IG-00-033

AUDIT

REPORT RELIEF GRANTED TO CONTRACTOR FOR

OVERPAYMENT OF GENERAL AND

ADMINISTRATIVE COSTS

April 20, 2000
National Aeronautics and

Space Administration

OFFICE OF INSPECTOR

GENERAL
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Code W

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Acronyms

ACO Administrative Contracting Officer

CACO Corporate Administrative Contracting Officer

CAS Cost Accounting Standard

DCAA Defense Contract Audit Agency

FAR Federal Acquisition Regulation

G&A General and Administrative
W April 20, 2000

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Relief Granted to Contractor for Overpayment of

General and Administrative Costs

 Report Number IG-00-033

Background

Our office received a copy of a referral alleging that a NASA Administrative Contracting Officer

(ACO)1 exceeded the delegated authority under the contracting warrant and that certain actions did not

safeguard the interests of the U.S. taxpayer. Specifically, the referral stated that the ACO did not

ensure compliance with the terms of the payload ground operations contract at Kennedy, or the Federal

Acquisition Regulation (FAR) and Costs Accounting Standards (CAS)2in regard to allocating G&A

costs to unallowable costs.

The allegation referred to audit work performed by the Defense Contract Audit Agency (DCAA)3 and

an audit report stating that the contractor was in noncompliance with FAR and CAS because it included

unallowable bonus costs in its computation for billable General and Administrative (G&A)4 costs. This

practice resulted in the contractor improperly billing the Government for G&A costs allocable to

employee bonuses. The DCAA recommended that the contractor adjust its vouchers to exclude G&A

costs allocable to unallowable costs already billed to the

 

1

 The ACO performs contract administration functions, which are listed in Federal Acquisition Regulation, Subpart 42.3, and

include administration of Cost Accounting Standards.

2

The 19 cost accounting standards, promulgated by the Cost Accounting Standards Board, are in 48 Code of Federal Regulations,

Chapter 99. The standards are applicable to negotiated prime contracts and subcontracts with the U.S. Government in excess of

$500,000. The standards are numbered and referred to as CAS 401-418 and CAS 420.

3

The DCAA provides preaward and postaward contract auditing services, internal control system audits, and other support

services to contracting officers from the Department of Defense, NASA, and other Federal agencies.

4

 G&A costs are management, financial, or other costs that are for the general management and administration of a business.
2

Government and exclude those costs from all future billings. The NASA ACO disagreed with the

DCAA and a former ACO determination, and on January 9, 1999, granted the contractor financial

relief for the G&A costs associated with employee bonuses.

Recommendation, Management’s Response, and OIG Evaluation

On February 14, 2000, we issued a draft report recommending that the Kennedy Center Director

rescind the relief given to the contractor and seek recovery for the unallowable G&A costs paid to the

contractor. Management nonconcurred with the recommendation, stating that the ACO’s “relief

granted” was actually an authoritative determination that, based on the contract proposal and the

parties’ advance agreement, employee bonuses were actually a distribution of fee and not a cost to the

contract. The complete text of management’s response to the draft report is in Appendix C, and OIG

comments on the response are in Appendix D.

Based on management’s response and a lack of clear language in the contract, we concluded that

recovery of the estimated $2 million in G&A costs associated with the bonuses is improbable.

However, NASA could be vulnerable if a similar bonus provision is included in other contracts without

clarifying language. Therefore, we revised the recommendation in this final report to

address future contracts. We recommended that Kennedy should clarify under future contracts whether

any costs paid from fee, direct and indirect, are allocable and allowable. We requested that

management provide additional comments on this report.

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Relief Granted to Contractor for Overpayment of

General and Administrative Costs
FINAL REPORT

AUDIT OF RELIEF GRANTED TO CONTRACTOR

FOR OVERPAYMENT OF GENERAL AND ADMNISTRATIVE COSTS
W April 20, 2000

TO: AA/Director, Kennedy Space Center

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on the Audit of Relief Granted to Contractor for

Overpayment of General and Administrative Costs

Assignment Number A9907200

Report Number IG-00-033

The subject final report is provided for your use and comments. Our evaluation of your

response is incorporated into the body of the report. In response to management’s comments

and our further consideration, we revised the report recommendation. Therefore, we request

management’s comments on the revised recommendation by May 22, 2000. The

recommendation will remain open for reporting purposes.

