IG-01-019

AUDIT

REPORT THIOKOL'S USE OF PROFESSIONAL AND

CONSULTANT SERVICES

March 30, 2001

National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL
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Acronyms

CRAG Contractor Risk Assessment Guidelines

DCAA Defense Contract Audit Agency

DCMA Defense Contract Management Agency

DOD Department of Defense

FAR Federal Acquisition Regulation
W March 30, 2001

TO: A/Administrator

FROM: W/Inspector General

SUBJECT: INFORMATION: Thiokol’s Use of Professional and Consultant Services

Report Number IG-01-019

The NASA Office of Inspector General has completed an audit of Thiokol Propulsion's

(Thiokol) use of professional and consultant services. Professional and consultant services are

services performed by persons who are members of a particular profession or possess a special

skill and who are not officers or employees of the contractor.1 NASA's controls over

Thiokol’s use of professional and consultant services can be improved. We found cases in

which justifications for noncompetitive procurements of professional and consultant services

were inadequate and untimely. Specifically, we found that Thiokol officials did not maintain

adequate support for decisions to noncompetitively award the service subcontracts and did not

prepare written justifications for the noncompetitive awards prior to initiation of the work. As a

result, NASA has reduced assurance that Thiokol obtained the best available source or price

for consultant services costing $1.4 million under seven subcontracts and may not have

benefited from about $87,500 in professional and consultant service costs charged to NASA.

Background

Thiokol has provided reusable solid rocket motors for the Space Shuttle missions under three

cost-plus-award fee contracts2 that require the contractor to comply with Federal Acquisition

Regulation (FAR) requirements pertaining to professional and consultant service costs. The

FAR states that these service costs are allowable costs only when supported by evidence of the

nature and scope of the furnished service. Support would include details of the agreement

between Thiokol and the consultant, invoices from

2

 

1

 Federal Acquisition Regulation Part 31.205-33 provides this definition of professional and consultant services. The

NASA budget includes a separately stated amount for services titled, “professional, administrative, and management

advisory services.” The budget amount applies to services obtained by NASA under contract and does not apply to

professional and consultant services obtained by a NASA contractor through subcontract. Therefore, the NASA budget

amount does not apply to the audit objectives and scope.

2

 Thiokol provides reusable solid rocket motors under contracts NAS8-30490, NAS8-38100, and

NAS8-97238. The three contracts have a total value of $7.5 billion.
consultants that provide sufficient detail on the nature of the actual services performed, and the

consultant’s work products. The Defense Contract Audit Agency (DCAA) is responsible for

reviewing Thiokol’s incurred costs for allowability.

The contract also requires Thiokol to competitively award subcontracts to the maximum extent

practical. This includes documenting efforts to identify potential sources and the reasons

sources not selected were incapable of performing the subcontract requirements. The Defense

Contract Management Agency (DCMA) is responsible for the Government’s oversight of

Thiokol’s purchasing system, including oversight of costs for professional and consultant

services.

Contracting for professional and consultant services is susceptible to problems such as

noncompliance with laws and regulations related to competition and conflict of interest,

circumvention of related internal controls, and potential improper use of funds. Although the

costs for these services are generally low-dollar costs, they are considered sensitive costs.3

Weaknesses in the procurement and contract administration processes exist in this sensitive cost

area that, taken in combination, pose a risk of abuse to NASA.

Recommendations

We recommended that NASA direct Thiokol to ensure that contractor personnel submit timely

and acceptable justifications for noncompetitive procurements. This action helps ensure that

Thiokol awards professional and consultant service subcontracts to the best available source at

a reasonable price, particularly in the absence of competition or an appearance of a conflict of

interest. We also recommended that NASA (1) ask the DCAA to include reviews of

professional and consultant services in future incurred cost audits and (2) ask the DCMA to

incorporate professional and consultant service subcontracts into future surveillance reviews.

Finally, we recommended that NASA ask the DCMA to include in its surveillance reviews the

allocation4 of professional and consultant service costs charged as indirect costs and to notify

the NASA contracting officer when the Agency did not receive reasonable benefits in

comparison to the costs allocated to NASA. Because professional and consultant service

subcontracts are vulnerable to improper use, additional review by the DCAA and DCMA will

give NASA improved oversight of such services.

