IG-00-049

AUDIT

REPORT HEALTH CARE COSTS AT NASA CONTRACTORS

September 26, 2000

National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL
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Acronyms

ACO Administrative Contracting Officer

CAS Cost Accounting Standards

CIPR Contractor Insurance/Pension Review

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DFARS Defense Federal Acquisition Regulation Supplement

DoD Department of Defense

FAR Federal Acquisition Regulation

PCO Procuring Contracting Officer
W September 26, 2000

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Health Care Costs at NASA Contractors

Report Number IG-00-049

The NASA Office of Inspector General has completed an audit of health care costs at selected

NASA contractors. NASA's process for controlling health care costs is through reliance on

contractor insurance/pension reviews (CIPR’s) performed by the Defense Contract

Management Agency (DCMA), with Defense Contract Audit Agency (DCAA) support.1 Our

evaluation of CIPR reports for 6 of NASA’s top 20 contracts (see Appendix D) showed that 4

of the 6 reports were incomplete and that 3 of the 6 reports were untimely. Further, recent

Department of Defense (DoD) policy changes governing the timing of CIPR’s can reduce CIPR

coverage by shifting to a risk-based rather than cyclical approach to review insurance/pension

plans and costs. Therefore, NASA contracting officers must increase their oversight of the

CIPR process to ensure sufficient reviews of insurance and pension plans and costs, including

health care costs. The costs can equal more than half the direct labor costs charged to

Government contracts. Improved oversight should lead to more current, accurate, and

complete CIPR’s and to negotiations of fair and reasonable contract prices.

Background

Health care costs are significant and continue to rise annually. The estimated health care costs

for the 6 contracts we reviewed exceed $65 million (see Appendix E). Health care costs are

also susceptible to fraud and abuse.2 The significance and complexity of

 

1

 NASA delegates its authority to review contractor insurance/pension plans and costs (including health

care costs) to the Department of Defense.

2

 Projected health care costs for the year 2000 could exceed $1.3 trillion and represent about 14.3 percent of

the gross national product. We obtained this data from National Health Expenditure Projections for the

years 1998-2008. The Office of the Actuary, Health Care Financing Administration produces these

projections annually. According to a 1997 General Accounting Office Letter Report, estimated fraud and

abuse costs for health care nationwide range from 3 to 10 percent. Applying those estimates to the year
2

insurance/pension plans and costs require that CIPR results be current, accurate, and complete.

NASA Procuring Contracting Officers (PCO’s) generally delegate their authority to review

contractor insurance/pension plans and costs to a DCMA Administrative Contracting Officer

(ACO).3 The ACO, based on current Defense Federal Acquisition Regulation Supplement

(DFARS) requirements, determines when CIPR’s are performed. The ACO’s uses the

DCMA CIPR staff to perform CIPR’s and to assist the ACO’s in identifying contractors

needing a CIPR. The ACO is generally responsible for negotiating forward pricing, billing, and

final indirect cost rates involving Government contractors.

Recommendations

We recommended that NASA management establish a process to track and review CIPR’s for

its major NASA contractors. The process should include a requirement for DCMA to provide

a periodic report to NASA on the status of CIPR’s for major NASA contractors. We also

recommended that management revise the NASA Federal Acquisition Regulation (FAR)

Supplement to include guidance for the contracting officer’s review of CIPR’s, the criteria and

process for requesting special CIPR’s,4 and any requirements for contracting officer input to the

DoD on contractors for which NASA has a major financial interest.

Management Response and OIG Evaluation

Management concurred with the findings and recommendations. Management’s response to

our first recommendation related to establishing a process to track and review CIPR’s for major

NASA contractors is potentially responsive. Management plans to investigate the ability of

DCMA’s system to track CIPR’s for major NASA contractors. We understand that other

alternatives will be pursued if the DCMA system does not meet NASA’s needs and ask that

management clarify that intention in response to the final report. Regarding the recommendation

that management revise the NASA FAR Supplement to include guidance for the contracting

officer’s review of CIPR’s, management plans to issue a Procurement Information Circular

containing relevant CIPR guidance. The planned action is responsive to our recommendation.

 

2000 projected health care costs, we estimated that health care fraud and abuse costs could range from $39

billion (3 percent of $1.3 trillion) to $130 billion (10 percent of $1.3 trillion).

3

 The contracting officer normally delegates various contract administration functions to the ACO pursuant

to Federal Acquisition Regulation Subpart 42.3. Functions delegated to the ACO include reviewing

contractor insurance plans and determining whether contractors comply with Cost Accounting Standards

(CAS). The ACOs use the DCMA and/or DCAA to assist them in carrying out these responsibilities.

4

 DFARS Subpart 242.73, “CIPR,” states that a special CIPR is a joint DCMA/DCAA review that

concentrates on specific areas of the contractor’s insurance program, pension plan, or other deferred

compensation plan. Special CIPR’s are discussed in detail on page 3 of the report.
3

NASA provided several comments concerning the CIPR process, relationship with DCMA and

the fact that we did not identify a dollar impact on a specific contract. To do so would require

us to actually perform or reperform the CIPR’s which was not the objective of our audit. Our

position is that NASA needs to increase its vigilance related to CIPR’s and we are pleased that

NASA has generally concurred. We address management's general comments in our evaluation

of management's responses in the finding section of the report.

[Original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Health Care Costs at NASA Contractors
FINAL REPORT

AUDIT OF HEALTH CARE COSTS AT NASA CONTRACTORS
W September 26, 2000

TO: H/Associate Administrator for Procurement

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on the Audit of Health Care Costs at NASA Contractors

Assignment Number A9907000

Report Number IG-00-049

The subject final report is provided for your use and comment. Please refer to the Results in

Brief section for the overall review results. Our evaluation of your response is incorporated into

the body of the report. We consider management’s proposed corrective action to

recommendation 1 potentially responsive and request that management provide additional

comments by November 27, 2000. The response to recommendation 2 is responsive, and the

recommendation will remain open for reporting purposes until corrective action is completed.

