IG-01-006

AUDIT

REPORT IMPACT OF THE BOEING COMPANY'S

RESTRUCTURING ON NASA

November 27, 2000

National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL
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Acronyms

CAS Cost Accounting Standards

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFARS Defense Federal Acquisition Regulation Supplement

DoD Department of Defense

FAR Federal Acquisition Regulation
W November 27, 2000

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Impact of the Boeing Company's Restructuring on

NASA

Report Number IG-01-006

The NASA Office of Inspector General (OIG) has completed an audit of the Impact of

the Boeing Company’s (Boeing) Restructuring on NASA. We performed the audit to

determine whether Boeing’s restructuring was executed in accordance with Federal

guidance and was beneficial to NASA. We found that while Boeing handled the

restructuring in accordance with Federal requirements, it has not been beneficial to

NASA. Boeing’s commercial and defense customers will primarily benefit from its

restructuring, changes in accounting practices, and cost allocation methods, while NASA

will absorb most of the costs.1 We also found reasons to question the potential savings

accruing to NASA that Boeing reported in the advance agreement2 with the Defense

Contract Management Agency (DCMA).3 The audit identified potential monetary

benefits of $64.7 million that NASA can recover through future contract cost reductions

resulting from the DCMA’s efforts to mitigate the impacts of accounting and cost

allocation changes Boeing implemented as part of its restructuring. The audit also

identified NASA’s need for legislation requiring contractors involved in restructurings to

provide NASA the same consideration (savings) as that provided to the Department of

Defense (DoD).

 

1

 Appendix C lists NASA’s major contracts with Boeing that experienced cost increases as a result of

Boeing’s restructuring, changes in accounting practices and cost allocation methods.

2

 The Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement

(DFARS) permit contractors to enter into advance agreements with the Government for the treatment of

special or unusual costs.

3

 The DCMA is the contract manager for the Department of Defense (DoD). The DCMA's mission is to

ensure Federal acquisition programs, supplies, and services are delivered on time and within cost and meet

performance requirements. DCMA provides to DoD components and to other Government agencies

(including NASA) contract management and administration services that consist of on-site surveillance and

program-specific processes that cannot be monitored by off-site buying agencies.
2

Background

As a result of its acquisition of the Rockwell International Corporation (Rockwell)

Aerospace and Defense Units and its merger with the McDonnell Douglas Corporation

(McDonnell Douglas), Boeing signed an advance agreement with the DCMA in

December 1999. The advance agreement permitted Boeing to charge restructuring costs

to Government contracts with the expectation that future Government savings would be

at least twice the amount of incurred restructuring costs. Boeing’s cost proposal, which

served as the basis for the advance agreement, identified total potential gross savings of

$839.3 million of which $376 million accrued to the DoD. The total savings included

$279.6 million related to the closing and transfer of operations from a Boeing (formerly

Rockwell International) facility in Downey, California, that primarily supported NASA

missions. NASA’s total net savings under the agreement were projected to be $50

million. 4

Prior to initiating the advance agreement with the DCMA, Boeing also adopted changes

to its accounting and cost allocation methods as a result of its acquisition of Rockwell

and its merger with McDonnell Douglas. Those changes had major effects on

Government contracts, particularly on NASA contracts in that the accounting and cost

allocation changes exceed the projected restructuring savings for NASA. However,

neither Boeing nor the DCMA addressed the accounting changes and their impacts when

developing and negotiating the advance agreement.

The $64.7 million in potential monetary benefits represents the Defense Contract Audit

Agency's (DCAA)5 and the DCMA's analysis of the cost to NASA, resulting from

Boeing’s accounting and cost allocation changes, that the Agency could recover from

 

4

 We found that NASA’s share of projected savings resulting from Boeing’s restructuring was not

equitable. Boeing’s cost proposal identified a net savings of $219 million (36 percent of the total net

savings of $601 million) as a result of transferring operations from and closing the Downey, California,

facility. Johnson Space Center (Johnson) procurement officials told us that historically, 80 percent of the

workload at the Downey facility was NASA-related. However, Boeing’s cost proposal identified only $50

million (8 percent) of the $601 million of total net savings as accruing to NASA. Based on the historical

percentage of NASA work performed at the Downey facility, NASA should have logically expected to

receive about $175 million (80 percent of the $219 million savings from closing the Downey facility.)

5

 The DCAA is responsible for performing all contract audits for the DoD and for providing accounting and

financial advisory services for contracts and subcontracts to DoD procurement and contract administration

activities. The DCAA also provides contract audit services to other Government agencies including

NASA.
3

Boeing. 6 Implementation of our recommendations will ensure that the Agency realizes

this cost recovery through offsets to contract billings, which will have a positive effect on

NASA’s budget.7

Recommendations

We recommended the Associate Administrator for Procurement pursue legislation for

NASA similar to that provided the DoD regarding business restructurings and monitor

any future restructurings to ensure that the 2-to-1 savings-to-cost ratio is realized.8 We

also recommended that the Associate Administrator coordinate with the DCAA to

determine whether actual savings are accruing to NASA from the advance agreement and

to ensure that DCAA segregate any NASA savings in its planned audit of Boeing’s DoD

business segments. We further recommended the Associate Administrator participate in

the negotiations between the DCMA and Boeing to mitigate the adverse effects of the

accounting and cost allocation changes. Implementation of these recommendations will

help ensure that NASA's interests are adequately protected not only with respect to

Boeing's restructuring, but also in the event of future restructuring by NASA's

contractors.

Management’s Response and OIG Evaluation

Management concurred with all the recommendations, but its proposed actions are

responsive to only two of the six recommendations. Management’s planned corrective

actions are responsive in relation to pursuing legislation for NASA similar to that

provided the DoD regarding business restructurings and to monitor future restructurings

to ensure the savings-to-cost ratio is realized. In future restructurings involving NASA

contracts, management intends to pursue an agreement with the DoD to achieve the same

2-to-1 savings-to-cost ratio required for DoD.

Management did not provide specific corrective actions or implementation dates in

relation to (1) coordinating with the DCAA to obtain cost savings data pertaining

specifically to NASA and (2) participating in the negotiations between the DCMA and

Boeing to mitigate the impacts of the accounting and cost allocation changes. We have

asked management to provide specific corrective actions and implementation dates.

Management also did not address the potential monetary benefits of $64.7 million.

 

6

 The DCMA Boeing Defense Corporate Executive told us that NASA should recover $64.7 million from

Boeing. DCMA determined the amount using audit information DCAA developed. See Appendix F for

more details.

7

 DCMA officials told us that under the offset method, Boeing would continue to bill NASA for contract

work, but NASA would not make contract payments on the billings until the amounts billed equaled the

offset amount negotiated.

8

 As specified by the DFARS, the 2-to-1 savings-to-cost ratio applies only to DoD contracts. DCMA

officials told us that Boeing and the DCMA agreed to treat non-DoD customers the same as DoD in

negotiating the advance agreement
4

Management commented extensively on our findings (see Appendix G). We respond to

those comments in Appendix H of the report. Management’s basic position is that we did

not understand the statutory and regulatory requirements associated with business

restructuring and cost accounting changes. As detailed in the report, we are well aware

of the statutory and regulatory requirements for those areas. Although Boeing and the

DCMA handled the restructuring and cost accounting changes as two separate and

distinct events, they were not mutually exclusive, and taken together had an adverse

effect on NASA. Our report describes and quantifies that effect on NASA and provides

some methods for relief.

Details on the status of the recommendations are in the finding section of the report.

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Impact of the Boeing Company’s Restructuring on NASA
FINAL REPORT

AUDIT OF IMPACT OF THE BOEING COMPANY'S

RESTRUCTURING ON NASA
W November 27, 2000

TO: H/Associate Administrator for Procurement

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on Audit of Impact of the Boeing Company's Restructuring

on NASA

Assignment Number A0003900

Report Number IG-01-006

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

response is incorporated into the body of the report and Appendix H.

We ask that management provide additional comments on recommendations 1, 2, 5, and

6 by January 26, 2000. The additional comments should provide the specific corrective

actions and implementation dates in relation to (1) requesting the DCAA to audit and

validate the actual savings accruing to NASA from Boeing’s restructuring,

(2) determining whether the actual restructuring savings exceed costs by a ratio of

2-to-1, (3) the specific role the Agency intends to take in the negotiations to mitigate the

impacts from Boeing’s accounting changes, and (4) requesting DCAA to provide a

specific breakout of the effects to NASA from DCAA’s audit of Boeing’s business

segments. We also ask that management address the $64.7 million in potential monetary

benefits associated with recommendation 5. The corrective actions planned for

recommendations 3 and 4 are responsive. Please notify us when action has been

completed on those recommendations, including the extent of testing performed to

ensure corrective actions are effective. All recommendations will remain open for

reporting purposes until agreed-to corrective actions are completed.