3

 

3

 FAR 9.5, "Organizational and Consultant Conflicts of Interest," states that organizational and consultant conflicts of

interest result when other activities or relationships limit a person's ability to give impartial advice to the Government

or objectively perform contract work. The U.S. General Accounting Office defined sensitive costs in publication

GAO/AFMD-8.1.2, “Guide for Evaluating and Testing Controls Over Sensitive Payments,” May 1993. As recent as

October 2000, the Department of Defense Office of Inspector General reported that the Army and Air Force Exchange

Service did not require unpaid consultants to file financial disclosure reports, which could have assisted in identifying

potential conflicts of interest

4

 Allocation refers to the method the contractor uses to distribute indirect costs to contracts with Federal agencies. The

contractor's allocation method results in NASA paying about 70 percent of the indirect costs incurred for all Thiokol

contracts with Federal agencies.
Management’s Response

NASA concurred with the recommendations. The NASA contracting officer will issue

guidance to Thiokol to ensure that the contractor's buyers have required and completed written

justifications prior to awarding noncompetitive procurements. The NASA contracting officer

(1) will request that the DCAA include professional and consultant services costs in future

incurred cost audits and that the DCMA include the services subcontracts as part of purchasing

system and surveillance reviews and (2) will coordinate with the DCMA to ensure that Thiokol's

allocations of service costs charged as indirect costs result in NASA receiving reasonable

benefits in relation to cost.

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

[original signed by]

Roberta L. Gross

Enclosure

Final Report on Audit of Thiokol’s Use of Professional and Consultant Services
THIOKOL’S USE OF PROFESSIONAL AND CONSULTANT

SERVICES
W March 30, 2001

TO: M/Associate Administrator for Space Flight

MSFC/AA/Director, Marshall Space Flight Center

FROM: W/Assistant Inspector General for Auditing

SUBJECT: Final Report on Audit of Thiokol’s Use of Professional and Consultant

Services, Assignment Number A0002101

Report Number IG-01-019

The subject final report is provided for your information and use. Please refer to the Executive

Summary for the overall audit results. Our evaluation of your response is incorporated into the

body of the report. The recommendations will remain open for reporting purposes until

corrective actions are completed. Please notify us when actions have been completed on each

recommendation.

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

Director, Procurement Audits, at (818) 354-3360; or Ms. Nora Thompson, Audit Program

Manager, at (757) 864-3268; or Mr. Doug Orton, Auditor-in-Charge, at (281) 244-1159.

We appreciate the courtesies extended to the audit staff. The final report distribution is in

Appendix E.

[original signed by]

Russell A. Rau

Enclosure

cc:

B/Acting Chief Financial Officer

B/Comptroller

BF/Director, Financial Management Division

G/General Counsel

H/Associate Administrator for Procurement

JM/Director, Management Assessment Division
Contents

Executive Summary, i

Introduction, 1

Finding and Recommendations, 3

Controls over Noncompetitive Procurements of Professional and

Consultant Services, 3

Appendix A - Objectives, Scope, and Methodology, 10

Appendix B - Consultant Subcontracts Reviewed, 11

Appendix C - Summary of Prior Reviews and Findings, 12

Appendix D – Management's Response, 14

Appendix E – Report Distribution, 17
NASA Office of Inspector General

IG-01-019 March 30, 2001

A0002101

Thiokol’s Use of

Professional and Consultant

Services

Executive Summary

Background. Thiokol has provided reusable solid rocket motors for the Space Shuttle

missions under three contracts with a total value of $7.5 billion. Marshall Space Flight Center

(Marshall) awarded the first contract, NAS8-30490,5 to Thiokol in March 1989 for about $3.2

billion. Marshall awarded the second contract, NAS8-38100, in June 1991 for about $2.6

billion and the third contract, NAS8-97238, in August 1999 for about $1.7 billion.6 The

primary location of performance on the contract is Brigham City, Utah. Thiokol acquired

professional and consultant services to obtain advice, studies, training, or a liaison with

Government officials.

The DCMA is responsible for the Government's oversight of Thiokol's purchasing system,

including the award and management of professional and consultant services subcontracts. The

Defense Contract Audit Agency (DCAA) also performs annual audits of incurred costs on the

contract.