If you have questions concerning the report, please contact Mr. Lorne A. Dear, Program

Director, Procurement Audits, at (818) 354-3360; Mr. Tony Lawson, Program Manager,

Procurement Audits, at (301) 286-6524; or Mr. Michael Bruns, Auditor-in-Charge, at (216)

433-8918. We appreciate the courtesies extended to the audit staff. The final report

distribution is in Appendix H.

[Original signed by]

Russell A. Rau

Enclosure

cc:

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

JM/Acting Director, Management Assessment Division
NASA Office of Inspector General

IG-00-049

 A9907000 September 26, 2000

Health Care Costs at NASA Contractors

Introduction

The NASA Office of Inspector General conducted an audit of health care costs at selected

NASA contractors. Because health care costs are significant and susceptible to fraud and

abuse, we reviewed the adequacy of NASA's processes to control health care costs for 6 (see

Appendix D) of its top 20 contracts. The estimated health care costs for the six contracts alone

exceeded $65 million annually (see Appendix E).

The DoD ACO, an employee of the DCMA, is primarily responsible for determining the

allowability, allocability, and reasonableness of insurance/pension costs on Government

contracts when contract administration is delegated. The DCMA insurance/pension specialists

and DCAA auditors assist ACO’s in making insurance/pension cost determinations by

conducting contractor insurance/pension reviews. The DoD ACO is assigned responsibility for

requesting and overseeing performance of the CIPR. The DCMA insurance/pension specialist

is responsible for leading the review team and for preparing and distributing to the ACO the final

CIPR report that summarizes review results.

In negotiating fair and reasonable prices for new contracts and modifications to existing

contracts (hereafter referred to as forward pricing), NASA PCO’s generally rely on cost

information, including estimates of future health care costs, that is part of an offeror’s proposal.

The DCMA ACO generally reaches advance agreement with a contractor on forward pricing

rates that are used for purposes of pricing these new contracts and modifications and that

include estimated health care costs for future periods. Similarly, the cognizant DCMA ACO

negotiates insurance and pension costs actually incurred and uses those costs to determine

indirect cost rates that are applied to Government contracts. The NASA FAR Supplement

1842.705 encourages NASA contracting officers to participate in these indirect cost rate

determinations in cases where NASA has a major financial interest. In these forward pricing

and incurred cost negotiations, the CIPR is critical to ensuring that the Government’s interest is

protected.

The overall objective of the audit was to evaluate NASA processes for controlling health care

costs. See Appendix A for additional details on the audit objectives, scope, and methodology.
2

Results in Brief

NASA had a fundamentally sound process for controlling health care costs through reliance on

CIPR’s performed by DCMA, with DCAA support, in forward pricing and indirect cost rate

negotiations conducted by NASA and DCMA. However, we evaluated six CIPR reports and

determined that four of the six were incomplete and that three of the six were untimely. Further,

recent DoD policy changes governing the performance of CIPR’s by DCMA can reduce CIPR

coverage by shifting to a risk-based rather than cyclical approach to review performance. As a

result, increased attention is warranted by NASA contracting officers to ensure that insurance

and pension costs, including health care costs, are sufficiently reviewed to ensure successful

negotiations and to request special CIPR’s (discussed on next page) when warranted.

Background

In determining the allowability, allocability, and reasonableness of insurance/pension costs on

Government contracts, a DoD ACO is subject to provisions in the FAR,5 the DFARS, and

Government Cost Accounting Standards (CAS).6 Further, a DCMA Directive, referred to as

the One Book,7 addresses DCMA responsibilities in performing CIPR’s. For NASA

contracts, the ACO is also required to comply with the NASA FAR Supplement.

DFARS CIPR Requirements. DFARS Subpart 242.73, "CIPR," revised November 9,

1999, provides DoD policy governing CIPR’s. DFARS section 242.7301 "General," makes

the ACO responsible for determining the allowability8 of insurance/pension costs in Government

contracts. Further, this section describes a CIPR as an in-depth evaluation9 of a contractor's:

• insurance program;

• pension plan;

• other deferred compensation plans; and

• related policies, procedures, practices, and costs.

The DFARS section also states that a special CIPR is a joint DCMA/DCAA review that

concentrates on specific areas of the contractor's insurance program, pension plan, or other

deferred compensation plan.

 

5

 FAR Part 31, " Contract Cost Principles and Procedures," contains principles and procedures for the

determination or allowance of costs.

6

 CAS are designed to achieve uniformity and consistency in the cost accounting practices governing

measurement, assignment, and allocation of costs to contracts with the U.S. Government.

7

 The DoD refers to DCMA Directive 5000.4, “Contract Management,” as the One Book.

8

 FAR Part 31 states that factors for determining allowability include, but are not limited to, allocability and

reasonableness.

9

 Evaluation procedures can consist of verification of premium payments to third-party insurance companies

or payments to insurance companies for administrative fees only. We believe the likelihood of fraud or

waste detection using these procedures is minimal.
3

Requirements for Conducting CIPR’s. DFARS Section 242.7302, "Requirements," states

that a CIPR shall be conducted only when:

• a contractor has $40 million of qualifying sales to the Government during the

contractor's preceding fiscal year; and

• the ACO, with advice from DCMA insurance/pension specialists and DCAA

auditors, determines the need for a CIPR based on a risk assessment of the

contractor's past experience and current vulnerability.