If you have questions concerning the report, please contact Mr. Chester A. Sipsock, Program

Director, Environmental and Financial Management Audits, at (216) 433-8960, or Ms. Sandra

Massey, Auditor-in-Charge, at (321) 867-4057. We appreciate the courtesies extended to the

audit staff. The final report distribution is in Appendix E.

[Original signed by Lee T. Ball for Mr. Rau]

Russell A. Rau

Enclosure

cc:

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

H/Associate Administrator for Procurement
2

JM/Director, Management Assessment Division

M/Associate Administrator for Space Flight

bcc:

AIGA, IG, Reading Chrons

H/Audit Liaison Representative

M/Audit Liaison Representative

GRC/W/Audit Program Director

KSC/W/Audit Program Manager

KSC/HM-E/Audit Liaison Representative
NASA Office of Inspector General

IG-00-033 April 20, 2000

 A9907200

Audit of Relief Granted to Contractor

For Overpayment of General

And Administrative Costs

Introduction

On February 16, 1999, a referral of fraud, waste, and abuse was made to the General

Accounting Office with a copy to the NASA Office of Inspector General. The Inspector

General agreed to address the referral. The allegation stated that a NASA administrative

contracting officer (ACO)5 exceeded the delegated authority under the contracting warrant and

that the actions did not safeguard the interests of the U.S. taxpayer. Specifically, the referral

stated that the ACO did not ensure compliance with the terms of the payload ground operations

contract at John F. Kennedy Space Center (Kennedy), or the Federal Acquisition Regulation

(FAR) and Costs Accounting Standards (CAS)6 in regard to allocating general and

administrative (G&A)7 costs to unallowable costs.

The allegation referred to audit work performed by the Defense Contract Audit Agency

(DCAA).8 On November 15, 1991, the DCAA issued an audit report stating that the payload

ground operations contractor at Kennedy was in noncompliance with FAR and CAS because it

included unallowable bonus costs in its computation for billable G&A costs. This practice

resulted in the contractor improperly billing the Government for G&A costs allocable to

unallowable base costs that included employee bonuses. The DCAA recommended that the

contractor adjust its vouchers to exclude G&A costs allocable to unallowable costs already

billed to the Government and exclude those costs from all future billings. On February 14,

1992, the DCAA notified the NASA ACO that the contractor continued to be in

noncompliance with FAR and CAS. The ACO agreed with the DCAA and requested a cost

impact proposal from the contractor.

 

5

The administrative contracting officer performs contract administration functions, which are listed in Federal

Acquisition Regulation, Subpart 42.3, and include administration of Cost Accounting Standards.

6

The 19 cost accounting standards, promulgated by the Cost Accounting Standards Board, are in 48 Code of Federal

Regulations, Chapter 99. The standards are applicable to negotiated prime contracts and subcontracts with the U.S.

Government in excess of $500,000. The standards are numbered and referred to as CAS 401-418, and CAS 420.

7G&A costs are management, financial, or other costs that are for the general management and administration of a

business.

8

The DCAA provides preaward and postaward contract auditing services, internal control system audits, and other

support services to contracting officers from the Department of Defense, NASA, and other Federal agencies.
2

The subsequent NASA ACO disagreed with the DCAA and the former ACO determinations,

and on January 9, 1999, granted the contractor financial relief for the G&A costs associated

with employee bonuses.

Our overall objective was to determine whether NASA inappropriately granted relief to a

contractor for overpayment of G&A costs billed to the Government under the payload ground

operations contract. See Appendix A for details on our scope and methodology.

Results in Brief

We agreed with the DCAA that the contractor improperly billed the Government for G&A

costs allocable to unallowable bonus costs. The bonuses were not reimbursable under the terms

of the contract and, therefore, were unallowable. The G&A costs allocated to unallowable

bonus costs should be identified and excluded from billings to the Government. Although the

NASA ACO did not exceed delegated contracting authority, as alleged in the referral, the ACO

inappropriately authorized reimbursement to the payload ground operations contractor for G&A

costs associated with employee bonuses.