Objectives. The overall objective was to determine whether NASA had adequate controls

over Thiokol’s use of professional and consultant services. Appendix A describes the specific

audit objectives and methodology. For our review, we selected subcontracts to contract

NAS8-38100 that were active in 1998 and 1999 and that appeared to be at risk for

unallowable costs or were subcontracts with former Thiokol employees and subcontractors.

Thirteen subcontracts, with a total value of $1.4 million, met our criteria for review (see

Appendix B).

Results of Audit. NASA's controls over Thiokol’s use of professional and consultant services

can be improved. Weaknesses in the procurement and contract administration processes exist

in this sensitive cost area that, taken in combination, pose a risk of abuse to NASA. For 7 of

the 13 professional and consultant service subcontracts we reviewed, Thiokol buyers did not

 

5

 Contract NAS8-30490 was a cost-plus-award fee contract with a period of performance from March 1989 through

December 31, 1997. NASA awarded three supplemental acquisitions of motors and included the acquisitions as

schedules to the contract. Two of the acquisitions were separate contracts, but NASA bundled the acquisitions under

contract NAS8-30490 for ease of administration.

6

 Contract NAS8-38100 was cost-plus-award fee contract with a period of performance from June 1991 through

December 31, 2000. Contract NAS8-97238 is a cost-plus-award fee contract with a period of performance from

August 1999 through May 31, 2005.
ii

require adequate justifications for noncompetitive procurements. Justifications for the seven

subcontracts had one or more of the following deficiencies:

• Untimely or inappropriate justification for noncompetitive procurement (two

subcontracts)

• Inadequate explanatory statement (six subcontracts)

• Missing description of actions to compete future procurements (four subcontracts)

As a result, NASA has reduced assurance that Thiokol obtained the best available source or

price for consultant services paid for under the seven subcontracts and may not have benefited

from about $87,500 in professional and consultant service costs charged to NASA.

Recommendations. We recommended that management require the Agency's contracting

officer for NAS8-38100 to (1) direct Thiokol to ensure contractor personnel submit timely and

acceptable justifications for noncompetitive procurements; (2) request the DCAA to include

professional and consultant service costs in samples selected for future incurred cost audits; (3)

request the DCMA administrative contracting officer to include professional and consultant

service subcontracts as part of DCMA’s surveillance reviews; and (4) request the DCMA

administrative contracting officer to include in oversight reviews the allocation of professional

and consultant service costs charged as indirect costs and to notify the NASA contracting

officer when the Agency did not receive reasonable benefits in comparison to the costs

allocated to NASA.

Management Response

Management concurred with all the recommendations and plans to implement the recommended

actions.

Evaluation of Management’s Response. We consider management’s comments

responsive.
Introduction

Thiokol's Responsibilities in Subcontracting. NAS8-38100 gives Thiokol authority to

subcontract for professional and consultant services and requires Thiokol to award and

administer subcontracts according to requirements in FAR, Part 44, "Subcontracting." Thiokol

must maintain a purchasing system that promotes efficient and effective use of Government

funds. The purchasing system must include processes that select the best source for a

subcontract and oversight controls that ensure the proper award of subcontracts. Oversight

controls are critical to protecting NASA's interest since most Thiokol subcontracts for

professional and consultant services involved sources not subject to Government oversight.

FAR Part 44 requires Thiokol to comply with Government policies in subcontract awards,

including the Government policy of full and open competition in contracting.

Oversight of Professional and Consultant Services. On January 5, 2000,7 the NASA

contracting officer delegated to the DCMA administrative contracting officer approval of the

Thiokol purchasing system and oversight of contractor operations. The DCMA administrative

contracting officer uses DCMA purchasing system reviews and risk assessments as a basis for

approving the Thiokol purchasing system. In March 1992, Thiokol became a voluntary

participant in a Department of Defense (DOD) program, the Contractor Risk Assessment

Guidelines (CRAG), which allows contractor self-administered purchasing system reviews.8

Following CRAG, Thiokol conducted purchasing system reviews every 3 years since 1992, and

DCMA validated the reviews. During the 3-year period between purchasing system reviews,

DCMA performs risk assessments of Thiokol's management controls over general functional

areas. The DCMA risk assessments evaluate risk by comparing Thiokol's management controls

against a checklist of best practices, but the assessments do not include any reviews of

transactions. In 1997 and 1998, Thiokol performed self-administered purchasing system

reviews. Based on the 1998 purchasing system review and risk assessment, DCMA continued

its approval of Thiokol's purchasing system. In March 2000, DCMA completed the latest risk

assessment. The DCMA administrative contracting officer renewed the approval of the Thiokol

purchasing system on March 31, 2000.