The DFARS also states that a special CIPR can be performed when any of the following

circumstances exists, but only if the circumstance(s) may result in an a material effect on

Government contract costs:

• Information identifies a deficiency in the contractor's insurance/pension program.

• The contractor proposes or implements changes in its insurance, pension, or

deferred compensation plans.

• The contractor is involved in a merger, acquisition, or divestiture.

• The Government needs to follow up on contractor implementation of prior CIPR

recommendations.

If another Government organization such as NASA requests a special CIPR, the ACO can

initiate it or address the requester's concerns as part of a CIPR already scheduled for the near

future.

Before the November 1999 DFARS revision, Subpart 242.73 required that the CIPR team

conduct a review at least every 2 years for qualifying contractors. Additionally, the

November 1999 guidance limits CIPR’s (excluding special CIPR’s conducted based on the

circumstances listed above) to cases in which a risk assessment determines a CIPR is needed

based on the contractor’s past experience or current vulnerability. This is a fundamental change

in the underlying requirement for performance of CIPR’s that can limit both the frequency and

scope of these reviews. To ensure that the ACO can continue to fulfill responsibilities

associated with determining the allowability (includes allocability and reasonableness) of

insurance and pension costs and the needs of other CIPR users are met, it is imperative that

these risk assessments be comprehensive and timely. However, the DFARS provides no

guidance on the frequency or scope of the assessments. This change shifts significant

responsibility from the ACO to the NASA PCO for determining whether the CIPR is adequate

for purposes of a particular negotiation. It should not be assumed that the most recent CIPR is,

in fact, current under this new policy.

CIPR Responsibilities. DFARS section 242.7303 identifies the CIPR-related responsibilities

of the ACO, the insurance pension specialist, and the DCAA auditor. The ACO's

responsibilities include, but are not limited to:

• Determining the need for a CIPR.
4

• Reviewing the CIPR report, advising the contractor of the recommendations contained therein,

considering contractor comments, and rendering a decision on those recommendations.

• Providing other interested contracting officers copies of documents related to the CIPR.

• Performing contract administration responsibilities related to CAS administration as described

in FAR Subparts 30.2 and 30.6.

The ACO uses resources from the DCMA's CIPR Center10 and the DCAA to perform

CIPR’s. The CIPR Center is composed of two teams11 that primarily consist of

insurance/pension specialists. Section 242.7303 identifies the insurance/pension specialist as the

team leader for CIPR’s and the DCAA auditors as CIPR team members. The section states

that the team leader’s responsibilities include, but are not limited to:

• Maintaining complete documentation for CIPR reports.

• To the extent possible, resolving discrepancies between audit reports and CIPR draft reports

prior to releasing the final CIPR report.

We considered CIPR reports incomplete if the team leader did not include relevant information

from DCAA audit reports or prior CIPR reports that could affect the allowability, allocability,

and reasonableness of insurance costs in the CIPR report. See Appendix B for more DFARS

CIPR requirements concerning responsibilities for the insurance/pension specialist and DCAA

auditor.

CAS 416 Criteria for Insurance Costs. CAS 416 provides criteria for the measurement of

insurance costs, the assignment of such costs to cost accounting periods, and their allocation to

cost objectives. The ACO must ensure contractors comply with this standard. Per the

DFARS, the DCAA auditor is responsible for performing contract audit responsibilities related

to CAS administration. If contractor health care costs do not comply with CAS 416, they are

unallowable. If contract audit work identified a possible contractor noncompliance with CAS

416, and the CIPR report did not include a statement to that effect, we considered the CIPR

report incomplete.

DCMA Directive. DCMA Directive 5000.4, "Contract Management," Chapter 7.2 "CIPR,"

designates the DCMA as the executive agency for performing CIPR’s within the DoD. The

directive states that DCMA performs CIPR's because:

• Costs of insurance and pension programs materially affect contract price.

• Contractor insurance and pension programs are a high risk area because the indirect

costs of these programs usually exceed 50 percent of direct labor costs.

• Cost avoidances in this area range up to hundreds of millions of dollars.

 

10 The CIPR Center is part of the DCMA Contract Business Operation Unit located at DCMA Headquarters

(Fort Belvoir, Virginia).

11 The two CIPR teams are known as the CIPR Team East and the CIPR Team West. The CIPR Team East is

located in Staten Island, NewYork, and the CIPR Team West is located in Carson, California.
5

Currently, no guidebook for the CIPR process exists. However, the directive requires that the

ACO perform a number of post-CIPR actions that include, but are not limited to:

• Sending a letter to the contractor summarizing CIPR results and requesting

contractor comments on the review recommendations.

• Discussing contractor responses with the CIPR team leader and finalizing the

Government's position on the issues.

• Maintaining price negotiation memorandum documentation supporting issue

resolution.

• Providing the CIPR team with a copy of any audit report received after a CIPR that

relates to insurance, pensions, or other deferred compensation issues.

Disposition of issues is to occur during negotiation of forward pricing rate agreements and final

indirect cost rates. Thus, contracting officers predominantly use CIPR reports to determine

pricing of insurance/pension costs on many Government contracts and proper charging of

incurred insurance/pension costs to Government contracts.

Prior Audit Coverage. The NASA Office of Inspector General has not performed prior

audits of health care costs. However, two DoD Office of Inspector General reports issued

within the last 4 years identified various issues affecting the CIPR process. For example, a DoD

Inspector General March 1997 report on oversight of defense contractor insurance and pension

plans states "the lack of proper review coverage presents substantial risk to the Government

that incurred costs are improperly allocated and budget estimates are inaccurate. Unless

reviews are timely, contractor forward pricing rates may not be updated and negotiated

contracts may be adversely affected." Appendix C contains more detail about the March 1997

report and a DoD Inspector General report related to health care costs issued in April 2000.