Without seeking legal, procurement, or audit advice, the ACO concluded that the costs

associated with the employee bonuses should be reimbursed even though the bonuses were not

reimbursed. The billing of G&A costs associated with the bonuses warranted a thorough

review, including consultation with audit and legal resources as well as obtaining concurrence of

the NASA Procurement Office at Kennedy. As a result of the ACO’s autonomous action,

NASA reimbursed the contractor an estimated $2 million9 for G&A costs associated with

employee bonuses incurred from 1987 through 1996.

On February 14, 2000, we issued a draft report recommending that the Kennedy Center

Director rescind the relief given to the contractor and seek recovery for the unallowable G&A

costs paid to the contractor. Management nonconcurred with the recommendation, stating that

the ACO’s “relief granted” was actually an authoritative determination that, based on the

contract proposal and the parties’ advance agreement, employee bonuses were actually a

distribution of fee and not a cost to the contract.

Based on management’s response and a lack of clear language in the contract, we concluded

that recovery of the estimated $2 million in G&A costs associated with the bonuses is

improbable. However, NASA could be vulnerable if a similar bonus provision is included in

other contracts without clarifying language. Therefore, we are

revising the audit recommendation to address future contracts.

 

9

 The DCAA estimated the $2 million by comparing the G&A costs without bonuses in the G&A base ($87,342,971)

and with the bonuses in the G&A base ($85,154,641). The difference of $2,188,330 is the net increased G&A cost to

the Government.
3

Background

On January 1, 1987, NASA awarded the payload ground operations contract (NAS10-

11400) to McDonnell Douglas Astronautics Company,10 a division of McDonnell Douglas

Space Systems Corporation. The contract was for management, services, and property

necessary to support all payload activities for which Kennedy has responsibility. The basic

contract and options have a total contract value of about $1.9 billion and cover the 15-year

period from January 1, 1987, through December 31, 2001. Unlike other contracts with the

company, the payload ground operations contract provides that employee bonuses will be paid

from fee. Therefore, NASA does not reimburse the contractor for employee bonuses under

this contract.

On June 22, 1988, the corporate administrative contracting officer (CACO),11 located at

Huntington Beach, California, issued a report to McDonnell Douglas Space Systems

Corporation citing the corporation12 for being in noncompliance with CAS 405, Accounting for

Unallowable Costs. The CACO cited the corporation for being in noncompliance with CAS

405 because the corporation billed the Government for G&A costs allocable to unallowable

costs. See Appendix B for DCAA reports and other correspondence related to the

noncompliance with CAS 405.

On November 15, 1991, the DCAA, Eastern Region, issued Audit Report

No. 1311-91D44200051, citing the payload ground operations contractor for being in

noncompliance with CAS 405 and referencing the prior report from the CACO. The

contractor did not concur with the DCAA report and declined to make any changes in the

accounting treatment of the employee bonuses until the CAS 405 issue was resolved at the

corporate level. Resolution at the corporate level was delayed pending the outcome of

contractor appeals related to CAS 405 and subsequent court rulings.13

In 1992, the NASA ACO at Kennedy issued a final determination that the payload ground

operations contractor’s billing of G&A costs allocable to unallowable costs (employee bonuses)

 

10The company is also known as the Kennedy Space Center Division under which the payload ground operations

contract is performed.

11 The CACO is a civil service employee who performs contract administration functions at the corporate level.

12 The CACO informs the contractor of the initial determination of noncompliance. If the contractor disagrees with the

determination, it may submit a rebuttal. After considering any additional information provided by the contractor, the

CACO then issues a final determination, which the contractor may appeal.

