covered a satellite’s entire mission life. Government’s Recourse Is Limited When a Satellite Fails

The government’s recourse in the event of a catastrophic satellite failure  on-orbit is generally limited to recovery of a portion of the on-orbit  incentive. By design, on-orbit  incentives are only a portion of the total contract value and therefore will  not make the government whole in the event of total failure. Further, the government accepts more  of the on-orbit risk than the contractor, in part because catastrophic  failures are rare, according to satellite studies and industry experts we  spoke to. Also, it is unclear whether increased on-orbit incentives would decrease  the likelihood of on-orbit failures. Attributing positive on-orbit performance directly to on- orbit incentives is challenging, given the many factors that contribute to a  satellite program’s success, including requirements and funding stability,  technology maturity, and government and contractor experience. As a result, it appears the most cost effective way to  limit the government’s loss in the event of a catastrophic failure may be to  reduce cost growth and schedule delays by using best practices during  satellite development, as we have previously recommended. Agency Comments

We provided a draft of this report to DOD, NASA, and NOAA for their  review and comment. As a result, the total costs for  a given program will be larger than the contracts values discussed in this  report. Appendix II: Objectives, Scope, and Methodology

To assess the Department of Defense (DOD), National Aeronautics and  Space Administration (NASA), and the Department of Commerce’s  National Oceanic and Atmospheric Administration’s (NOAA) contract and  incentive structures, under the authority of the Comptroller General to  conduct evaluations on his own initiative, we examined (1) the types of  contracts and incentive structures government satellite programs use to  develop satellites and why, (2) how selected programs structure on-orbit  incentives, and (3) government options for recourse, if any, when a  satellite fails or underperforms.
Why GAO Did This Study

Acquiring and fielding satellites are high stakes endeavors. Each year, DOD, NASA, and NOAA spend billions of dollars acquiring satellites. Unlike with other major acquisitions, such as ships or aircraft, an agency can only determine the quality of a satellite after it is launched. That means any defects that occur may be impossible to repair, and in space, a single failure can be catastrophic for a mission's success.
As a result, contractor performance is critical to a program's success, and contract incentives can be particularly important in aligning government and contractor interests—both in achieving mission success and ensuring responsible financial management.
This report addresses (1) the types of contracts DOD, NASA, and NOAA use to develop satellites, (2) how selected programs structure on-orbit incentives, and (3) what recourse, if any, the government has in the event of satellite failure or underperformance. To conduct this work, GAO analyzed contract obligations data and documentation for 19 current satellite programs; reviewed policies and guidance regarding contact types and incentives; selected 12 case studies to determine incentive structures and recourse options; and interviewed program and contracting officials at each agency, as well as commercial representatives and industry experts.

What GAO Found

Given high development risks and uncertain requirements in satellite programs, most government satellite acquisitions use cost-reimbursement contracts. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies used firm-fixed-price contracts. Overall, across 19 programs GAO reviewed at the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), about $43.1 billion of $52.1 billion was obligated on cost-reimbursement contracts and orders, while the remaining $9 billion were on firm-fixed-price and fixed-price incentive contracts and orders.
Most of the 12 selected programs that GAO reviewed contained an on-orbit incentive—incentives based on successful performance in space; however, they varied widely in terms of the amount at-risk for the contractor and the timing of payments. For example, the on-orbit incentives included on the contracts and orders for the 12 selected programs ranged from no on-orbit incentive to approximately 10 percent of the contract value. GAO also found variation in how the at-risk amount was spread out over a satellite's mission life. For example, some contracts included on-orbit incentives that covered a satellite's entire mission life while other contracts covered only a portion of the mission life.
The government's recourse in the event of a catastrophic satellite failure is limited, relative to its overall investment. Given the small on-orbit incentive amounts included in contracts, the government's maximum financial recovery potential is modest. This is by design, however, as on-orbit incentives are not intended to make the government whole in the event of total failure. The government accepts this level of risk, in part because such failures are rare, according to government and industry experts. Also, it is unclear whether larger on-orbit incentives would reduce on-orbit failures given numerous other factors that affect a program's success, including requirements stability, design maturity and contractor experience. As a result, the most cost effective way to limit the government's loss in the rare case of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as GAO has previously recommended.

What GAO Recommends

GAO is not making any recommendations in this report.