The latter report states that audit coverage of certain health care costs was limited and focused

primarily on administrative rather than health care delivery costs.

DCMA Actions to Improve the CIPR Process. During audit field work, we discussed with

the DCMA actions to improve the CIPR process. DCMA management stated that they

proposed actions during fiscal year 2000 to improve the CIPR process. The proposed actions

addressed issues in the March 1997 DoD Inspector General report mentioned earlier. Those

actions included implementing a joint review guide for insurance costs and providing more

working paper support for analyses performed. The joint review guide for insurance is in draft

form. DCMA plans to meet with DCAA before

September 30, 2000, to discuss which agency will perform proposed steps in the joint review

guide and to finalize the guide. DCMA also plans to improve the quality of documentation

included in the CIPR working papers. DCMA employees received working paper training

during FY 2000, which included instructions on the type of documents that the working papers

should contain. DCMA CIPR Center Management plans to perform reviews of employee

working papers.
6

NASA Oversight of CIPR Reports and Services

Finding. NASA can enhance the value of CIPR’s in the negotiation of contracts and

modifications and better ensure that delegated contract administrative services effectively control

contract costs. Specifically, four of the six CIPR reports addressing six major NASA contracts

lacked a complete analysis of insurance costs as required by CIPR guidance, and three of those

six reports were not issued in a timely manner. This occurred partly because NASA was not

systematically reviewing or tracking CIPR’s performed by DCMA when contract administrative

responsibilities were delegated. Additionally, the NASA FAR Supplement contains no

guidance related to CIPR’s such as contracting officer responsibilities for obtaining and

reviewing CIPR reports, providing input to risk assessments performed to determine the need

for a CIPR, or the conditions under which a NASA PCO should consider requesting a special

CIPR and how such a request should be processed. Since CIPR guidance was modified in

November 1999 to eliminate the requirement for a CIPR every 2 years and to focus instead on

a risk-based approach, a greater need exists for NASA contracting officers to request special

CIPR’s. These requests can be based on questions arising during contract performance or as a

result of forward pricing or indirect cost negotiations. Incomplete and untimely CIPR’s

adversely affect the ability of NASA PCO’s to negotiate fair and reasonable prices for

contracts and modifications because of the resulting uncertainty concerning forward pricing

rates. In addition, DCMA ACO’s can be impeded from effectively negotiating contractor

indirect cost rates under these circumstances. Finally, NASA contracting officers participating

in indirect cost rate negotiations in cases of a significant NASA financial interest could also be

negatively affected by the lack of complete and timely CIPR results.

FAR and NASA FAR Supplement Requirements. The FAR and the NASA FAR

Supplement contain little guidance on CIPR’s. FAR Subpart 42.302, "Contract administration

functions," requires contracting officers to review contractor insurance/pension plans. NASA

normally delegates that responsibility to the cognizant DCMA ACO. However, NASA

contracting officers are ultimately responsible for ensuring that services affecting their contracts

are satisfactory. The NASA FAR Supplement contains no requirements or guidance for

contracting officers to request or review CIPR reports. Additional NASA FAR Supplement

guidance is needed to emphasize CIPR’s are no longer performed on a cyclical basis. NASA

PCO’s, therefore, must carefully review CIPR’s to ensure that the results are current and

applicable to the negotiation at hand. Because the November 1999 policy change will likely

affect the frequency of CIPR’s, the need for a special CIPR and the associated lead time for its

performance are critical factors that the contracting officer must plan for.

Completeness of CIPR Reports. Four CIPR reports reviewed were incomplete because the

team leader did not resolve or include references to discrepancies between audit reports and

CIPR field work before issuing the CIPR report. The DFARS Section 242.7303 requires the
7

team leader, when possible, to resolve such discrepancies. Two incomplete reports are

illustrated below; the remaining two are discussed in Appendix F:

• A February 4, 1998, CIPR report of the Lockheed Martin Corporation that

covered multiple fiscal years, including 1995, concluded that group insurance costs

were allowable, allocable, and reasonable to Government contracts. However, two

1996 DCAA reports identified two instances of contractor noncompliance with

CAS 416. In both instances, the contractor's allocation method did not properly

allocate the costs on a causal and beneficial basis as required by CAS 416. The

DCAA auditors assessed these noncompliance(s) as significant but did not quantify

the impact in dollar terms. Accordingly, either noncompliance may have affected

the allowability, allocability, and reasonableness of insurance costs addressed in the

February 1998 CIPR report. Yet, the 1998 CIPR report made no mention of

either noncompliance and concluded the costs were allowable. We also reviewed a

March 2000 DCAA audit report that cited the noncompliance(s) as ongoing.

• A June 4, 1999, CIPR report of the United Space Alliance stated that the DCAA

should verify allocation amounts for group plans. However, about a month later, the

DCAA issued a July 1999 supplemental audit report on final indirect rates and

incurred costs for fiscal year 1997 at the United Space Alliance. The auditors

reviewed the contractor's indirect cost pools and allocation bases and found them

acceptable except for a qualification related to corporate home office allocations

that could affect group insurance plans. Despite DFARS requirements that require

the team leader to resolve discrepancies between audit reports and the CIPR work

before releasing the final CIPR report, the team leader did not include a reference to

DCAA's audit work or pending report that was issued the following month. As a

result, we consider the CIPR results to be incomplete.