13 Martin Marietta brought a similar CAS 405 noncompliance issue before the Armed Services Board of Contract

Appeals. Although the Board ruled against the Government, a Federal Circuit Court decision on December 28, 1993,

overturned the Board’s previous decision, and the G&A costs allocated to unallowable costs again became unallowable.
4

was in noncompliance with CAS 405 and the contractor’s disclosure statement.14 In addition,

the ACO requested that the contractor submit a cost impact proposal.

Once the court issued its final ruling in favor of the Government in 1993, the CACO began

negotiating a settlement with McDonnell Douglas at the corporate level for the CAS 405

violation. The CACO instructed the subsequent NASA ACO at Kennedy to address the CAS

405 issue relating to bonuses because the treatment of bonuses was unique to the payload

ground operations contract15 under the ACO's administration.

Payment of Unallowable G&A Costs

Finding. NASA inappropriately reimbursed the payload ground operations contractor for

G&A costs associated with employee bonuses. The terms of the contract excluded bonuses

from reimbursement, which made them unallowable. Accordingly, the contractor should not

have charged the associated G&A costs to the Government. Without seeking legal,

procurement, or audit advice, the NASA ACO inappropriately concluded that the contractor

should be reimbursed these costs even though the bonuses were not reimbursed. As a result,

the contractor received an estimated $2 million related to unallowable costs incurred from 1987

through 1996.

FAR Requirements for Treatment of G&A Costs Associated with Unallowable Costs

The FAR, Section 31.001, defines unallowable costs as any cost which, under the provisions of

a contract, cannot be included in cost reimbursements under a Government contract to which it

is allocable.16 Although the payload ground operations contract does not specifically state that

employee bonuses are unallowable, it does state that “employee bonuses paid pursuant to the . .

. employee bonus plan, dated January 1987, will be paid out of fee.” The NASA acquisition

team stated that NASA had experienced escalating employee bonus costs under previous

contracts. Therefore, NASA decided that bonuses would not be reimbursed under the payload

ground operations contract but would be paid from award fee.17 Because the bonuses were

allocable, but not reimbursable under the contract, they met the FAR definition of unallowable

costs.

 

14A disclosure statement is a written description of a contractor’s cost accounting practices and procedures. Any

business unit receiving a CAS covered contract or subcontract of $25 million or more must submit a disclosure

statement before contract award.

15Unlike other contracts, the payload ground operations contract provides that employee bonuses will be paid from fee.

Therefore, NASA does not reimburse the contractor for employee bonuses under this contract.

16 FAR 31.201-4 states that a cost is allocable to a Government contract if it (a) is incurred specifically for the contract,

(b) benefits both the contract and other work and can be distributed in reasonable proportion to the benefits received, or

(c) is necessary to the overall operation of the business.

17Award fee is a monetary award paid to the contractor based on the Government’s judgmental evaluation, which must

be sufficient to provide motivation for excellence in contract performance.
5

As prescribed by FAR, Section 31.203(c), all items that would be part of the cost input base,18

whether allowable or unallowable, shall bear their pro rata share of G&A costs. Thus, the

employee bonuses should be a part of the cost input base and bear a pro rata share of G&A

costs. CAS 405 describes the practice for accounting for unallowable costs. This standard

provides that any costs directly associated with unallowable costs are also unallowable. The

unallowable costs should be identified and excluded from billings to the Government. Pursuant

to CAS 405, the G&A costs allocated to unallowable bonus costs should be identified and

excluded from billings to the Government.

NASA Grants Financial Relief to a Contractor

The NASA ACO did not formally document the ACO review of the proper accounting

treatment of employee bonus costs and its applicability to CAS 405. The ACO review

consisted of examining excerpts from the payload ground operations contract and the original

contract proposal19 provided by the contractor. Based on the review, the ACO inappropriately

concluded that because the contractor agreed to pay bonuses from award fee, the bonuses

were not a cost under the contract. Therefore, the ACO decided that the costs could neither be

characterized as unallowable nor subject to CAS 405. The NASA ACO did not agree with the

DCAA that the contractor was in noncompliance with CAS 405 with regard to the bonuses.