If you have questions concerning the report, please contact Mr. Kevin J. Carson,

Program Director, Safety and Technology Audits, at (301) 286-0498, or Mr. Karl Allen,

Program Manager, at (202) 358-2595. We appreciate the courtesies extended to the

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

[original signed by Lee Ball for]

Russell A. Rau

Enclosure
2

cc:

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

JM/Acting Director, Management Assessment Division

L/Associate Administrator for Legislative Affairs

M/Associate Administrator for Space Flight

AA/Director, Lyndon B. Johnson Space Center

AA/Director, John F. Kennedy Space Center

AA/Director, George C. Marshall Space Flight Center
3

bcc:

AIGA, IG Chrons

JSC/BD5/Audit Liaison Officer

KSC/QA-D/Audit Liaison Officer

MSFC/BE01/Audit Liaison Officer

W/K. Carson

 K. Allen

 L. Brickhouse
ADMINISTRATIVELY CONTROLLED INFORMATION-PROPRIETARY

FOR OFFICIAL USE ONLY

NASA Office of Inspector General

IG-01-006 November 27, 2000

 A0003900

Impact of the Boeing Company’s

Restructuring on NASA

Introduction

On December 17, 1999, Boeing entered into an advance agreement with the DCMA. The

advance agreement allowed Boeing to claim the costs to reorganize and restructure as a

result of its previous acquisitions and mergers, with the expectation that future savings to

the Government would be at least twice the amount of the restructuring costs incurred.

We performed this audit to address the resulting disparities between the savings accruing

to Boeing and the DoD, and those accruing to NASA. The objectives of the audit were to

determine whether:

• the advance agreement negotiated by the DCMA met all Federal requirements and

• NASA’s interests were adequately considered and addressed under Boeing’s

restructuring.

Appendix A contains further details on the audit objectives, scope, and methodology.

Results in Brief

NASA did not benefit from Boeing’s restructuring and its advance agreement with the

DCMA. Boeing’s DoD customers could realize potential savings of $376 million, while

NASA could incur as much as $115 million in additional costs resulting from Boeing’s

acquisition of the Rockwell International Corporation (Rockwell) Aerospace and Defense

Units and its merger with the McDonnell Douglas Corporation (McDonnell Douglas).

The additional costs may accrue to NASA because it does not have guidance and

legislation9 comparable to that for the DoD regarding external business restructurings and

because NASA was not closely involved in reviewing and negotiating Boeing’s

restructuring proposal. Through active participation in negotiations with the DCMA and

Boeing, NASA has an opportunity to recover about $64.7 million through future contract

cost reductions, which would mitigate some of the impact of Boeing’s restructuring and

reorganization on the Agency.

 

9

 The Defense Federal Acquisition Regulation Supplement (DFARS) is the implementing guidance for

DoD concerning contractor restructurings as a result of legislation provided under Section 8115 of the DoD

Appropriations Act of 1997 (Public Law 104-208).
2

Background

Boeing became the largest aerospace company in the world and NASA’s largest

contractor after its 1996 acquisition of the Aerospace and Defense Units of Rockwell and

its 1997 merger with McDonnell Douglas. After the acquisition and merger, Boeing

asked the DCMA to execute an advance agreement under which the company could

charge the costs of reorganizing and restructuring to Government contracts, under the

provisions of the Federal Acquisition Regulation (FAR) and the Defense Federal

Acquisition Regulation Supplement (DFARS). The regulations permit contractors to

enter into advance agreements with the Government and allow the contractors to

accumulate and bill restructuring costs to the Government as long as the savings from the

restructuring exceed costs by a ratio of 2-to-1.10 The DCMA's December 17, 1999,

advance agreement with Boeing allowed Boeing to be reimbursed for its costs to

restructure, reorganize, and consolidate operations of the three former separate business

entities (Boeing, Rockwell, and McDonnell Douglas).

Boeing’s cost proposal, which served as the basis for the advance agreement, identified

total potential gross savings of $839.3 million as a result of the restructuring, of which

$376 million would accrue to the DoD. The total savings of $839.3 million included

$279.6 million related to the closing and transfer of operations from a former Rockwell

facility in Downey, California, that had primarily supported NASA missions. The cost

proposal identified NASA’s total net savings as $50 million. Appendix B of the report

provides specific details of the cost proposal’s beneficiaries, potential savings, and

projected costs.

Prior to DCMA’s approval of the restructuring proposal, Boeing also adopted accounting

changes and revised its cost allocation methods. These changes and revisions resulted in

significant cost redistributions among Boeing's various business units. The changes and

revisions in accounting procedures and allocation methods had a greater cost impact on

NASA than did the projected savings from the advance agreement (see Appendix C).

Appendix D of the report provides additional information on Boeing’s acquisition,

merger, and restructuring. Appendix E contains a summary of prior NASA OIG audits

related to contractor restructurings.

Boeing Company Restructuring

Finding. NASA has not benefited from Boeing’s restructuring and its advance

agreement with the DCMA. Specifically, NASA (1) received an inequitable share of the

projected restructuring savings and (2) has little assurance that it will realize any actual

savings from Boeing’s restructuring. In addition, NASA could incur increased costs of as

 

10 As specified by the DFARS, the 2-to-1 savings-to-cost ratio applies only to DoD contracts. DCMA

officials told us that Boeing and the DCMA agreed to treat non-DoD customers the same as DoD in

negotiating the advance agreement.
3

much as $115 million due to changes in accounting procedures and cost allocation

methods related to Boeing's restructuring. The Agency has not benefited because

(1) NASA does not have the legislation and implementing guidance similar to DoD’s

regarding external business restructurings, (2) NASA was not actively involved in

reviewing and negotiating Boeing's restructuring proposal, and (3) the DCMA considered

Boeing’s accounting and cost allocation changes separate and distinct from its

restructuring efforts and did not include these items in negotiating the advance

agreement. As a result, Boeing’s commercial and defense customers will primarily

benefit from its restructuring, changes in accounting practices, and cost allocation

methods while NASA will absorb most of the costs. NASA has an opportunity to recover

about $64.7 million in contract offsets as a result of DCMA’s efforts to mitigate some of

these cost increases. The contract offsets are actual dollar savings for NASA and have a

positive impact on the Agency’s budget.11

Guidance on Restructuring and Advance Agreements

The FAR, Part 31, section 109, "Advance Agreements," requires that contracting officers

and contractors seek advance agreements on the treatment of special or unusual costs.

The FAR also states that an advance agreement may be negotiated with a particular

contractor for a single contract, a group of contracts, or all the contracts of a contracting

office, an agency, or several agencies. Further, before negotiating an advance agreement,

the Government negotiator shall:

(1) determine if other contracting offices inside the agency or in other

agencies have a significant unliquidated dollar balance in contracts with

the same contractor;

(2) inform any such office or agency of the matters under consideration

for negotiation; and

(3) as appropriate, invite the office or agency and the responsible audit

agency to participate in prenegotiation discussions and/or in the

subsequent negotiations.

The DFARS, section 231.205-70, "External Restructuring Costs," provides further

guidance on restructuring costs and states:

. . . for business combinations occurring after October 1996, the

Undersecretary of Defense for Acquisition, Technology, and Logistics

must certify that projections of future restructuring savings resulting to

DoD from the business combination are based on audited cost data and

the audited projected savings for the DoD will either exceed the costs

 

11 DCMA officials indicated that under the offset method (once the amount is negotiated), Boeing would

continue to bill NASA for contract work. Conversely, NASA would not make contract payments on the

billings until the amounts billed equaled the offset amount negotiated. DCMA officials indicated this

method is preferable to having Boeing issue a check for the offset amount. A check would be deposited

directly into the U.S. Treasury, and while the Government would benefit as a whole, there would be no

direct benefit to NASA.
4

allowed by a factor of at least 2-to-1 or that the business combination

results in the preservation of a critical capability that might otherwise

be lost to DoD.

NASA has no legislation equivalent to that in Public Law 104-208 or guidance to parallel

that in the DFARS regarding business restructurings. Further, the NASA FAR

Supplement does not address business restructurings and advance agreements. Thus, if

an external restructuring affects both DoD and non-DoD customers, there is no

requirement that effects on non-DoD customers be addressed as long as the 2-to-1

savings-to-cost ratio is realized for the DoD.

The NASA FAR Supplement contains provisions for Agency representatives to

participate with DoD in situations involving NASA’s interests. Specifically, the NASA

FAR Supplement Subpart 1842.705-1(a)(i) states:

Since many NASA contractors are under DoD’s final overhead rate

determination procedure, NASA’s policy is to participate jointly with

DoD for those companies where NASA has a major financial interest.

The NASA participant shall be a representative from that installation

having the predominance of NASA work.