Timeliness of CIPR Reports. Three reviewed CIPR reports were untimely because the

CIPR team did not ensure that they complied with DFARS biennial requirement for CIPR’s in

effect before November 1999. Although a CIPR was required every 2 years, there was no

requirement that the CIPR team issue a CIPR report every 2 years. However, for the three

CIPR reports we reviewed, the elapsed time between issuance of CIPR reports was greater

than 2 years as detailed below. If timely CIPR reports are not issued, the risk increases that an

ACO may negotiate a contract price that is not in the Government's best interest.

• The CIPR team issued its last CIPR report of the Space Telescope Science

Institute,12 in August 1993. The CIPR team had not performed a review since that

time.

 

12 The Goddard Space Flight Center formally contracts with the Association of Universities for Research in

Astronomy. The Space Telescope Science Institute is an operating segment of the association and

performs most contract operations.
8

• The CIPR team issued its most recent CIPR report of Raytheon Information

Systems Company,13 in May 1996. The DCMA informed us in February 2000 that

a CIPR was on going. As of July 2000, the CIPR team had not issued its report.

• The CIPR team issued its most recent report of Thiokol Propulsion,14 in August

1999. The report indicated that although the CIPR team issued reports from July

1992 through August 1999, the team leader could locate only a July 27, 1992,

report. The team leader should have been able to locate CIPR reports issued

through August 1999. The information in the August 1999 report does not indicate

how many CIPR reports the team issued from July 1992 to August 1999 or why

the missing reports could not be located.

Reasons for Untimely Reports. The three CIPR reports were untimely for various reasons.

The team leader responsible for the 1993 CIPR report at the Space Telescope Science Institute

considered biennial CIPR's unnecessary because he believed there was a low risk of insurance

costs being unallowable. The team leader lacked the authority to make such a decision in light

of the DFARS requirement for biennial reviews. Further, DCMA Directive 5000.4 states,

"contractor insurance and pension programs are a high risk area." The team leader responsible

for the Raytheon Information Systems CIPR report has not provided an explanation for the lack

of a CIPR report since 1996.15 The Thiokol team leader indicated in the August 1999, report

that his office has been unable to locate prior reports transferred to the CIPR West Coast office

upon closure of the CIPR operation previously located in Chicago, Illinois.

Guidance Needed to Ensure Timely CIPR’s. Current DFARS guidance does not ensure

that CIPR’s will be performed in a timely manner. Prior to the November 9, 1999, DFARS

change, a CIPR was required every 2 years. DFARS Section 242.7302, “Requirements,”

currently states that the ACO determines the need for a CIPR based on a risk assessment16 of

 

13 The Goddard Space Flight Center awarded contract number NAS 5-6000 to the Hughes Information

Technology Corporation in 1993. This Hughes Aircraft Company component eventually became the

Hughes Information Technology Systems, Civil Systems (HITS-CS). On December 18, 1997, the Raytheon

Company merged with the Hughes Aircraft Company's defense business units that included HITS-CS. After

the merger, HITS-CS was renamed Raytheon Systems Company-Civil Systems. In December 1999, the

company became Raytheon Information Systems Company following a Change-of-Name Agreement

between Raytheon and the United States of America.

14 The CIPR team performed its review at Cordant Technologies, Inc., which consists of Thiokol Propulsion

and two other major businesses. On May 5, 1998, Thiokol Corporation (TC) announced it was changing its

name to Cordant Technologies, Inc. On July 1, 1997, TC consolidated its propulsion business into a single

division called Thiokol Propulsion. Thus, Thiokol Propulsion is now a division of Cordant Technologies,

Inc.

15 In February 2000, the DCMA El Segundo, California, office informed the DCMA Baltimore office that a

CIPR was in progress on transferred pension plan assets/liabilities for a company merger. The CIPR West

Coast team has not provided us with further details.

16 DCMA Directive 5000.4, “Contract Management, “ Chapter 7.2, Section 4.F.2, states that prior to the start

of each fiscal year, the CIPR Team must review the list of contractors known to exceed the $40 million

Government sales threshold along with the data supplied by the ACO’s. The CIPR Team must perform a risk
9

the contractor’s past experience and current vulnerability. This change in DFARS guidance

could result in extended periods between CIPR’s and in ineffective CIPR’s. For example, the

June 4, 1999, CIPR report of the United Space Alliance addressed group insurance plans that

were no longer in effect in June 1999. NASA CIPR guidance is needed to ensure (1) timely

CIPR’s are performed if changes in contractors’ insurance plans occur and (2) NASA uses

current information for contract negotiations and modifications. NASA could enhance its

oversight of the CIPR process/reports if the Agency received periodic status reports from the

DCMA. The DCMA should be able to provide NASA with information concerning DoD's

major contractors that could include recently issued CIPR reports, planned CIPR’s, and major

deficiencies arising from CIPR’s that may affect NASA.

Although insurance/pension costs could materially affect contract price, the NASA FAR

Supplement contains no CIPR requirements or guidance. Consequently, NASA contracting

officers may have relied on incomplete and untimely CIPR reports to develop contract

negotiation positions and obtain what they considered fair and reasonable contract prices.

Further, NASA lacks assurance that DCMA has adequately reviewed and tested health care

costs.

Recommendations, Management’s Response, and Evaluation of

Response

The NASA Associate Administrator for Procurement should:

 1. Establish a process to track and review CIPR’s for major NASA contractors.

The process should include a requirement for DCMA to provide a periodic

report to NASA on the status of CIPR’s for major NASA contractors.

 2. Revise the NASA FAR Supplement to include guidance for the contracting

officer review of CIPR’s, the criteria and process for requesting special CIPR’s,

and any requirements for contracting officer input to the DoD on contractors for

which NASA has a major financial interest.

Management’s Response. Concur. Regarding recommendation 1, NASA management

stated it will review data compiled in the DCMA Contractor Information Service’s Contractor

Systems Status Table to determine its usefulness for tracking and reviewing CIPR’s.