During contract performance, the DCMA administrative contracting officer conducts

surveillance reviews to evaluate individual purchases or subcontracts and performs consent to

subcontract reviews. The reviews of individual purchases and subcontracts ensure Thiokol

maintains adequate purchasing procedures. The consent to subcontract reviews require Thiokol

officials to obtain the DCMA administrative contracting officer's consent before awarding

subcontracts that exceed 5 percent of total estimated contract costs.

 

7

 The most recent delegation to the DCMA is dated January 5, 2000. The DCMA has provided contract administration

services for contracts NAS8-30490, NAS8-38100, and NAS8-97238.

8

 CRAG guidelines for the self-administered purchasing system reviews are stated in the DOD Contractor's Risk

Assessment Guide, October 1988, Chapter V, "Purchasing."
2

The DCAA conducts annual audits of incurred costs for contract NAS8-38100 and determines

whether costs meet contract and FAR allowability requirements.9 Because Thiokol changed to

a calendar year accounting method in June 1998, DCAA performed two incurred cost audits

for 1998. The DCAA completed the 1998 audit of incurred costs and reported the results to

the DCMA administrative contracting officer in two reports, dated June 10, 1999, and

September 8, 1999.10

Prior Reviews. During prior reviews of consultant services and subcontracts at other

contractors, the DOD Office of Inspector General and the NASA Office of Inspector General

have found deficiencies. See Appendix C for a summary of the reports and findings.

 

9

 DCAA reports those costs that do not meet allowability requirements to the DCMA administrative contracting

officer. The DCMA administrative contracting officer resolves and dispositions any costs that DCAA reports as

unallowable.

10 DCAA issued results of the 1998 incurred cost audits in Audit Report No. 3231-99P10150001, "Report on Audit of

Fiscal Year 1998 Incurred Costs," dated June 10, 1999, and Audit Report No. 3231-99P10150002, "Report on Audit of

Fiscal Period 1998T Incurred Costs," dated September 8, 1999.
3

Finding and Recommendations

Finding. Controls over Noncompetitive Procurements of Professional

and Consultant Services

For 7 of the 13 professional and consultant service subcontracts we reviewed, Thiokol officials

did not prepare acceptable justifications for noncompetitive procurements. Justifications were

unacceptable because Thiokol personnel did not follow Thiokol policy in noncompetitive

procurements with former Thiokol employees and sources with prior Thiokol subcontracts.

Also, DCMA purchasing system and surveillance reviews and DCAA audits of incurred costs

did not include professional and consultant services subcontracts due to the relatively low-dollar

value of these subcontracts but without consideration of the inherent risks. Further, the DCMA

consent to subcontract review excludes professional and consultant services subcontracts

because the subcontracts do not meet the threshold dollar value for the review. As a result,

NASA has reduced assurance that the contractor obtained the best source and may not have

benefited from about $87,500 in professional and consultant service costs charged to NASA.

FAR and Contract NAS8-38100 Requirements

FAR, Subpart 31.205-33, “Professional and Consultant Service Costs,” states that

professional and consultant services are allowable costs only when supported by evidence of

the nature and scope of the service the consultant furnished under the subcontract.11 FAR

requires the contractor to maintain details of the agreement between the consultant and

contractor (for example, work requirements and rate of compensation) and details of actual

services the consultant performed. These requirements are in place in recognition of the inherent

risk that professional and consultant service subcontracts can result in conflicts of interest and

favoritism in the award process.