In addition, the ACO inappropriately accepted the contractor’s explanation that the accounting

treatment for the bonuses paid from 1987 to 1991 was in error and that the impact was

immaterial to the Government. Specifically, the contractor recorded the bonuses in a cost base

that carried a share of G&A costs. The contractor contended that the bonuses should not have

been included in the base and should not have carried a share of G&A costs. Accordingly, the

contractor excluded the bonuses from the cost base for 1992 through 1996. In contrast to the

DCAA’s estimated impact of more than $600,000 for 1987 through 1991, the contractor

asserted that the impact to the Government was immaterial.20 The ACO agreed with the

contractor and on January 9, 1999, issued a letter relieving the contractor of the G&A costs

associated with the bonuses.

Procurement or Legal Advice

Although the ACO did not exceed delegated contracting authority as alleged by the DCAA, the

ACO did not follow FAR or Agency procedures before granting relief to the contractor.

 

18 The cost input base is the cost, except G&A costs, which is allocable to the production of goods and services during a

cost accounting period.

19In response to NASA’s request for proposal, McDonnell Douglas Astronautics Company submitted a cost-plusaward-fee proposal for performing the work specified under the payload ground operations contract.

20In response to a November 1991 DCAA report, McDonnell Douglas Astronautics Company prepared a cost impact

proposal identifying the G&A costs allocable to unallowable costs as $21,803.
6

FAR and Agency Requirements for Contracting Officers. NASA established controls to

ensure that procurement actions are in accordance with FAR requirements and in the best

interest of the Government. Contracting officers are responsible for ensuring performance of all

necessary actions for effective contracting, ensuring compliance with the terms of the contract,

and safeguarding the interests of the U.S. in its contractual relationships. Those responsibilities

are described in FAR 1.6. The FAR provides contracting officers wide latitude to exercise

business judgment. However, FAR Section 1.602-2 provides that contracting officers request

and consider the advice of specialists in audit, law, and other fields as appropriate. Further, the

ACO’s certificate of appointment21 for contracting officer authority specifies that any

determinations made that conflict with the DCAA recommendations require the concurrence of

the procurement officer or his deputy.

In addition, NASA Policy Directive 5101.1D, “Requirements for Legal Review of Procurement

Matters,” states that NASA legal counsel will provide advice and services to NASA on

procurement matters that arise out of contract award and administration.

The ACO’s 1999 action reversed the prior ACO’s 1992 determination that the contractor was

in noncompliance with CAS 405. In addition, the ACO’s action conflicted with the audit

recommendation contained in the 1991 DCAA report to exclude from reimbursement the G&A

costs already billed to the Government. Prior to granting relief, the ACO did not obtain a

NASA legal review or concurrence of the procurement officer or his deputy as required by the

NASA directive and the contracting officer warrant. Notwithstanding these procurement

requirements, the ACO believed that under the provisions of FAR 1.6, the ACO had wide

latitude to address the CAS 405 issue and was not required to take any other actions.

Management’s Response to Draft Recommendation

On February 14, 2000, we issued the draft of this report, which recommended that the

Director, Kennedy Space Center, rescind the relief given to the contractor and seek recovery

for the unallowable G&A costs paid to the contractor. Management nonconcurred with the

recommendation, stating that the ACO’s “relief granted” was actually an authoritative

determination that, based on the contract proposal and the parties’ advance agreement,

employee bonuses were actually a distribution of fee and not a cost to the contract. The

complete text of management’s response is in Appendix C. Our comments on management’s

response are in Appendix D.

Need for Clear Language on Bonuses

 

21On March 17, 1997, the ACO was appointed Contracting Officer and was authorized to take actions with respect to

contract administration services.
7

We maintain our position that the employee bonuses were unallowable under the contract and

that a share of G&A should have been identified and excluded from billings to the Government.

In the absence of clear contract language related to the allowability of the bonus costs and of

evidence of the intent of the parties, resolution of the allowability issue rests solely on contract

interpretation. Kennedy management concluded that the bonuses were not a cost under the

contract based on the contract proposal and the parties’ advance agreement. However, the

contract proposal did not address the treatment of G&A costs associated with the employee

bonuses and the parties’ advance agreement was an oral agreement. As a result, we relied on

the application of FAR and CAS provisions to determine the proper treatment of bonuses and

associated G&A costs.