Management will address recommendation 2 by issuing a Procurement Information Circular

containing relevant CIPR guidance.

 

assessment for each contractor based on criteria set forth in DFARS 242.7302 and must make

recommendations to the ACO regarding the need to perform the CIPR. The ACO must decide to perform the

CIPR based on the level of the Government’s risk. The ACO should refer to DFARS 242.7302 for guidance

in recognizing situations that increase the Government’s risk. A DCMA CIPR Team official stated that the

majority of the CIPR’s are special CIPR's rather than CIPR's planned for in advance at the start of the year.
10

In addition, NASA management’s general comments on the report indicated that we did not:

• grasp the CIPR process relative to Corporate Administrative Contracting Officers

and buying activities such as NASA;

• demonstrate that untimely or incomplete CIPR reports adversely affected contract

prices; and

• understand why a risk-based approach is the most efficient method for determining

when a CIPR is performed.

The complete text of management’s comments is in Appendix G.

Evaluation of Response. Although management concurred, planned actions are only

potentially responsive to the intent of recommendation 1 as discussed below. We consider

recommendation 2 resolved but undispositioned and open until agreed-to corrective actions are

completed. In addition, we disagree with the context of management’s general comments on

the findings. Details on our positions follow.

Management stated it plans to investigate the ability of DCMA’s system to track CIPR’s for

major NASA contractors. We consider management’s response incomplete because it does

not include a commitment to establish a process should the DCMA system prove unworkable.

We understand that management will pursue alternative methods for tracking CIPR’s for major

NASA contractors if the DCMA system does not meet management’s needs. Moreover,

management did not state its plans for obtaining a periodic status report for its major contractors

from the DCMA. Accordingly, we request that management provide additional comments on

the implementation of controls to track and review CIPR’s for major NASA contractors.

We also disagree with several of management’s general comments. Management indicated that

we failed to grasp the CIPR process as it relates to NASA or any other Federal buying activity.

Management stated that because Corporate Administrative Contracting Officers use CIPR

results to negotiate final indirect cost rates and forward pricing rates at the corporate level, the

results are not specifically reported to ACO’s and are not, therefore, normally reported to the

buying activity such as NASA. We disagree based on the six CIPR reports we reviewed.

Of the six CIPR reports reviewed, two were specifically directed to ACO’s and one was

directed to both the DCMA ACO and the NASA Corporate ACO. In addition, the DCMA

One Book requires the CIPR team to make distribution of the report to the ACO.
11

Furthermore, DFARS guidance identifies the ACO as the individual responsible for requesting a

CIPR. NASA and delegated ACO’s should play a much larger role in the CIPR process than

NASA management implies.

The CIPR serves multiple purposes. First, the CIPR is used by ACO's in the negotiation of

contractor-incurred cost proposals in order to determine final indirect cost rates that are used to

close out contracts. NASA PCO's should maintain an awareness of these negotiations and, as

discussed in the NASA FAR Supplement, directly participate if NASA has a major financial

interest. Such negotiations can result in deobligation of funds that potentially can be applied to

other requirements or, less likely, can result in the identification of funding shortfalls that must be

addressed. Second, the CIPR is used by ACO's to determine forward pricing rates which, in

turn, are used by PCO's for negotiation of new contracts and modifications to existing contracts.

The NASA PCO is ultimately responsible for obtaining fair and reasonable prices. In forming a

negotiating position, the PCO should understand the basis for the rates proposed by the

contractor and the results of all current assessments related to those rates, including, for

example, DCAA audits and the CIPR performed by DCMA. Third, the CIPR should be used

by ACO's in the negotiation of billing rates which the contractor uses for submission of requests

for payment as work progresses on contracts. The NASA PCO has a direct interest in these

billing rates because adjustments may be required to ensure sufficient funds are obligated on

contracts as part of the internal control process to ensure compliance with fiscal statutes,

including the Antideficiency Act.

Management comments do not recognize that DCMA performs contract administration through

a delegation from NASA. NASA responsibility for contract administration does not end when

the delegation is executed, and the impact of any deficiencies is reflected in the quality and

timeliness of the goods and services received and the prices paid. Management comments

demonstrate the precise problem that is the cause for our concern by stating; “DCMA has only

15 pension and insurance specialists to review pension and insurance plans for all Government

contractors for which it is responsible for contract administration.” Our findings that the CIPR's

were incomplete and untimely coupled with policy changes that will reduce required CIPR

coverage are all a reflection of this relatively low resource commitment by DCMA. As a paying

customer of DCMA, NASA should be requesting the level of assurance it deems necessary to

award and administer contracts through the use of special CIPR requests rather than blindly

accept the risk that these pension and insurance costs, which are invariably significant, are

allowable, allocable, and reasonable.

NASA’s general assertion that buying activities normally do not see the results of the CIPR is

inconsistent with the importance of the CIPR process to the award and administration of NASA

contracts and the decrease by DCMA in resources and policy requirements associated with

performance of CIPR's. In our opinion, NASA should be on guard to ensure the CIPR

process is providing appropriate support to negotiations by or for NASA that impact NASA

contracts. In this regard, we are pleased that NASA has decided to concur with our

recommendations to correct these weaknesses.
12

NASA management also stated that the report does not support our position that incomplete or

untimely CIPR reports adversely affect NASA contract prices. We did not accomplish or

reaccomplish CIPR’s in order to demonstrate actual impact. However, the risks of a faulty

CIPR process are clear. The DCMA One Book states that costs of insurance and pension

programs materially affect contract price. The One Book states “contractor insurance and

pension programs are a high risk area because the indirect costs of these programs usually

exceed 50 percent of direct labor costs.” Furthermore, the DoD Inspector General concluded

in a 1997 audit report that CIPR reviews were inadequate and untimely and that a substantial

risk existed that incurred costs were improperly allocated to Government contracts and that

forward pricing estimates for future contracts were inaccurate. Similar to the DoD Inspector

General audit, our audit showed that CIPR reports continue to be incomplete and untimely;

therefore, we concluded that NASA contract prices could be adversely affected.

