The U.S. Government Accountability Office (GAO) released a report Friday analyzing the risk incurred by the government on expensive satellite programs, finding that the contracts leave the financial burden upon government agencies  in cases of failure.

The GAO studied twelve satellite programs at the Department of Defense (DoD), NASA, and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA). Program funding totaled at $52.1 billion.

Satellite acquisition programs are uniquely risky in that it's difficult for the technology to be tested before the satellite is launched and once it is launched, it's difficult or impossible for repairs to be made. This opens a window for total loss, with high government risk.

The study differentiated between fixed-priced contracts and cost-reimbursement contracts, players in the amount of risk the government incurs. The GAO found $43.1 billion of the $52.1 billion studied was spent on cost-reimbursement contracts and orders, meaning, the amount the government pays varies based on the cost incurred by contractors plus an amount of profit.

Eighty-three percent of the DoD contract obligations are cost-reimbursement contracts, on-par with the other surveyed agencies at 77 percent and 91 percent.

Additionally, most satellite acquisition contracts have on-orbit incentive structures, which are payments that are made based on the satellite's performance in space. However, these can vary widely in what percent of the contract it encompasses.  

The study found that this contract structure is actually rather effective, though the government incurs disproportionate risk compared to contractors. The risk is often not realized because, according to the industry experts and satellite studies, failures are rare. But when a failure occurs, DoD carries a big financial burden.

The commercial companies that the GAO spoke with said they often purchase insurance to mitigate the costs of a failure. The cost of insurance adds 10 to 20 percent of the total cost. However, due to the higher cost of government satellites, insurance companies cannot afford to insure those programs.

"The small market of satellite insurance providers would not have the capacity to insure many government satellites, given their high costs to build and launch," the report said.

The DoD experienced one of these rare failures with the Defense Meteorological Satellite Program 19 (DMSP-19). The DMSP-19 failed during its second year in orbit when the Air Force discovered it could no longer control the satellite. The contractor at fault paid back $2.7 million plus interest.

Similarly, when NASA's SMAP program failed while in orbit, no money was returned because the contract had zero on-orbit incentives.

The study also found that contractors also highly value future contracts with the government, which offers incentives for a positive relationship.

In its report, the GAO analyzed five DoD programs and determined the percent of the contract value at risk for on-orbit performance, signaling the amount of the contract the DoD could recover in the case of a failure. Most of the results were below 6 percent.




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