The Code of Federal Regulations, Title 48, Chapter 99, "Cost Accounting Standards

Board, Office of Federal Procurement Policy, Office of Management and Budget,"

requires certain contractors and subcontractors to comply with the Cost Accounting

Standards (CAS) by providing written disclosure statements and to consistently follow

the company's disclosed accounting practices. The CAS apply only to negotiated

contracts and subcontracts. Compliance with the CAS is mandatory for all executive

branch agencies and for contractors and subcontractors in estimating, accumulating, and

reporting costs in connection with pricing and administration and settlement of disputes

concerning all negotiated prime contract and subcontract procurements with the U.S.

Government in excess of $500,000.

NASA’s Share of Restructuring Savings

NASA’s share of projected savings resulting from Boeing’s restructuring was not

equitable. Boeing’s cost proposal served as the basis for the advance agreement and

identified a net savings of $219 million (36 percent of the total net savings of $601

million) as a result of transferring operations from and closing its Downey, California,

facility. 12 Johnson Space Center (Johnson) procurement officials told us that historically,

about 80 percent of the workload at the Downey facility was NASA-related and

estimated the total dollar value of the NASA work performed at the facility at about $8

billion. However, Boeing’s cost proposal identified only $50 million (8 percent) of the

$601 million of total net savings as accruing to NASA. Based on the historical

 

12 The heritage Boeing North America portion of the company (formerly Rockwell InternationalRocketdyne) operated a facility in Downey, California, where the Space Shuttle fleet was conceptualized,

designed, and built beginning in the early 1970’s.
5

percentage of NASA work performed at the Downey facility, NASA should have

logically expected to receive about $175 million (80 percent of the $219 million savings

from closing the Downey facility) in net savings from the facility closure.

DCMA representatives told us the savings accruing to NASA were not based on the

historical percentage of NASA work performed at Downey. Instead, the NASA savings

were based on the projected percentage of work to be performed at the facilities to which

Boeing transferred the work. The majority of work performed at the Downey facility was

transferred to Boeing’s Huntington Beach, California, facility. DCMA representatives

stated that the Huntington Beach facility primarily performed DoD-related work prior to

the transfer of NASA work that had been performed at the Downey facility. After the

transfer, NASA’s activities represented only about 45 percent of the Huntington Beach

facility’s total workload. In addition, the costs to transfer the NASA work to Huntington

Beach reduced the projected net savings even further. As a result, Boeing’s Commercial

Aircraft Group and its DoD business segments (the Military Aircraft and Missiles Group

and the DoD business base of the Space and Communications Group) realized more

savings from closing the Downey facility than did NASA, even though historically,

NASA contracts provided the majority (80 percent) of the workload for the facility.

Actual versus Projected Savings

The actual savings realized from Boeing’s restructuring could be much less than Boeing’s

projected savings. Specifically, neither the DCMA nor the Defense Contract Audit

Agency (DCAA) requires Boeing to identify and report actual restructuring savings.

Further, the actual restructuring costs could be much higher than those projected. DCMA

representatives told us that they do not request Boeing to provide actual savings figures

and that the DCAA does not require actual savings data for its audits. Rather, DCAA

audits the projected savings and determines whether Boeing followed the methodologies

outlined in its cost proposal in determining the savings amounts. As further evidence that

the savings are only estimates, the DCAA does not review all the individual business

elements13 supporting the annual projected savings figures. DCMA officials told us that

DCAA reviewed 19 of the 60 business elements since the 19 elements accounted for

more than 90 percent of the annual reported savings.

In addition to the actual savings being less than projected, the restructuring

implementation costs could be higher than those used to negotiate the advance

agreement. While the implementation costs under the advance agreement will be

 

13 The 60 business elements were all the locations at which Rockwell International, McDonnell Douglas,

and Boeing had facilities prior to Boeing’s acquisition and merger. Boeing’s restructuring proposal

consolidated, transferred, or discontinued operations from a number of the sites. The Downey, California,

site is one such example.
6

amortized14 through 2003, the advance agreement also contains a negotiated cost ceiling

that is $90.3 million more than the implementation costs used to determine projected

restructuring savings. Thus, until completion of restructuring amortization (2003), the

actual implementation costs will not be known. Consequently, the actual restructuring

savings could be much less than Boeing’s projections due to higher than anticipated

implementation costs.

The procedures previously discussed do not provide NASA with reasonable assurance

that actual savings are being generated. Unless NASA asks Boeing and DCAA to

determine actual savings, the Agency cannot be assured that it is realizing any savings

from the restructuring. NASA should request that DCAA audit and determine whether

actual savings are accruing to the Agency and to ensure that NASA’s savings exceed the

restructuring costs by a 2-to-1 ratio.

Changes in Accounting Procedures and Cost Allocation Methods

Boeing implemented accounting and cost allocation changes in December 1998 (prior to

the restructuring advance agreement) as a result of its acquisition of Rockwell and its

merger with McDonnell Douglas. These changes could result in an additional $115

million cost increase to NASA. The accounting changes included changes in

capitalization and depreciation methods15 while the change in cost allocation methods

involved a change from a total-cost-input basis to a value-added base method of cost

allocation. 16 The change in cost allocation methods had the most significant impact on

Boeing’s Space and Communications Group, which is the company’s business segment

that provides support to NASA. Boeing’s first estimate of the total impact to the Space

and Communications Group resulting from the accounting changes and changes in cost

allocation methodology was $128 million; of that amount, Boeing estimated NASA’s

share of the costs to be $115 million. 17

 

14 Boeing's cost proposal supporting the advance agreement provided for 20 percent of the estimated total

indirect costs to be amortized (charged to customers) annually over a 5-year period beginning in 1999. At

the end of the 5-year period, the total amount amortized will be the lesser of the actual indirect costs

incurred or the indirect cost ceiling negotiated by DCMA ($327.9 million).

15 Capitalization refers to the accounting treatment for assets. Specifically, when an asset is acquired and

placed into service and if it has a lifespan of several years, its cost is usually divided over the number of

years it is expected to be in service. Depreciation is the yearly proportionate charge of the acquisition cost.

After acquiring Rockwell International's Space and Defense units and merging with McDonnell Douglas,

Boeing implemented a standard as to when assets were placed into service (capitalized) and when the

charges for the assets began (depreciated). Prior to the acquisition and merger, capitalization and

depreciation methods were different for each of the heritage companies.

16 The total cost input base of allocation is all costs (direct and indirect) charged to final cost objectives

(that is, contracts), excluding incoming intercompany work authorization costs, cost of money, and general

and administrative expense. The value-added base allocation method is the total cost input base less direct

material and subcontract costs.

17 We obtained this information from Boeing’s presentation, "Merger Overview," given at NASA

Headquarters on March 28, 1999.
7

Legislation and Implementing Guidance Regarding External Business

Restructurings

NASA does not have legislation and implementing guidance for external business

restructurings similar to the legislation and guidance applicable to DoD. There is no

legislative authority or guidance (as provided in the DFARS) for NASA to benefit similar

to the DoD. Further, the NASA FAR Supplement has no provisions addressing

contractor restructurings or advance agreements, and there is no requirement for the

restructurings to generate a savings-to-cost ratio of at least 2-to-1. Even though Boeing

and the DCMA agreed to provide NASA equitable treatment under the advance

agreement, NASA’s share of the potential savings is minimal. Therefore, NASA should

pursue legislation for the Agency similar to that provided to the DoD requiring that

external restructurings generate NASA a savings-to-cost ratio of at least 2-to-1.

NASA Involvement in the Restructuring Proposal

NASA did not actively participate in the development or negotiation of the advance

agreement. NASA’s participation was limited even though DCMA representatives met

with Johnson procurement officials and invited a NASA Headquarters division director to

review the agreement prior to its implementation. DCMA representatives told us that

they did not invite NASA to participate in the review and negotiation of the advance

agreement, but were aware of NASA’s concerns for fair and equitable treatment. Even

though a NASA Headquarters division director had the opportunity to review the advance

agreement before it was signed, Boeing had not identified or presented the total impact of

the restructuring on NASA. For example, details regarding the projected savings from

closing the Downey, California, facility were not addressed in the advance agreement,

but were included as 1 of 21 Work Breakdown Structures in an appendix to the cost

proposal supporting the advance agreement. Furthermore, the effects of the accounting

and cost allocation changes were not made known until March 1999.18 In accordance

with the provisions of FAR Part 31, Section 109, NASA should have had the opportunity

to help develop and negotiate the advance agreement and provide an opinion on the

potential savings and impacts. Instead, NASA had a limited opportunity to review the

cost proposal/advance agreement prior to its implementation and without full knowledge

of the potential savings and impacts. NASA should take action to participate in any

future restructurings involving Agency contractors and ensure the agreements provide a

2-to-1 savings-to-cost ratio for NASA.