FAR Part 6, "Competition Requirements," directs contracting officers to take specific actions

that ensure compliance with Government policy on full and open competition in Government

contract awards. The contracting officer must solicit offers from as many potential sources as is

practical. To identify potential sources, the contracting officer conducts a market analysis,

documents the analysis, and retains the documentation in the contract file. A contracting officer

can award a noncompetitive procurement when only a single qualified source is available to

perform the contract requirements. However, the contracting officer must prepare a written

justification that explains why a competitive procurement is not appropriate. The justification

 

11 FAR also requires that invoices from the consultant show sufficient details regarding the time the consultant spent on

the subcontract and the nature of the actual services the consultant performed. The contractor must maintain

consultants' work products and documents related to the work the consultant performed. Examples include trip

reports, minutes of meetings, and collateral memoranda and reports. Trip reports should indicate persons the

consultant visited and subjects the consultant discussed during the visits.
4

must describe the market analysis and results of the analysis, list other sources that are available,

explain the selected source's unique qualifications, and explain why the available sources that

were not selected are unqualified.

FAR, Part 44, "Subcontracting," requires Thiokol to comply with Government policies in

subcontract awards, including the Government policy of full and open competition. The

administrative contracting officer must maintain a sufficient level of surveillance to ensure the

contractor's purchasing system complies with competition requirements.

To ensure Thiokol competitively awards subcontracts to the maximum extent practical, contract

NAS8-38100 incorporated FAR clause 52.244-5, "Competition in Subcontracting." Thiokol

implemented Procurement Organization Operating Instruction FI-T400-20.4, “Single/Sole

Source Justification," which established requirements similar to FAR Part 6. In accordance with

the Instruction, Thiokol personnel must avoid noncompetitive procurements whenever possible.

The written justification must explain why a competitive procurement is not appropriate and

describe actions that prevent future noncompetitive procurements. Instruction FI-T400-20.4

directs the Thiokol buyer to ensure that the written justification meets requirements before

awarding the noncompetitive procurement.

Justifications for Noncompetitive Procurements

The 13 professional and consultant service subcontracts we reviewed were noncompetitive

procurements. For 7 of the 13 noncompetitive procurements, professional and consultant

service subcontracts included one or more of the following deficiencies:

• Untimely or inappropriate justification. On two subcontracts, Thiokol personnel

requesting the procurement prepared a written justification for the initial noncompetitive

procurement, but did not update the justification when Thiokol issued a follow-on

subcontract to the same subcontractor. On one subcontract, for example, Thiokol

issued the initial noncompetitive subcontract in 1993 and awarded follow-on

subcontracts for years 1994 through 2001 without written justifications.

• Inadequate explanatory statement. On six subcontracts, Thiokol personnel who

requested the noncompetitive procurement did not explain why a competitive

procurement was inappropriate. Four of the six justifications did not show that

requesting personnel considered any other source. Two of the six justifications

summarized other sources that the requester considered and stated that the
5

selected source was uniquely qualified. The justifications did not state why the other

available sources were incapable of performing the subcontract requirements.

• Missing description of actions to compete future procurements. Justifications for

four subcontracts lacked a description of actions to compete future procurements. For

the procurements, requesting personnel either did not complete that section of the

justification form or indicated they would take no action.

Thiokol Personnel

Thiokol personnel were aware of Thiokol procurement policy FI-T400-20.4 but did not follow

the policy in noncompetitive procurements with former Thiokol employees or subcontractors.

• For four of the seven procurements, Thiokol requesting personnel selected sources that

either were former Thiokol employees or had prior subcontracts with Thiokol. When

requesting personnel were familiar with the sources, requesting personnel did not

perform a market analysis to identify other sources. Buyers accepted justifications that

did not have adequate explanatory statements when the noncompetitive procurement

involved a former Thiokol employee or subcontractor.

• For two procurements, Thiokol senior management directed contractor personnel to

select a specific source through a noncompetitive procurement because the source

previously performed work for other Thiokol divisions. Requesting personnel and

buyers did not seek competition for the procurements.

• Requesting personnel did not document plans to compete future procurements on

justifications that involved former Thiokol employees, former Thiokol subcontractors,

or sources that Thiokol senior management selected.

The NASA contracting officer should direct Thiokol to ensure that requesting personnel submit

adequate justifications for noncompetitive procurements and that buyers do not award

noncompetitive procurements without adequate justifications.