The payload ground operations contract did not clearly state that the costs for employee

bonuses and any associated G&A costs would be unallowable. The DCAA reviewed the

contract proposal and recommended that the following specific language be included in any

contract resulting from the proposal.

Beginning 1 January 1987, incentive compensation and bonuses (except for the executive bonus

plan) for direct/indirect employees shall not be an allowable cost, either direct or indirect, to this

contract.

The contract did not include the recommended language, but stated only that “bonuses would

be paid from fee.” If the parties had clearly stated in the contract that the bonuses were

unallowable, then the $2 million G&A costs associated with the bonuses would have been

recoverable by the Government.

Based on management’s response and a lack of clear language in the contract, we concluded

that recovery of the estimated $2 million in G&A costs associated with the bonuses is

improbable. However, NASA could be vulnerable if a similar bonus provision is included in

other contracts without clarifying language. Therefore, we are revising our recommendation to

address future contracts. We request that management provide additional comments on this

report. The recommendation is considered unresolved and open for reporting purposes.

Recommendation for Corrective Action

The Director, Kennedy Space Center, should clarify in future contracts whether any costs paid

from fee, direct and indirect, are allocable and allowable.
8

Appendix A. Objectives, Scope, and Methodology

Objective

Our overall objective was to determine whether NASA inappropriately granted relief to a

contractor for overpayment of G&A costs billed to the Government under the payload ground

operations contract.

Scope and Methodology

We limited our review to the alleged CAS 405 violation relating to G&A costs for employee

bonuses paid by McDonnell Douglas Astronautics Company under the payload ground

operations contract. We interviewed NASA procurement officials, DCAA representatives and

contractor employees regarding the contract negotiation and award as well as accounting

treatment for employee bonuses paid under the contract.

Management Controls Reviewed

We reviewed the following management controls:

• FAR, Subpart 1.6, “Career Development, Contracting Authority, and

Responsibilities,” which describes the responsibilities for contract administration.

• FAR, Part 31, “Contract Costs, Principles, and Procedures,” defines unallowable

costs.

• FAR, Subpart 31.2, “Contracts with Commercial Organizations,” which describes

composition of total costs and lists factors for determining whether a cost is

allowable.

• FAR, Subpart 42.3, “Contract Administration Office Functions,” which describes

the functions delegated to an ACO.

• NASA Policy Directive 5101.1D, “Requirements for Legal Review of Procurement

Matters,” which requires a NASA legal review of contract administration and

award activities.

Audit Field Work

We performed audit field work from September 1999 to January 2000 at NASA Headquarters

and Kennedy. We conducted the audit in accordance with generally accepted government

auditing standards. 
9

Appendix B. Reports and Correspondence Addressing CAS 405

DCAA Report of Noncompliance, Cost Accounting Standard 405, McDonnell

Douglas Space System Company, Kennedy Space Center Division, Report

No. 1311-91D44200051, November 15, 1991. The report states that when computing its

billable G&A costs on its public vouchers, the contractor includes the unallowable base costs,

including bonuses, in its computation even though it does not bill the Government for these

costs. This practice results in the Government being billed for G&A costs allocable to

unallowable base costs which is in noncompliance with CAS 405.40(a). The DCAA

estimated a cost impact of $584,84 through September 30, 1991. DCAA recommended

that the contractor adjust its vouchers to exclude G&A cost allocable to unallowable costs

already billed to the Government. The contractor responded that the CAS 405

noncompliance applies to an ongoing issue with the corporate office and, therefore, the

contractor did not intend to make any changes locally until the issue was resolved.

Letter from the prior ACO to Kennedy Space Center Division, McDonnell

Douglas Space Systems Company, May 5, 1992. The letter communicates the ACO’s

final determination that the contractor’s billing of G&A costs allocable to unallowable costs

is in noncompliance with CAS 405 and the contractor’s disclosure statement.22 The letter

requests the contractor to submit a cost impact proposal.