Accounting Procedures and Cost Allocation Changes Not Considered Part of

Restructuring

Boeing adopted its revised cost accounting and cost allocation procedures in December

1998. Boeing made these changes to standardize procedures throughout the company.

Although Boeing made the changes as a result of the acquisition of Rockwell and the

 

18 Boeing’s presentation entitled "Space and Communications Group Home Office Costs Review," on

March 12, 1999, was the first discussion of the impact of the accounting and cost allocation changes to

NASA.
8

merger with McDonnell Douglas, DCMA excluded the changes from the advance

agreement negotiations because they did not meet DCMA's interpretation of the DFARS

restructuring activities definition of:

non-routine, non-recurring or extraordinary activities to combine

facilities, operations, or workforce, in order to eliminate redundant

capabilities, improve future operations and reduce overall costs.

DCMA officials also told us they considered the changes to be routine accounting

practice modifications, not restructuring activities as defined by the DFARS. In our

opinion, the Boeing changes in accounting and cost allocation procedures were not

routine, were made to facilitate the company's restructuring, and should have been

considered in determining the savings-to-cost ratio used to justify the advance agreement.

In February 1999, the DCMA asked DCAA to determine whether Boeing’s accounting

changes represented “improved cost accounting, accommodated operational economies

and efficiencies, or are necessary given a particular organizational structure

notwithstanding the cost impact of such changes on specific contracts or types of

contracts.” In a March 1999 letter to the DCMA, the DCAA stated that the changes were

not considered desirable or necessary, did not represent operational economies or

efficiencies, and were not necessary to meet Boeing’s organizational structure.

Additionally, in a February 2000 audit report,19 the DCAA concluded that the changes

were not desirable to the Government because they appeared to have shifted costs from

commercial to Government work, specifically to NASA contracts.

A comparison of the effects of the accounting and cost allocation changes to the projected

savings from the advance agreement shows that NASA’s savings do not offset its

increased costs. Boeing uses the savings from the restructuring efforts and increased

costs due to the change in accounting and cost allocation practices to determine contract

forward pricing rates. Therefore, DCMA should use the effects of the changes to

determine the actual savings resulting from the advance agreement since they ultimately

affect contract rates.

Mitigating the Impact to NASA

Efforts by the DCMA to mitigate the cost impact to NASA from Boeing's accounting and

cost allocations procedure changes could result in NASA receiving up to $64.7 million in

contract offsets. These offsets would result from DCMA’s application of CAS 9903.201-

4(a)(4), which provides for negotiations between the contractor and the contracting

officer to determine the terms and conditions under which a change may be made to a

cost accounting practice provided that the agreement will not increase the costs paid by

the Government. As stated previously, the DCAA determined that Boeing’s accounting

 

19 This information was contained in the February 3, 2000, DCAA Audit Report Number 4381-

1999F19500004, "Report on Audit of Boeing Company Offices' General Dollar Magnitude Cost Impact

Proposal for Cost Accounting Practice Changes Associated with Original and Revisions 99A, 99B, and

99C, effective 1 January 1999."
9

changes were not considered desirable or necessary, did not represent operational

economies or efficiencies, and were not necessary to meet Boeing’s organizational

structure.

DCMA asked Boeing to identify the impact to its Government contracts since the

accounting and cost allocations procedure changes resulted in significant cost increases.

DCMA provided us with Boeing’s estimates and the DCAA audit of the estimates. Using

the offset procedure outlined in the CAS whereby positive impacts resulting from the

changes are used to offset the negative impacts, the DCMA determined that NASA is due

$64.7 million from Boeing’s changes in accounting and cost allocation procedures. The

DCMA has yet to negotiate these amounts with Boeing. DCMA officials told us the

amounts were both reasonable and supportable and invited NASA participation in the

negotiations. NASA's Associate Administrator for Procurement or his designated

representative should participate in any negotiations with Boeing involving the offsets to

ensure the Agency's interests are adequately protected and that the maximum offset

possible is received.

Other Potential Material Impacts

The DCAA has scheduled an audit of Boeing’s three main defense businesses (the

Military Aircraft and Missiles Group, the Space and Communications Group, and the

Phantom Works) to determine whether they meet the definition of a business segment

and are actually operating as such. DCAA is concerned that the segments may not

actually be operating as separate business units. Consequently, some of the costs

allocated to contracts by the segments would not be allowable. Should DCAA’s audit

confirm that Boeing’s defense units do not operate as segments, much of the impact from

the cost allocation changes will likely be negated.20 Further, such findings would result

in additional contract cost offsets for NASA. 21 NASA should monitor the progress of

DCAA’s audit to determine whether the Agency is entitled to additional contract offsets.

Recommendations, Management's Response, and Evaluation of Response

The Associate Administrator for Procurement, should:

1. Request the DCAA to audit and validate the amount of actual savings

accruing to NASA from Boeing's restructuring.

 

20 DCAA representatives provided this information at a June 1, 2000, meeting with the NASA Office of

Inspector General at Boeing’s Headquarters in Seattle, Washington. The DCAA representatives told us

that a finding that Boeing’s defense units did not operate as true segments would essentially “undo” the

cost allocation pools established prior to the restructuring. Consequently, the change (Boeing’s accounting

change that had the largest impact on NASA) to a value-added basis cost allocation from the total-costinput method would be negated.

21 DCAA representatives stated that DCAA would have to calculate the net difference between Boeing’s

allocations using methods prior to its restructuring and those in effect after its restructuring. This

difference will then serve as the basis for any adjustment necessary to offset the increased costs resulting

from Boeing’s change in cost allocation methods.
10

Management's Response. Concur. Management believes that it is not necessary to

request a DCAA audit to determine actual savings to NASA because there is a statutory

requirement for an annual report to DoD beginning with the year of certification.

Management will work with the Boeing Defense Corporate Executive to track external

restructuring savings to NASA on an annual basis as is done for DoD. The complete text

of management’s response is in Appendix G.

NASA management also provided extensive comments on the finding that we address in

Appendix H.

Evaluation of Management's Response. Management’s planned actions are not

responsive to the recommendation. A DCAA audit is necessary because the actual

savings from Boeing’s restructuring could be less than projected. We believe that it

would be more valuable to the Agency to have actual savings data rather than estimates

in order to use that data in determining whether NASA is actually receiving a benefit

from the cost of the restructuring. The benefit of knowing whether actual savings are

accruing to NASA is worth requesting DCAA to perform the audit. Therefore, we

request that management provide additional comments to address the need for a DCAA

audit to validate the amount of actual savings accruing to NASA. The additional

comments should include an estimated completion date for planned corrective actions.

The recommendation is unresolved and will remain undispositioned and open for

reporting purposes.

2. Determine whether the savings accruing to NASA are at least twice the costs

of restructuring. The Associate Administrator or his designated representative

should use the results of DCAA’s audit (Recommendation 1) to make this

determination and participate in negotiations as necessary to ensure the 2-to-1

savings are achieved.

Management's Response. Concur. Management will work with the Boeing Defense

Corporate Executive to annually track the restructuring savings accruing to NASA.

Management does not guarantee that the savings accruing to NASA as a result of

Boeing’s restructuring will be at least twice the restructuring costs because there is no

requirement that actual savings exceed actual costs by 2-to-1 (see Appendix G).

Evaluation of Management's Response. Management’s planned actions are not

responsive to the recommendation. The planned actions do not constitute a reasonable

effort to ensure that the Agency realizes savings of at least twice the costs of the

restructuring. While we agree there is no statutory provision that actual savings be

realized, we believe that actual savings should be generated because NASA is paying for

restructuring costs and that the actual savings should at least approximate the savings that

Boeing estimated. However, as stated in the report, there is no comparison of the actual

savings generated to the estimates being reported. Therefore, we request that

management provide additional comments that address whether NASA is actually

achieving a 2-to-1 savings-to-cost ratio as a result of the restructuring. The additional
11

comments should include an estimated completion date for planned corrective actions.

The recommendation is unresolved and will remain undispositioned and open for

reporting purposes.

3. Pursue legislation for NASA similar to that provided to the DoD (Section

8115 of the DoD Appropriations Act of 1997) requiring that external

restructurings yield a 2-to-1 savings-to-cost ratio for NASA.

Management's Response. Concur. Management believes that the pursuit of legislation

is not the best approach to take and that such legislation could work against the

restructuring process by creating separate requirements for NASA and DoD contracts.

Management proposed to pursue an agreement with DoD to achieve, in future

restructurings involving NASA contracts, the same 2-to-1 savings-to-cost ratio required

for DoD (see Appendix G).

Evaluation of Management's Response. Management's planned actions are responsive

to the recommendation. The recommendation is resolved but will remain undispositioned

and open for reporting purposes until corrective actions are completed.

4. Monitor any future external restructurings involving NASA contractors to

ensure that they meet the 2-to-1 savings-to-cost ratio.