DCAA and DCMA Oversight

DCAA audits of incurred costs and DCMA purchasing system reviews use a risk-based

approach to select individual items for review. The risk-based approach focuses a review on

items for which the dollar risk and expected benefit of review are greatest in terms of questioned

costs. For years prior to 2000, DCAA incurred cost audits and DCMA purchasing system

reviews did not disclose unallowable professional and consultant service costs at Thiokol. The

dollar value of individual professional and consultant services subcontracts are lower than other

items of incurred costs for those years. Although professional and consultant services
6

subcontracts are susceptible to improper use or conflict of interest, DCMA and DCAA reviews

are less likely to select the subcontracts because of their lower dollar value.

Additionally, the DCMA administrative contracting officer performs a consent to subcontract

review that is likely to exclude professional and consultant services subcontracts. Under the

consent to subcontract review, the DCMA administrative contracting officer reviews

subcontracts that exceed 5 percent of the $7.5 billion estimated total value of the three

contracts, limiting the review to subcontracts with an estimated value of $375 million or more.

The review will not include professional and consultant services subcontracts with a value less

than $375 million. For example, none of the 13 professional and consultant service

subcontracts we reviewed was subject to the DCMA administrative contracting officer’s

consent to review because the value of each subcontract was less than $375 million. To ensure

Thiokol's purchasing system complies with the Government policy of full and open competition

and to avoid the appearance of favoritism, the DCMA administrative contracting officer should

review a sample of professional and consultant services subcontracts. The NASA contracting

officer should modify the delegation to the DCMA administrative contracting officer to ensure

that the officer includes a sample of professional and consultant services subcontracts in the

consent to subcontract reviews.

Effect on Competition and Oversight Reviews

Adequate justifications and supporting documentation are needed to provide NASA assurance

that Thiokol awarded professional and consultant service subcontracts to the best available

source at a reasonable price. Also, adequate documentation facilitates DCMA purchasing

system and surveillance reviews by describing the steps the contractor used to identify the

available sources and the contractor's basis for noncompetitively selecting a single source.

Three of the seven noncompetitive procurements with unacceptable justifications obtained

consulting services that another source may have been able to provide. The three

procurements, shown in the following table, have a total value of $593,850, or about 42 percent

of the $1.4 million in subcontracts that we reviewed.
7

Subcontracts with a Potential for Competition

Subcontract Description of Services* Contract Value

M8FB200 Provide consulting services for marketing

tactical technology and production in the

Huntsville, Alabama, area.

$28,000

8FB048 Assist in marketing activities for current and

upcoming business opportunities in the

commercial and DOD arenas.

 $125,000

M8FB235 Provide consultants to support leadership

training events.

 $440,850

* We obtained the description of services provided under the subcontract from the subcontract scope of award or the

written justification for noncompetitive procurement.

The contractor needs adequate justifications and supporting documentation to show that a

noncompetitive procurement was the appropriate procurement instrument.

Additionally, for subcontract 8FB048, the subcontract documentation describes $125,000 in

professional and consultant services for marketing activities that primarily supported Air Force,

Navy, and Army programs. Thiokol has used the consultant's services since July 1992. The

pricing analysis for the 1997 award stated that the consultant would provide marketing services

for Air Force silo-based programs, including the Minute-Man Missile program. A DCAA

review of the consultant's monthly trip reports for August 1997 through January 2001 showed

the consultant primarily provided marketing services for DOD programs. For 1998 and 1999,

NASA paid about 70 percent12 of the $125,000 subcontract, or about $87,500, for

professional and consultant services. The contractor charged the subcontract as an indirect cost

to its contracts with Federal agencies and in agreement with its normal accounting practices.13

The subcontract involved activities that are allowable indirect costs for years 1997 and 1998.

However, the subcontract illustrates the importance of the DCMA administrative contracting

officer reviewing the contractor's method of charging, or allocation,14 of professional and

 

12 The 70 percent represents the amount of an indirect cost that the contractor charges to NASA. The contractor

charges the remaining 30 percent to Thiokol contracts with other Federal agencies.

13 Thiokol disclosed its normal accounting practices for professional and consultant service subcontracts in its Cost

Accounting Standards Board Disclosure Statement, Section 3.2.3. The statement prescribes that a professional and

consultant service subcontract is a direct cost if the subcontract is readily, economically, and consistently identifiable to

a contract or project. A professional and consultant service subcontract is an indirect cost if the contractor incurred the

cost for multiple contracts and the services are necessary for the overall operation of the business.