Finally, management indicated that the auditor did not comprehend that using a risk-based

rather than cyclical approach is more effective in determining when the contracting officer

requests a CIPR. Management stated that due to scarce DCMA resources, a risk-based

approach is necessary. Our concern is that in order to identify the level of risk, some level of

review is needed. It is inappropriate to assume a low level of risk and then use this unsupported

risk assessment as a basis to justify not performing CIPR’s.

In conclusion, due to scarce DCMA resources and a history of CIPR control weaknesses

identified by recent audits, increased NASA oversight is necessary. ACO’s and NASA

contracting officers are inherently responsible for CIPR results and should be aware of the

impact of those results on business segments and contract prices. FAR Part 15 requires a

contracting officer to obtain a fair and reasonable contract price. This requirement exists

although PCO’s normally delegate reviews of insurance plans and costs to the contract

administration office. Given the materiality of insurance/pension costs and the requirements of

the FAR and DoD regulations, we believe that NASA PCO’s must be knowledgeable of CIPR

results at major contractors.
13

Appendix A. Objectives, Scope, and Methodology

Objectives

Our overall objective was to evaluate NASA processes for controlling health care costs.

Specifically, we assessed the effectiveness of:

• NASA pricing policies and decisions for health care costs in NASA contracts;

• the services DCMA provides in administering health-care related aspects of NASA

contracts and in performing CIPR’s; and

• the services DCAA provides in supporting CIPR's, performing incurred cost audit work

related to health care costs, and supporting NASA pricing decisions regarding health care

costs in contract proposals.

Scope and Methodology

We obtained a list of NASA's active top 20 contracts by estimated value as of

August 31, 1999, and with a completion date after October 1, 1999. To evaluate the CIPR

process, we reviewed CIPR reports for 6 of NASA's 20 largest contracts. See Appendix D

for a list of the six contracts/contractors reviewed. Appendix E of this report shows a

comparison of annual contract and health care costs for the six contracts. We also:

• Reviewed DCAA audit reports for the six contracts/contractors.

• Met with the DCAA Branch Manager, supervisor, and auditors at two of the six

contractors, and reviewed audit working papers.

• Met with the Director of the CIPR Center at DCMA Headquarters to discuss various

aspects of the CIPR process and reports.

• Met with the CIPR East Coast team to review CIPR reports and working paper

documentation and to discuss the CIPR process.

• Discussed the CIPR processes and reports with the CIPR West Coast team leader.

• Met with the NASA ACO and the DoD ACO for the United Space Alliance.17

• Met with human resources, management, and financial representatives from the United

Space Alliance and the Space Telescope Science Institute to discuss the development and

status of their health care plans and accounting practices.

 

17 The Lyndon B. Johnson Space Center issued NASA's largest contract (by value), to the United Space

Alliance. The contract is currently valued at about $8.6 billion.
14

Management Controls Reviewed

During the audit, we performed a detailed review of contractor policies, procedures, and plans

associated with health care costs at both the United Space Alliance and the Space Telescope

Science Institute. Key reviewed documents included:

• A KPMG Peat Marwick independent audit report addressing the Space Telescope Science

Institute's Group Health Plan.

• A PricewaterhouseCoopers independent auditors' report of the control structure for

administrative claim services and modified administration plan processing for the year ended

December 31,1998, for CIGNA HealthCare.18

• The DCMA's Site Plan for providing delegated contract administration services to NASA

under the United Space Alliance contract.

We did not perform similar management control reviews for the remaining four contractors.

Audit Field Work

We performed the audit field work for this report from October 1999 through July 2000. We

conducted the audit in accordance with generally accepted government auditing standards.

 

18 The United Space Alliance purchases its employee health care insurance through CIGNA.
15

Appendix B. Responsibilities of Insurance/Pension Specialists and

DCAA Auditors

The DFARS Subpart 242.7303 defines the responsibilities of insurance/pension specialists and

the DCAA auditors when conducting a CIPR. The DFARS requires the insurance/pension

specialist to:

• Issue a technical report on the contractor's insurance/pension plans for incorporation into

the final CIPR report based on an analysis of the contractor's pension program, insurance

program, and other related data.

• Lead the team that conducts the review. Another individual may serve as the team leader,

however, if the insurance/pension specialist and that individual agree. The team leader

responsibilities include, but are not limited to:

ß Maintaining complete documentation for CIPR reports.

ß To the extent possible, resolving discrepancies between audit reports and

CIPR draft reports before issuing the final CIPR report.

ß Preparing and distributing the final CIPR report.

ß Providing the final audit report and/or the insurance/pension specialist's

report as an attachment to the CIPR report.

The DCAA auditor responsibilities are:

• Participating as a member of the CIPR team or serving as the team leader with the

concurrence of the insurance/pension specialist.

• Issuing an audit report for incorporation into the final CIPR report based on an analysis of

the contractor's books, accounting records, and other related data.

• Performing contract audit responsibilities related to CAS administration as described in

FAR Subparts 30.2 and 30.6.
16

Appendix C. DoD Office of Inspector General Reports Addressing

Health Care Costs

DoD Office of Inspector General Report on Evaluation of the Defense Contract Audit

Agency Audit Coverage of TRICARE19 Contracts, Report Number D-2000-6-004,

issued April 17, 2000. The report states that health care costs are “rapidly escalating,” and

indicates that the audit coverage provided was too limited to adequately cover health care costs.