Management's Response. Concur. Management plans to monitor future external

restructurings that involve a significant dollar amount of NASA contracts. However,

management does not guarantee that a 2-to-1 savings-to-cost ratio will be obtained for

NASA (see Appendix G).

Evaluation of Management's Response. Management's planned actions, in conjunction

with its plans (management’s response to recommendation 3) to pursue an agreement

with the DoD to achieve 2-to-1 savings in future restructurings that involve NASA

contracts, is responsive to the recommendation. The recommendation is resolved but will

remain undispositioned and open for reporting purposes until corrective actions are

completed.

5. Require the responsible contracting officers (or the Associate Administrator’s

designated representative) for NASA’s major existing contracts with Boeing to

participate in the negotiations to mitigate impacts from Boeing’s accounting

changes to ensure NASA receives the maximum offset possible (see Appendix F

for details on the potential benefits of $64.7 million).

Management's Response. Concur. The Administrative Contracting Officer is

responsible for administration of the CAS. For most NASA contractors, the

Administrative Contracting Officer is a representative of the DCMA. In those cases in

which NASA would be significantly affected by a contractor’s proposed accounting

changes, the Agency should participate. NASA’s participation could take a variety of
12

forms such as providing input to the Administrative Contracting Officer, attending

meetings, participating in teleconferences, or some combination of these activities (see

Appendix G).

Evaluation of Management's Response. Management’s planned actions are not

responsive to the recommendation. Management did not indicate whether it would

participate in the particular negotiations with Boeing and the DCMA to mitigate the

impacts from Boeing’s accounting changes. NASA has an opportunity to recover as

much as $64.7 million in contract offsets that are actual dollar savings for NASA and that

would have a positive impact on the Agency’s budget. Furthermore, the Boeing Defense

Corporate Executive told us that he would welcome NASA’s participation in these

negotiations. NASA's active participation in these negotiations is critical to ensure not

only that the Agency's interests are appropriately represented but also that the maximum

amount of dollar savings is obtained. Therefore, we request that management provide

additional comments that address the specific role the Agency will take in the

negotiations to mitigate the impacts from Boeing's accounting changes. The comments

should also indicate a planned completion date for the corrective actions and provide

specific comments on the potential $64.7 million cost avoidance. The recommendation is

unresolved and will remain undispositioned and open for reporting purposes.

6. Request DCAA to provide a specific breakout of effects on NASA in its audit

of Boeing’s business segments and to take appropriate action based on the

results.

Management's Response. Concur. Management stated that the recommendation is

premature because the referenced audit is still in progress. It is DCAA's opinion as to

whether Boeing's segments are operating as separate business units with the Boeing

Defense Corporate Executive being responsible for determining whether DCAA's

recommendation is correct. Management will monitor the results of DCAA's audit and

participate as appropriate (see Appendix G).

Evaluation of Management's Response. Management’s planned actions are not

responsive to the recommendation. Management plans to defer to the DCAA and Boeing

Defense Corporate Executive to resolve any issues identified by the audit. We did not

recommend a separate audit but rather for DCAA to perform additional audit procedures

that would provide a specific breakout of the effects on NASA of its audit of Boeing’s

business segments. A finding that Boeing’s defense units did not operate as separate

business segments could result in additional contract offsets to NASA. Therefore, we

request that management provide additional comments on requesting that DCAA provide

a specific breakout of effects on NASA from the audit of Boeing's business segments.

The comments should also include an estimated completion date for the planned

corrective actions. The recommendation is unresolved and will remain undispositioned

and open for reporting purposes.
13

Appendix A. Objectives, Scope, and Methodology

Objectives

The overall objective of the audit was to determine whether the advance agreement

between Boeing and the DCMA was equitable to NASA. Specific objectives were to

determine whether:

• the advance agreement negotiated by the DCMA met all Federal requirements and

• NASA’s interests were adequately considered and addressed under Boeing’s

restructuring.

Scope and Methodology

To determine whether the advance agreement between Boeing and the DCMA was

equitable to NASA, we:

• Researched applicable regulations, requirements, and guidance including Section 818

of the National Defense Authorization Act of 1995 (Public Law 103-337); 10 United

States Code section 2325; Section 8115 of the DoD Appropriations Act for Fiscal

Year 1997; CAS (48 Code of Federal Regulations 99); FAR Part 31, Section 109;

DFARS subpart 231.205-70; and the NASA FAR Supplement.

• Obtained and reviewed the Boeing/DCMA advance agreement and Boeing’s cost

proposal and other applicable supporting documentation.

• Obtained and reviewed the DCAA audit report of the Boeing restructuring cost

proposal and other applicable DCAA reports and documents.

• Met with Johnson procurement personnel, including the Director of Procurement, and

discussed NASA’s involvement with the advance agreement and impacts resulting

from its execution.

• Met with DCMA and DCAA personnel including the DCMA Corporate

Administrative Contracting Officer and discussed the advance agreement, Boeing's

cost proposal, and their impacts to NASA.

• Visited the Downey facility, and met with both Boeing and NASA personnel at the

facility.
14

Appendix A

Management Controls Reviewed

We reviewed management controls related to the development and execution of advance

agreements including DoD appropriations, public laws, the FAR and DFARS. We also

reviewed management controls related to contractor compliance and disclosure with the

CAS (48 CFR 99). These controls are adequate to meet the purpose intended. For this

audit, compliance with these controls was primarily external to NASA. However, NASA

does not have similar controls related to external business restructurings in the NASA

FAR Supplement. We recommend that NASA pursue legislation to provide similar

benefits from corporate restructurings to that provided to the DoD and contained in the

DFARS.

Audit Field Work

We performed the audit field work from April through July 2000 at the Johnson Space

Center; the Marshall Space Flight Center; and Boeing Company Headquarters in Seattle,

Washington. We performed the audit in accordance with generally accepted government

auditing standards.
15

Appendix B. Projected Savings and Costs by Customer

Due to Boeing’s Restructuring

Boeing Cost Proposal Data

(in millions of dollars)

Beneficiary Gross Savings Restructuring Cost Net Savings

Boeing1$391 $113 $278

DoD2376 103 273

NASA 72 22 50

Totals $839 $238 $601

Net Savings Attributable to the Downey Closure3

Gross Savings Restructuring Costs Net Savings

$279.6 $60.3 $219.3

1

 The cost proposal specifically identifies Boeing’s Commercial Aircraft Group and its Shared Services

Group.

2

 DoD’s share of the potential savings and costs is adjusted to represent net present value of $320.6 million

and $90.3 million, respectively.

3

 We obtained this data from Boeing’s Cost Proposal Work Breakdown Structure Number 15.04.
16

Appendix C. NASA/Boeing Contracts Affected by Boeing’s Changes in

Accounting Methods and Cost Allocation Methodology

Cost Impact

(in millions of dollars)

Contract FY 99 FY 00 Out-Years Total

Space Flight Operations Contract

(subcontract to United Space Alliance)

NAS9-20000 $8.6 $4.2 $5.1 $17.9

Payload Ground Operations Contract

NAS10-11400 2.7 1.1 0.0 3.8

Space Shuttle Main Engine

NAS8-40000 23.4 18.1 17.2 58.7

International Space Station

NAS15-10000 16.4 8.0 6.2 30.6

Space Shuttle Sustaining Engineering

NAS9-140002 4.1 0.0 0.0 4.1

Totals $55.2 $31.4 $28.5 $115.1
17

Appendix D. Additional Information on the Boeing Company

After its 1996 acquisition of the Aerospace and Defense Units of Rockwell International

Corporation and its subsequent 1997 merger with McDonnell Douglas, the Boeing

Company became the largest aerospace company in the world, employing more than

195,000 people. Its major operations are centered in the Seattle-Puget Sound area of

Washington State; Southern California; Wichita, Kansas; and St. Louis, Missouri.

Boeing is organized into four major business segments: the Boeing Commercial Airplane

Group; the Space and Communications Group; the Military Aircraft and Missile Systems

Group; and the Shared Services Group.

Boeing is NASA’s largest contractor. NASA’s fiscal year 1999 contract awards to

Boeing totaled about $36.4 billion (total award value of contracts including options),

while fiscal year 1999 obligations related to Boeing contracts totaled about $1.3 billion.