Letter from McDonnell Douglas Space Systems Company, Kennedy Space

Center Division, June 23, 1992. The contractor reiterated its strong disagreement with

the determination of having noncomplied with CAS 405. The contractor submitted a cost

impact proposal totaling $21,803 associated with the NASA payload ground operations

contract for 1987 through 1991. The letter characterized the cost impact as immaterial.

DCAA Audit Report on Cost Impact Proposal Associated with CAS 405

Noncompliance, Billing of G&A Costs Allocable to Unallowable Costs, McDonnell

Douglas Space Systems Company, Kennedy Space Center Division, August 31,

1992. In the DCAA’s opinion, the cost impact proposal associated with the CAS 405

noncompliance was inadequate because it excluded unallowable bonus and other costs

related to travel. Further, adjusting for the contractor’s error results in increased costs of

$898,660 to the Government; $837,235 of that amount is associated with the payload

ground operations contract.

 

22A disclosure statement is a written description of a contractor’s cost accounting practices and procedures. Any

business unit receiving a CAS covered contract or subcontract of $25 million or more must submit a disclosure

statement before contract award.
10

Appendix B

Assist Audit on CAS 405 Cost Impact, March 15, 1995. The DCAA Titusville

Branch Office, Florida, prepared the report for DCAA, Huntington Beach, California, to

assist in DCAA’s calculation of the CAS 405 Cost Impact at the corporate level for

calendar years 1987 through 1994. The DCAA report reaffirms its findings to the

contractor in August 1992. The report states that the cost impact prepared by the

contractor is inadequate because it excludes the bonus costs from the cost base.

Therefore, the costs for the bonuses did not receive their pro rata share of the G&A costs.
11

Appendix C. Management’s Response
12

Appendix C
13

Appendix C
14

Appendix C

See Appendix D,

OIG Comment 2

See Appendix D,

OIG Comment 1

See Appendix D,

OIG Comment 3
15

Appendix C

See Appendix D,

OIG Comment 1
16

Appendix C

See Appendix D,

OIG Comment 4
17

Appendix C

See Appendix D,

OIG Comment 5

See Appendix D,

OIG Comment 6
18

Appendix D. OIG Comments on Management’s Response

Kennedy management provided the following general comments in its response to our draft

report. Our responses to the comments are also presented.

Management’s Comment. There is no provision within the contract or the FAR cost

principles that makes the costs of such employee bonus payments expressly unallowable.

Generally speaking, the CAS does not determine allowability, but instead addresses

allocability of costs. A fundamental requirement of CAS is that “cost expressly

unallowable or mutually agreed to be unallowable, including costs mutually agreed to be

unallowable directly associated costs, shall be identified and excluded from any billing,

claim, or proposal applicable to a Government contract.”

1. OIG Comments. Although we agree that the bonuses were not stated in the contract

to be expressly unallowable, the parties mutually agreed that bonuses would not be

reimbursed under the contract and they were, therefore, unallowable under the contract

terms. We concluded that the bonuses were unallowable based on FAR 31.001, which

states that unallowable costs are any costs which, under the provisions of a contract,

cannot be included in cost reimbursements under a Government contract to which it is

allocable. We further concluded that these costs were allocable because the bonuses

benefited both the NASA contract and other contract work and could be distributed in

reasonable proportion to the benefits received. This position is strengthened by the fact

that the bonuses were allocable to other contracts with the Government.

Management’s Comment. The latter determination provided by the ACO is not in

disagreement or inconsistent with the former ACO determinations. The determinations of

the former ACO applied generally to unallowable costs and G&A allocation related thereto

and did not focus on or necessarily pertain to bonuses. It is also expected that, had the

former ACO had the opportunity to address bonuses as a stand alone issue, the results

would have been the same.

2. OIG Comments. The former ACO issued a final determination that the contractor’s

billing of G&A allocable to unallowable costs was in noncompliance with CAS 405 and the

contractor’s disclosure statement. DCAA records show that employee bonuses

represented about 99 percent of the questioned unallowable costs for the reported period

1987 through 1991. Consequently, the majority of the CAS 405 noncompliance

addressed by the former ACO’s determination pertained to the bonuses.

