Contractors Face Shutdown Costs as NASA Space Program Morphs

If the Obama administration gets its way in revamping U.S. manned space-exploration efforts, two of the National Aeronautics and Space Administration’s largest contractors could be on the hook for hundreds of millions of dollars in program-shutdown costs.

Lockheed Martin Corp. and Alliant Techsystems Inc. are waging a behind-the-scenes dispute with NASA’s leadership over who will cover possibly more than $1 billion in such expenses, according to people familiar with the situation. The controversy has raised the financial and political stakes over NASA’s direction, with the Senate Commerce Committee expected on Wednesday to delve into thorny termination-liability issues.

At NASA’s Kennedy Space Center in Florida, a crane lifts part of a test vehicle for the Constellation program last year.

The costs associated with shutting down the NASA contracts include mothballing or dismantling equipment, paying outstanding bills to subcontractors, winding down the work force and ensuring that sensitive technology and hardware are protected.

President Obama’s proposed budget seeks $2.5 billion for phasing out the Constellation manned-exploration program. Those funds are intended to cover additional work such as refurbishing factories and cleaning up environmental damage, though lawmakers could decide to shift them to other termination categories.

If the two companies are forced to immediately set aside NASA contract funds for such liabilities, they have told the agency they may have to stop or slow development work in coming months, according to industry and government officials. Using company dollars for termination work, on the other hand, would hurt their balance sheets. With both sides digging in, the final resolution most likely will come from Congress or the courts.

Mr. Obama wants to cancel most of the Constellation program, which envisions a new fleet of rockets and spacecraft to blast astronauts into orbit and, eventually, deeper into the solar system. Instead, the administration seeks to outsource some shorter-term space transportation to private industry while revamping NASA’s programs to focus on longer-term technology development.

But so far, Congress has balked at the proposals. Some administration critics in industry and on Capitol Hill argue that NASA’s latest stance on termination costs amounts to a backdoor way to slow down or stop work on Constellation, without obtaining explicit congressional approval to do so.

For years, NASA program managers typically allowed Lockheed, Alliant Techsystems and some other large contractors to avoid setting aside contract funds to cover contingencies, as they were expected to do, for the possibility that big-ticket programs ended up being cancelled or restructured, said government and industry officials.

While the policy may have technically violated some federal acquisition laws and regulations, it allowed NASA and its contractors to try to accelerate high-profile programs by spending more on development and testing than otherwise would have been available.

But that changed abruptly in the wake of President Obama’s proposal to shut down Constellation. Now, NASA is warning the two largest Constellation contractors they will be held responsible for reserving or setting aside enough dollars—as part of their annual management of contract funds—to meet potential termination liabilities.

The change already has roiled companies working on Constellation. Last month, a senior Lockheed manager told employees and subcontractors in an internal message that NASA changed budgeting practices “and is now requiring us to cover [this] contingency cost on-contract within current funding.” As a result, the message said, Lockheed is “going to hold procurements” from subcontractors to conserve cash.

The Ares I-X rocket, part of the Constellation program, last year.

Lockheed, which has an estimated $350 million to $400 million in exposure, said in a statement Monday that “at NASA’s direction, we have included termination liability costs in our latest” funding request. Lockheed is seeking an additional $250 million in current-year funding to reduce its risk, but NASA is still considering the issue, said people familiar with the matter.

Alliant Techsystems has told the agency its termination costs could climb above $600 million and perhaps top $1.1 billion, these people said. Using company coffers for such hefty payments would be a big blow to the Minneapolis company, which listed total liabilities of $3.1 billon at the end of March. A company spokesman said Monday that “issues regarding termination liabilities are undefined and it would be premature” to comment on how such costs will be treated.

Boeing Co., which has a smaller role in Constellation, has negotiated an arrangement with NASA covering less than $100 million in potential termination costs, said people familiar with the matter.

In response to questions, NASA last week said it sent letters reminding the two contractors “of the express terms of the existing clauses in their contracts” that indicate the government isn’t obligated to cover termination costs beyond contract funds allotted to any program.

Congress has barred the agency from terminating Constellation contracts until lawmakers vote on the White House’s proposal, and NASA chief Charles Bolden repeatedly has told lawmakers he is abiding strictly by those restrictions.

Mr. Bolden told a Senate appropriations subcommittee last month that NASA is merely reminding contractors about their responsibility for termination liabilities. “It’s the company’s determination of what level of risk” it is willing to incur, “whether [executives] put aside funds or … they assume they are not going to need them,” he said.

The current clash stems in part from NASA’s tradition of giving the Johnson Space Center –where U.S. astronauts are based — extra latitude in running programs. According to industry and government officials, the Houston center frequently wasn’t required to comply strictly with the same accounting and program-management rules that applied to other parts of the agency.

That partly explains why many Constellation managers consistently relied on assurances from some NASA managers that the agency would step in and cover liabilities in the unlikely event termination became an issue.

“For some manned programs, that was standard procedure,” according to one industry official familiar with the details. “If you suddenly change the precedent, you could shut down large parts of NASA.”

The new attitude at NASA headquarters ratchets up pressure on lawmakers to approve large parts of the White House’s proposals, because that’s a way to keep funds flowing for development and testing.

By ANDY PASZTOR /WSJ

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