NASA’s major contracts with Boeing include the International Space Station managed by

the Johnson Space Center, the Space Flight Operations Contract (as a subcontractor to the

United Space Alliance) also managed by Johnson, the Payload Ground Operations

Support managed by the John F. Kennedy Space Center, and the Space Shuttle Main

Engine managed by the George S. Marshall Space Flight Center. NASA is Boeing’s

largest non-DoD Government customer. The heritage Boeing North America portion of

the company (formerly Rockwell International/Rocketdyne) operated a facility in

Downey, California, where the Space Shuttle fleet was conceptualized, designed, and

built beginning in the early 1970’s. Total estimated contract work performed for NASA

at the Downey facility from the 1970’s to present was about $8 billion. However, after

Boeing’s restructuring, only a small amount of NASA work related to the Space Shuttle’s

cryogenics remains at Downey. This function will be relocated as soon as a new

cryogenic facility is completed and certified.
18

Appendix E. Summary of Prior Audit Coverage

“Performance Management of the International Space Station Contract,” Report

Number IG-00-007, February 16, 2000. The report addressed NASA’s management of

the International Space Station contract and Boeing’s cost overruns of $203 million. The

report states that Boeing-projected estimates of cost overruns were unrealistically low

and that incentives paid were not earned. In addition, the report attributed a portion of

the cost overruns on the contract to Boeing’s reorganization and restructuring associated

with its acquisition of Rockwell International and its merger with McDonnell Douglas.

We made a total of 14 recommendations to strengthen the International Space Station

contract management and minimize the impacts of Boeing’s restructuring activities.

Management concurred or partially concurred with the findings and recommendations

and agreed to take corrective action on all 14 recommendations.

“Boeing Indirect Cost Allocations to Space Station Contract,” Report Number

JS-96-001, December 12, 1995. The report addressed NASA’s reimbursement to

Boeing for indirect costs for which it received no benefit. Essentially, the Space Station

contract received an inequitable allocation of indirect costs from Boeing’s Engineering

Resource and Engineering Computing Cost Centers. The DCAA and the Office of

Inspector General found these allocations did not comply with the provisions of CAS

418. We recommended that the Associate Administrators for Procurement and Space

Flight work with the DCMA to ensure indirect costs were appropriately allocated to the

Space Station contract in accordance with CAS 418. Management concurred and

indicated that it would monitor the Defense Administrative Contracting Officer’s

proposed corrective actions and review the feasibility of suspending payments for the

excess allocations of cost.

“Earth Observing System (EOS) AM Spacecraft Planning and Management

Restructuring Funding Authorization (RFA),” Report Number GO-94-004,

March 31, 1994. NASA did not receive cost reductions from a restructuring of General

Electric’s Aerospace Group and a subsequent advance agreement between General

Electric and the Defense Logistics Agency. NASA paid about $14 million in

restructuring funding over a 4-year period and, in turn, should have received savings

through reduced contract costs. However, the savings (contract price reductions) never

materialized. We recommended that the Center responsible for the contract have the

Defense Logistics Agency review the advance agreement and determine whether any

savings were realized. Management conditionally concurred indicating that it had

benefited from the restructuring agreement and that it would coordinate with the Defense

Administrative Contracting Officer to monitor the savings resulting from the agreement.
19

Appendix F. Calculation of Potential Funds That Could Be Put to

Better Use

Recommendation 5 results in a potential $64.7 million in funds that NASA can put to

better use. The DCMA determined the amount using audit information developed by the

DCAA. The amount represents the monetary harm to NASA from Boeing's changes in

accounting and cost allocation methods. The amount has yet to be negotiated with

Boeing. When negotiations are completed and finalized, the amount negotiated will

represent a true monetary savings to NASA and will be realized through offsets to current

Boeing contract billings.
20

Appendix G. Management's Response
21

Appendix G
22

Appendix G

See Appendix H,

OIG Comment 1

See Appendix H,

OIG Comment 2

See Appendix H,

OIG Comment 3

See Appendix H,

OIG Comment 4
23

Appendix G

See Appendix H,

OIG Comment 5

See Appendix H,

OIG Comment 6

See Appendix H,

OIG Comment 7
24

Appendix G

See Appendix H,

OIG Comment 8

See Appendix H,

OIG Comment 9

See Appendix H,

OIG Comment 10

See Appendix H,

OIG Comment 11
25

Appendix G

See Appendix H,

OIG Comment 12

See Appendix H,

OIG Comment 13

See Appendix H,

OIG Comment 14
26

Appendix G

See Appendix H,

OIG Comment 15

See Appendix H,

OIG Comment 16

See Appendix H,

OIG Comment 17

See Appendix H,

OIG Comment 18
27

Appendix G
28

Appendix G
29

Appendix G
30

Appendix G
31

 Appendix H. Office of Inspector General Comments on

Management's Response

The NASA Office of Procurement provided the following comments in response to the

draft report. Our responses to the comments are also presented.

Management's Comment. The findings and other information in the report convey a

general lack of understanding of the restructuring process and cost accounting practice

changes. This lack of understanding is demonstrated in three areas that are repeated

throughout the audit report: the savings-to-cost ratio should be based on the combined

results of the restructuring and cost accounting practice changes; there is little assurance

that any actual savings will be realized from the Boeing restructuring; and NASA has not

benefited from the restructuring.

1. Office of Inspector General (OIG) Comments. As stated in the “Objectives, Scope,

and Methodology" section of our report, the auditors developed an understanding of the

restructuring process and cost accounting practice changes by researching applicable

regulations, requirements, and guidance including Section 818 of the National Defense

Authorization Act of 1995 (Public Law 103-337); 10 United States Code section 2325;

Section 8115 of the DoD Appropriations Act for Fiscal Year 1997; CAS (48 Code of

Federal Regulations 99); FAR Part 31, Section 109; Defense Federal Acquisition

Regulation Supplement (DFARS) subpart 231.205-70; and the NASA FAR Supplement.

Also, as stated in the report and announced to management at the beginning of the audit,

one of our audit objectives was to determine whether NASA’s interests were adequately

considered and addressed under Boeing’s restructuring. To meet that objective, we

identified all the restructuring issues that had an effect on NASA. In doing so, we

presented an audit report that:

• Explained how the DCMA administered Boeing’s restructuring and accounting

practice changes and that the DCMA treated those administrative actions as two

separate and distinct events.

• Explained how the restructuring and accounting practice changes were due to

Boeing's acquisition of Rockwell and its merger with McDonnell Douglas.

• Identified the amount of savings Boeing expected to generate from closing the

Downey, California, facility and that NASA’s savings were not based on historical

workload requirements but on the savings generated at the facility where NASA’s

workload was being transferred.

• Presented the net effect of the two events (restructuring and accounting practice

changes) on NASA and emphasized that unless the savings from the restructuring

were greater than the costs from the accounting practice changes, NASA will not

realize any benefit.
32

Appendix H

The net result of these changes was an increase in costs to NASA of $65 million ($50

million net savings from restructuring less $115 million in additional costs from the

accounting changes). This position was supported by DCAA’s affirmation that Boeing’s

accounting practice changes were not desirable to the Government because they appeared

to have shifted costs from commercial to Government work, specifically to NASA

contracts. The $64.7 million in potential contract offsets is evidence of this logic as it

represents both the DCMA’s and DCAA’s efforts to restore NASA to the position it held

with Boeing prior to the implementation of accounting practice changes and the

subsequent restructuring.

Management’s Comment. The OIG commingled two separate statutory and regulatory

administrative actions. The DFARS definition of what constitutes an external

restructuring, which is derived from Section 8115 of the DoD Appropriations Act of

1997, precludes DCMA from considering the Boeing cost accounting practice changes as

part of the external restructuring.

2. OIG Comments. Nothing in the DFARS definition of an external restructuring

precludes cost accounting changes from the category of restructuring activities and, in

fact, quite the opposite is true. The cost accounting changes at issue were a direct

outgrowth of Boeing’s business combination. The accounting changes were clearly

nonroutine, nonrecurring, and extraordinary and were presented to the Government as

being necessary in order to facilitate Boeing’s corporate merger, to improve its future

operations, and to reduce overall costs. Thus, we concluded that cost accounting changes

resulting from business combinations may be, and in this case should have been, included

as an integral part of the restructuring process.

Regardless of how Boeing and the DCMA treated the accounting changes, our report

clearly detailed the DCMA's interpretation of the DFARS definition of restructuring

activities and its separate treatment of Boeing’s accounting practice changes. The report

also showed that Boeing adopted the accounting practice changes as a result of its

acquisition of Rockwell and merger with McDonnell Douglas, prior to submitting its

proposal to restructure to the DCMA. We did not commingle the statutory and regulatory

requirements concerning the restructuring and accounting practice changes. Although

these actions were approved by the appropriate Government agencies, the net result of the

restructuring and accounting changes is increased costs to NASA. Our report quantifies

the net effect of these separate actions on NASA.

Management’s Comment. The OIG arrived at the wrong conclusion, that is, that NASA

did not benefit from the external restructuring.

3. OIG Comments. We concluded that NASA did not benefit from the external

restructuring based on our audit work, which we performed in accordance with generally
33

Appendix H

accepted government auditing standards and for which we (1) included an analysis of the

documentation supporting the accounting changes and the advance agreement and

(2) held discussions with NASA procurement, DCAA, and DCMA personnel.