DCAA provided the requested audit support for contract awards, change orders, and contract

administration. However, the requested audit support was limited to the administrative health

care costs, which were only about 15 to 20 percent of the proposed contract costs. The

remaining 80 to 85 percent not reviewed represented health care delivery costs. The report

states that the DoD was at risk that unallowable costs had not been identified or questioned

because TRICARE management limited audit coverage to administrative costs.

DoD Office of Inspector General Evaluation Report on DoD Oversight of Defense

Contractor Insurance and Pension Plans, Report Number PO 97-013, issued March

28, 1997. The report states that the DCMA does not properly plan, document, and coordinate

the insurance and pension reviews with the Defense Contract Audit Agency. The report also

states that the DCMA generally has not performed timely reviews of pension and insurance

programs in connection with business reorganizations and that untimely reviews can adversely

affect negotiated contract prices. In addition, the report states that the two issues the Office of

Inspector General identified during its 1997 audit were also identified in a 1993 audit. The two

issues follow:

• The DCMA has failed to develop a joint review program with DCAA although it

agreed to do so. The lack of a review program seriously obstructs a coordinated

CIPR team effort.

• The DCMA insurance/pension specialists do not prepare workpaper

documentation of their reviews.

The DCMA did not take sufficient actions to correct these two issues as we discuss in this

report under the section titled, “ Prior Audit Coverage.”

 

19 In March 1995, the DoD created TRICARE to provide health care for active duty service members and

their families, military retirees and their families, and other TRICARE-eligible recipients through managed

care support contracts.
17

Appendix D. List of NASA Contracts Reviewed

Contract

Number

Contractor

Name Award Date

Completion

Date

May 31, 2000

Contract Value

NAS 9-20000 United Space

Alliance

09-26-1996 09-30-2002 $ 8.60 billion

NAS 8-38100 Thiokol

Propulsion

07-17-1991 02-15-2001 $ 4.00 billion

NAS 9-19100 Lockheed Martin

Engineering and

Science

Company

12-23-1993 12-31-2003 $ 1.70 billion

NAS 8-45000 Boeing North

American, Inc.

06-28-1996 12-31-2001 $ 1.30 billion

NAS 5-60000 Raytheon

Information

Systems

Company

03-30-1993 10-31-2002 $ .96 billion

NAS 5-26555 Space Telescope

Science Institute

04-30-1981 04-30-2002 $ .83 billion

Total Value $17.39 billion
18

Appendix E. Contractor Health Care Costs

Contractor Name

Contract Costs

for 19991

Estimated

Annual Health

Care Costs1

Percentage of Health

Care Costs

Compared to

Contract Costs

United Space

Alliance $1,447.6 million $40.5 million 2.8%

Thiokol Propulsion $ 201.9 million $7.3 million 3.6%

Lockheed Martin

Engineering and

Science Company

$ 164.3 million $5.2 million 3.2%

Boeing North

American, Inc. $ 179.0 million $9.7 million 5.4%

Raytheon Information

Systems Company $ 131.0 million $ 0.9 million2

0.7%

Space Telescope

Science Institute $ 67.4 million $ 1.7 million 2.5%

Total Estimated

Health Care Costs $65.3 million

1

 Contract costs and estimated annual health care costs are on a calendar year basis except for the Space

Telescope Science Institute contract amounts.

2 We did not include estimated health care costs for major subcontractors or interdivisional subcontractors

because the information is not available at this time.
19

Appendix F. Incomplete CIPR Reports

In addition to the two incomplete CIPR reports discussed under the section of this report

entitled, “Completeness of CIPR Reports,” we identified the following two incomplete CIPR’s:

• The August 31, 1999, CIPR report for Thiokol Propulsion20 contained incomplete results.

The section of the report addressing employee group insurance states that the team leader

planned to issue a separate report regarding employee group insurance. However, the

report did not indicate what aspects of the company's group insurance were reviewed (if

any) or why the team did not or could not address the group insurance plans.

• The August 10, 1993, CIPR report for the Space Telescope Science Institute lacked

evidence or testimony that specialists/auditors tested pertinent FAR and CAS sections. The

contractor is self-insured and assumes losses if health care claims are excessive. The FAR

Subpart 28.308 and CAS 416 require contractors to comply with various administrative

and cost requirements if self-insured.

 

20 Thiokol Propulsion is one of three businesses that comprise Cordant Technologies, Inc. In May 1998,

Thiokol Corporation, which included Thiokol Propulsion, changed its name to Cordant Technologies, Inc.
20

Appendix G. Management’s Response
21

Appendix G
22

Appendix G
23

Appendix G
24

Appendix H. Report Distribution

Note: This list shows the distribution of the final report only. The list does not apply to the

draft report.

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

AI/Associate Deputy Administrator

B/Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

C/Associate Administrator for Headquarters Operations

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

Q/Associate Administrator for Safety and Mission Assurance

R/Associate Administrator for Aerospace Technology

S/Associate Administrator for Space Science

U/Associate Administrator for Life and Microgravity Sciences and Applications

Y/Associate Administrator for Earth Sciences

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, Johnson Space Center

Director, Kennedy Space Center

Director, Langley Research Center

Director, Marshall Space Flight Center

Director, Stennis Space Center

Chief Counsel, John F. Kennedy Space Center
25

Appendix H

Chairman and Ranking Minority Member – Congressional Committees and

Subcommittees

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

House Committee on Appropriations

House Subcommittee on VA, HUD, and Independent Agencies

House Committee on Government Reform and Oversight

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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Major Contributors to the Report

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