Management Comment. Contractors may distribute or use earned fees for any number

of purposes, generally without the need to provide any accounting for its disposition to the

contracting agency. What a contractor elects to do with its earned fee is not governed by

the FAR, NASA FAR Supplement, or CAS.
19

Appendix D

3. OIG Comments. We agree that the contractor may use or distribute fee for any

number of purposes. However, the use of fee is not pertinent to the treatment of bonus

costs. The fact that the contractor agreed to pay employee bonuses from fee does not

change the nature of the bonuses as a contractor cost. Further, the contractor agreed to

pay the bonuses from fee only because Kennedy indicated that it would not continue to pay

the contractor’s escalating bonus costs. In addition, the contractor used this strategy to

enhance the likelihood of winning the contract award.

Management Comment. The ACO’s decision to permit the contractor to correct its

reported “error” did not prejudice the Government’s interest or increase the costs

otherwise payable under the contract.

4. OIG Comments. We disagree that the ACO’s action did not increase the cost to

NASA under the contract. By not requiring the contractor to include the bonuses in the

base and bear a pro rata share of G&A, the contractor billed NASA about $2 million

related to the bonus costs incurred from 1987 through 1996.

Management Comment. Kennedy management is concerned that the implied attempt to

interject the DCAA and OIG directly into contract administration activities would

improperly restrict the contracting officer’s delegated authority and would have a serious

impact on the negotiation process and the efficacy of contract settlements.

5. OIG Comments. The Inspector General Act of 1978 established the Offices of

Inspector General to provide independent and objective audits relating to the programs and

operations of the Agency. While fulfilling that purpose, we avoid restricting the contracting

officer’s authority or affecting the negotiation process. For this audit, we reviewed

negotiations and contract provisions that were already completed.

Management Comment. Kennedy management believes it is inappropriate to set a

precedent that would require contractors to account for fee distribution to or profit sharing

with their employees as a part of their G&A cost base.

6. OIG Comments. We are not suggesting that NASA require contractors to account

for fee distribution. Rather, as prescribed by the FAR, NASA must consider the treatment

of costs such as bonuses for allocability and allowability to the contract independent of how

such costs are paid by the contractor.
20

Appendix E. Report Distribution

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

AI/Associate Deputy Administrator

B/Chief Financial Officer

B/Comptroller

G/General Counsel

H/Associate Administrator for Procurement

HK/Director, Contract Management Division

HS/Director, Program Operations Division

J/Associate Administrator for Management Systems

JM/Director, Management Assessment Division

L/Associate Administrator for Legislative Affairs

M/Associate Administrator for Space Flight

NASA Centers

Center Director, John F. Kennedy Space Center

Chief Counsel, John F. Kennedy Space Center

Non-NASA Federal Organizations and Individuals

Assistant to the President for Science and Technology Policy

Deputy Associate Director, Energy and Science Division, Office of Management and

 Budget

Branch Chief, Science and Space Programs Branch, Energy and Science Division, Office

of Management and Budget

Associate Director, National Security and International Affairs Division, Defense

 Acquisitions Issues, General Accounting Office

Professional Assistant, Senate Subcommittee on Science, Technology, and Space

Chairman and Ranking Minority Member – Congressional Committees and

Subcommittees

Senate Committee on Appropriations

Senate Subcommittee on VA, HUD, and Independent Agencies

Senate Committee on Commerce, Science, and Transportation

Senate Subcommittee on Science, Technology, and Space

Senate Committee on Governmental Affairs
21

Appendix E

Chairman and Ranking Minority Member – Congressional Committees and

Subcommittees (Cont.)

House Committee on Appropriations

House Subcommittee on VA, HUD, and Independent Agencies

House Committee on Government Reform

House Committee on Science

House Subcommittee on Space and Aeronautics, Committee on Science

House Subcommittee on Government Management, Information, and Technology

House Subcommittee on National Security, Veterans Affairs, and International Relations

Congressional Member

Honorable Pete Sessions, U.S. House of Representatives
NASA Assistant Inspector General for Auditing

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