Management’s Comment. There is no information that the DCAA, which audited

Boeing's restructuring proposal, or DCMA management, which approved the Boeing

restructuring proposal, took exceptions to the Boeing Defense Corporate Executive's

separate handling of the restructuring and cost accounting changes.

4. OIG Comments. In a March 1999 letter and February 2000 audit report, the DCAA

stated that Boeing’s accounting practice changes were not considered desirable or

necessary, did not represent operational economies or efficiencies, were not necessary to

meet Boeing’s organization structure, and were not desirable to the Government because

they shifted costs from commercial to Government work, specifically to NASA contracts.

The Boeing Defense Corporate Executive requested both of these DCAA reviews.

Management's Comment. While the OIG is correct that the actual savings from

Boeing's external restructuring could be less than projected, the OIG does not point out

that there is no requirement that actual savings exceed actual costs by a ratio of 2-to-1,

the statutory criterion for DoD approval of a restructuring proposal.

5. OIG Comments. Management’s statement is not true. The draft report specifically

and clearly stated, in seven sentences and in two footnotes, that there is no requirement

that actual savings accruing to NASA exceed actual costs by a ratio of 2-to-1, which is

why we made the recommendation to create such a requirement. Included in the report is

a separate paragraph entitled, “Legislation and Implementing Guidance Regarding

External Business Restructurings” where we state, “NASA does not have legislation and

implementing guidance for external business restructurings similar to the legislation and

guidance applicable to DoD.”

Management’s Comment. If the actual savings and costs turn out to be different than

originally estimated, it has no impact on the restructuring that was approved. In other

words, it cannot be undone because the results do not turn out as projected.

6. OIG Comments. The report specifically detailed how the restructuring savings

estimates were calculated and reported. While we agree there is no statutory provision

that actual savings be realized, we believe a reasonable person would assume that actual

savings should be generated and should approximate the estimates. However, as stated in

our report, DCMA has made no comparison between actual savings generated and the

estimates that Boeing projected. Based on these facts, we believe NASA has little, if any

assurance that it is realizing any actual savings from the restructuring. Despite our

conclusion, the report does not state, nor does it make any inference that the restructuring

agreement be amended.
34

Appendix H

Management’s Comment. An examination of the actual performance for only 19 of the

60 restructuring projects for 1999 was performed to determine the estimated actual

savings for the annual report. As the OIG reported, those 19 projects accounted for more

than 90 percent of the actual reported savings. The implication of the OIG report is that a

much larger percentage of the projects should have been reviewed. However, we believe

that would have been an inefficient use of audit resources that would have provided little,

if any, additional assurance as to the reported savings.

7. OIG Comments. We reported the facts regarding the number of business elements

DCAA audited to validate Boeing’s restructuring savings estimates. The draft report

objectively identified the methods used to develop the estimated restructuring savings.

We did not express an opinion on and the report does not imply a need for DCAA to

perform additional audit work to validate the savings estimates. However, in an effort to

eliminate any perceived implications, we modified the statement in this final report

related to the number of business elements that DCAA audited.

Management's Comment. The OIG does not understand the higher ceiling amount is

intended to provide some relief from the original implementation cost estimates on those

projects not completed at the time of the negotiation and certification.

8. OIG Comments. The negotiated cost ceiling of $327.9 million is 38 percent and

$90.3 million more than the estimates Boeing used to determine the restructuring savings.

We find it an unlikely coincidence that the net present value of DoD's share of the

restructuring costs used to calculate the DoD savings-to-cost ratio also equals $90.3

million. We believe the ceiling represents little more than a "cushion" for inaccuracies in

Boeing's estimates and a means for showing a higher than required savings-to-cost ratio.

Consequently, if the restructuring costs are higher than expected and reach the ceiling

amount, NASA's savings are less than those projected.

Management's Comment. The DCAA review for the 1999 annual report showed that

the savings were in excess of those originally anticipated ($14.3 as opposed to $7.8

million) while the costs were slightly less ($5.5 as opposed to $5.7 million).

Management stated that this information was provided to the OIG during the audit but

was not included in the report.

9. OIG Comments. The data on NASA's savings for 1999 was not made available to

the OIG auditors who conducted this audit. We received this data from an OIG auditor at

Johnson who had received the data from an official at Johnson’s procurement office

regarding another matter. We received this data after the draft report was issued. During

face-to-face meetings with the Boeing Defense Corporate Executive at Boeing’s

Headquarters in Seattle, Washington, on May 31 and June 1, 2000, we specifically

requested information on the savings accruing to NASA from Boeing's restructuring.

The Boeing Defense Corporate Executive and the Defense Corporate Analyst told the
35

Appendix H

OIG auditors during those meetings that specific savings data for NASA were not

calculated because DCMA’s only requirement was to report the DoD savings to

Congress. However, the Defense Corporate Analyst, who told the auditors that this

information did not exist, notified Johnson procurement management of the estimated

amount of NASA savings in two electronic mail messages dated June 1, 2000 - the same

day of our meeting.

The first message, dated June 1, 2000, states:

DCAA, using the contractor’s data, estimated the NASA participation

percentage for the Space and Communications Group at about 29.8

percent for 1999. However, in addition to Space and Communications

Group specifically, NASA has a very small piece of Aircraft and

Missiles Group savings and an allocable share of the Company Office’s

savings. Based on this approach (using the percentage of NASA

workload), we estimate the external restructuring savings accruing to

NASA during 1999 total about $14.3 million.

A second message, also dated June 1, 2000, states:

Using the data furnished by Boeing and the same overall Space and

Communications Group approach to estimating NASA’s participation,

it would appear NASA participation in the 1999 costs is about $5.5

million.... It should be noted that as you “peel the onion” back further,

and begin looking at customer participation at lower levels

(segment/location), you probably would come up with slightly different

answers. Administratively, that would make the process more

cumbersome and wouldn’t significantly change the data we would

report to Congress in our Annual report.

Although these messages seem to indicate that savings accrue to NASA, a more thorough

examination indicates that DCAA estimated the savings by using NASA’s workload

participation percentages of 29.8 percent for the Space and Communication Group and

other unidentified methods. DCAA did not use actual savings data. Because of the total

reliance on estimates and percentages in deriving the projected savings, there is no

certainty that the projected amounts mirror any actual savings being generated. We

believe that DCAA should be asked to determine the amount of actual savings accruing

to NASA. This action would provide NASA with some degree of reliance on the

Boeing/DCAA/DCMA estimated savings.

Management's Comment. The OIG states that NASA’s share of the projected Boeing

restructuring savings was not equitable. This position is at the heart of the OIG's

recommendation that NASA pursue legislation mandating a 2-for-1 savings-to-cost ratio

for external restructurings.
36

Appendix H

10. OIG Comments. The OIG’s recommendation to pursue legislation requiring

equitable treatment as that provided the DoD is a direct result of Boeing’s restructuring

and the request of the NASA Headquarters Office of Procurement.

First, although the DCMA and Boeing agreed to provide NASA the same treatment under

the restructuring as its DoD customers, DCMA and Boeing had no obligation to do so.

We believe that DoD’s existing legislation was not enacted to provide benefits to one

Government agency at the expense of another. However, this is the reality of NASA's

current situation. Our recommendation was made to mitigate the inequity as it currently

exists and to provide NASA the same opportunities (savings) as the DoD when other

contractors chose to restructure.

Second, the OIG originally recommended that the NASA Headquarters Office of

Procurement revise the NASA FAR Supplement to include similar provisions as the

DFARS with respect to external restructurings. Staff from the NASA Office of

Procurement's Contract Management Division told us that they could not make the

suggested changes to the NASA FAR Supplement without the appropriate legislation

allowing them to do so. Therefore, the best course of action was to pursue legislation that

would allow NASA to obtain treatment similar to the DoD with respect to external

restructurings.

Management's Comment. Contrary to the OIG’s report, Boeing's Commercial Aircraft

Group did not benefit at all from the closure of the Downey plant.

11. OIG Comments. Boeing’s commercial interests did benefit to a greater extent than

NASA from Boeing’s restructuring, including the closing of the Downey plant. Boeing’s

August 2, 1999, restructuring proposal broke down the restructuring savings into three

categories as follows:

Other DoD NASA

$391 million

(47 percent)

$376 million

(45 percent)

$72 million

(8 percent)

Boeing’s description of the “other” savings was that it consisted of:

• Significant near-term fixed-price and fixed-price incentive business already on

contract.

• Substantial NASA and Foreign Military Sales business. (NASA’s savings were not

included in this category.)
37

Appendix H

• Commercial Airplanes. (The proposal stated that because the Commercial Airplanes

segment is a relatively large segment of the Boeing Company business base, it would

receive the largest benefit from Boeing’s restructuring savings.)

Based on this information and the fact that NASA’s savings were not based on the

historical percentage of NASA work performed at Downey (80 percent) but on the

projected percentage of work to be performed at the facilities to which Boeing transferred

the work (45 percent), we concluded that Boeing’s commercial interests clearly benefited

to a greater extent than NASA from Boeing’s restructuring and the closing of the

Downey plant.

Management’s Comment. Although NASA did not directly participate in negotiations

with Boeing, the Agency monitored the situation through meetings and teleconferences

with the Boeing Defense Corporate Executive to understand what was taking place.

Furthermore, the Boeing Defense Corporate Executive characterized NASA’s

involvement with the restructuring and cost accounting practice changes to be much

greater than that of any DoD customer, even though DoD had a much greater financial

interest than any other Government customer.

12. OIG Comments. Our report provides a balanced presentation of the facts made

available to the auditors concerning NASA’s participation in Boeing’s restructuring

process. We made repeated attempts to contact the NASA Headquarters’ representative

who was invited to review the advance agreement and obtain any data, information, trip

reports, summaries, or notes he accumulated during his involvement in Boeing's

restructuring process. The NASA Headquarters' representative never responded to our

requests.

The Boeing Defense Corporate Executive told us that he did not invite NASA to

participate in the negotiations for the advance agreement. Johnson personnel told us that

because NASA was not afforded the same legislative requirements as the DoD and

because DCMA chose not to include NASA in the advance agreement negotiations with

Boeing, all they could do was try to “leverage” the DCMA to provide NASA similar

benefits to the DoD. Our position that NASA should have taken a more proactive role in

the negotiations is also supported by the FAR. Specifically, FAR Part 31, section 109,

states that “before negotiating an advance agreement, the Government negotiator shall, as

appropriate, invite the office or agency and the responsible audit agency to participate in

prenegotiation discussions and/or in the subsequent negotiations."

Management's Comment. Johnson’s involvement, as the NASA installation with the

largest Boeing contracts, would have been greater had it not been for the OIG’s request

for them to hold off until the OIG completed its audit work and issued its audit report.

Management expected the report to be issued in the June 1999 timeframe.
38

Appendix H

13. OIG Comments. Management’s statement that the OIG requested Johnson to hold

off on its involvement in the negotiations until the OIG completed its audit in June 1999

is not true. No such request was made during this audit. As stated in Appendix A of this

report, field work on this audit did not begin until April 2000.

Management’s Comment. Johnson’s involvement has continued as evidenced by the

July 2000 meeting it requested in Seattle. The purpose of that meeting, which was held

with Boeing, DCMA, and DCAA, was to discuss NASA’s concerns regarding the

increased costs to the Agency resulting from Boeing’s proposed cost accounting changes.

14. OIG Comments. The OIG’s attendance at this meeting would have been beneficial

to all the parties involved; however, neither Johnson nor DCMA notified the OIG of the

meeting, and we did not receive details from the meeting until after we completed our

audit field work. Upon reviewing the information Boeing presented during those

meetings, we identified the following issues that we did not include in our audit report,

which cause us additional concern. Specifically:

• Boeing identified a total net impact of $343 million from Boeing’s accounting

practice changes to its Space and Communications Group (the Group that holds the

majority of NASA’s major contracts). Our audit identified a total net impact of $128

million to the Space and Communications Group of which $115 million applied to

NASA. Thus, the total cost to NASA as a result of the accounting practice changes

could be much higher than the cost identified in our audit.

• Boeing identified a $47 million cost shift to NASA resulting from General and

Administrative cost changes at the heritage Boeing North American (formerly

Rockwell) sites.

• Boeing identified an additional $26 million in costs related to employee benefit plans

that will be allocated to the Space and Communications Group. Our audit report

addressed the accounting practice changes Boeing adopted prior to approval of the

advance agreement with the DCMA, which were changes in Boeing’s capitalization

procedures and cost allocation methods.

• Boeing inappropriately commingled savings from the restructuring with impacts from

the accounting changes. Specifically, Boeing identified $24 million in restructuring

savings accruing from the Downey and Huntington Beach, California; Houston,

Texas; and Huntsville, Alabama, sites. The Boeing Defense Corporate Executive told

us that restructuring savings could not be used to offset the impact of the cost

accounting changes.
39

Appendix H

• The total effect of the accounting changes on NASA’s major contracts with Boeing,

as presented by Boeing during the meeting did not correlate to Boeing’s General

Dollar Magnitude Analysis that DCAA used to determine the impact of Boeing’s

1999 accounting changes on NASA.

• Boeing identified total restructuring savings to major NASA programs of $68.9

million through March 2000. The restructuring savings estimates that the DCMA

provided to Johnson on June 1, 2000, showed NASA’s fiscal year 1999 savings of

$14.3 million. Thus, the July presentation indicates that Boeing generated

restructuring savings accruing to NASA of at least $54.6 million during the first 6

months of fiscal year 2000, an increase of more than 700 percent from fiscal year

1999, which is highly unlikely.

We believe these points clearly support the need for active NASA participation in

negotiations concerning the accounting changes as well as any future restructurings

involving NASA contractors. These points also support our position that NASA needs

actual data on savings accruing to the Agency to ensure that its interests are adequately

protected as a result of Boeing's restructuring.

Management's Comment. The OIG stated “through active participation in negotiations

with the DCMA and Boeing, NASA has an opportunity to recover about $64.7 million

through future cost reductions which would mitigate some of the advance agreement’s

impact on the Agency.” The OIG again is confusing the external restructuring and the

cost accounting practice changes

15. OIG Comments. The $64.7 million in potential monetary benefits (contract offsets)

results from the accounting practice changes Boeing adopted as a result of its acquisition

of Rockwell International and its merger with McDonnell Douglas. Although the

accounting practice changes were not considered part of the advance agreement, the

changes Boeing implemented were based on its decision to restructure after the

acquisition and merger. Consequently, even though the $64.7 million is not a direct

product of the advance agreement, it is an indirect result of Boeing’s decision to

restructure and the DCMA’s response to that decision under the CAS.

Management’s Comment. The OIG did not mention in the report that in early 1999, the

Boeing Defense Corporate Executive disallowed $13.2 million on NASA contracts

pending the conclusion of the negotiation of the cost accounting practices changes.

16. OIG Comments. We cannot address management’s comments regarding the $13.2

million disallowance by the Boeing Defense Corporate Executive. The disallowance was

not related to any of the evidence we reviewed during the audit, and it does not affect the

$64.7 million in potential monetary benefits.
40

Appendix H

Management's Comment. Boeing chose to reorganize and restructure its operation in

order to combine facilities, operations, and workforce to eliminate redundant capabilities,

improve future operations, and reduce overall costs. These activities took place

irrespective of reimbursement by DoD. However, to receive reimbursement, Boeing had

to comply with the requirements of DFARS 231.205-70, which culminated in the

advance agreement.

17. OIG Comments. We agree and revised the report to show that Boeing could have

reorganized without the DCMA’s approval. However, because Boeing chose to charge

restructuring costs to its Government contracts, the company was required by law to

follow the guidance outlined in DFARS 231.205-70.

Management’s Comment. The report states that “should DCAA’s audit confirm that

Boeing’s four business units do not operate as segments, much of the impact from the

restructuring will likely be negated.” The OIG is incorrect in that the audit covers three,

not four segments, but more important, the 1999 cost accounting changes would be

negated, not the external restructuring.

18. OIG Comments. DCAA’s audit will be performed at the Defense units of Boeing’s

business segments. These units include the Military Aircraft and Missiles Group, the

Space and Communications Group, and the Phantom Works. The audit report has been

revised to reflect that a total of three of Boeing's business segments will be reviewed by

the DCAA and that the cost allocation changes would be negated, not the external

restructuring.
41

Appendix I. Report Distribution

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

AE/Chief Engineer

AI/Associate Deputy Administrator

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

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/Acting Director, Management Assessment Division

L/Associate Administrator for Legislative Affairs

M/Associate Administrator for Space Flight

P/Associate Administrator for Public Affairs

R/Associate Administrator for Aerospace Technology

S/Associate Administrator for Space Science

Y/Associate Administrator for Earth Science

Z/Associate Administrator for Policy and Plans

NASA Centers

Director, Ames Research Center

Director, Dryden Flight Research Center

Director, John H. Glenn Research Center at Lewis Field

Director, Goddard Space Flight Center

Director, Jet Propulsion Laboratory

Director, Langley Research Center

Director, John C. Stennis 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
42

Appendix I

Non-NASA Federal Organizations and Individuals (Cont.)

Associate Director, National Security and International Affairs Division, Defense

Acquisition 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

House Committee on Appropriations

House Subcommittee on VA, HUD, and Independent Agencies

House Committee on Government Reform

House Subcommittee on Government Management, Information, and Technology

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

House Committee on Science

House Subcommittee on Space and Aeronautics, Committee on Science

Congressional Member

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

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