14 Allocation refers to the method the contractor uses to distribute indirect costs. Thiokol collects indirect costs

incurred for all contracts with Federal agencies into a Federal indirect cost pool and distributes the Federal indirect cost

pool to the individual contracts through the indirect, or overhead, rate.
8

consultant service subcontracts that are indirect costs to individual contracts with agencies.

Such action will allow the NASA contracting officer to determine whether negotiating a limit on

the amount of indirect costs that the contractor can bill to the NASA contract is appropriate.

Recommendations, Management’s Response, and Evaluation of

Response

The Director, Marshall Space Flight Center, should require the NASA contracting

officer to:

 1. Direct Thiokol to ensure that requesting personnel submit acceptable and timely

justifications as required by Thiokol Procurement Organization Operating

Instruction FI-T400-20.4 and to ensure that buyers do not award noncompetitive

procurements without required and complete justifications.

2. Request the DCAA to include professional and consultant service costs in

samples selected for future incurred cost audits.

3. Request the DCMA administrative contracting officer to include professional

and consultant service subcontracts as part of purchasing system and

surveillance reviews.

4. Request the DCMA administrative contracting officer to include in DCMA

oversight reviews the allocation of professional and consultant service costs

charged as indirect costs and to notify the NASA contracting officer when

NASA did not receive reasonable benefits compared to the costs allocated to

NASA.

Management’s Response. Concur. The NASA contracting officer will issue guidance to

Thiokol to ensure that buyers have required and completed justifications prior to awarding

noncompetitive procurements. The contracting officer (1) will request that the DCAA include

professional and consultant services costs in future incurred cost audits and that the DCMA

include professional and consultant service subcontracts as part of purchasing system and

surveillance reviews and (2) will coordinate with the DCMA to ensure that Thiokol’s allocations

of service costs charged as indirect costs result in NASA receiving reasonable benefits in

relation to cost.

The complete text of management’s response is in Appendix D.

Evaluation of Management’s Response. Management’s planned actions are responsive to

the recommendations. The recommendations are resolved but will remain undispositioned and

open until agreed-to-corrective actions are completed.
9

Appendix A. Objectives, Scope, and Methodology

Objectives

The overall objective was to determine whether NASA had adequate control of Thiokol’s use

of professional and consultant services. Specifically, we determined whether the contractor’s

professional and consultant service costs included unallowable costs.

Scope and Methodology

We reviewed professional and consultant service subcontracts that were active in 1998 and

1999. During that period, Thiokol had 47 active professional and consultant service

subcontracts totaling $2.3 million. We examined subcontract documentation related to years

1998 and 1999. Documentation included subcontracts, statements of work, noncompetitive

justifications, cost and price analyses, consultants’ invoices and work products, payment

approvals, and miscellaneous correspondence. We also compared each subcontract against

requirements in the FAR and relevant Thiokol policies and procedures and interviewed

contractor personnel who requested the consultant services, Thiokol procurement officials, the

NASA contracting officer, and the DCMA administrative contracting officer.

Use of Computer-Processed Data

We obtained computer-generated data on subcontract awards and tested the data by

comparing it to source documents for the sampled subcontracts. For those sampled

subcontracts with extensions covering years before or after 1998 and 1999, we validated 1998

and 1999 subcontract costs and confirmed the total subcontract cost with DCAA. The tests

showed that the computer-processed data were sufficiently reliable to be used in meeting the

audit objectives.

Management Controls Reviewed

We reviewed management controls over compliance with FAR allowability requirements and

the award of consultant subcontracts. Management controls over the justification of

noncompetitive procurements need improvement as discussed in the report finding.

Audit Field Work

We performed audit field work from May through December 2000 at Marshall Space Center

and at Thiokol’s facility in Brigham City, Utah. We conducted the audit in accordance with

generally accepted government auditing standards.
10

Appendix B. Consultant Subcontracts Reviewed

Subcontract Dollar Value Incurred Cost

(Through December

1999)

Deficiency

M8MG068 $ 44,000 $ 25,047 Inadequate explanatory statement

7FB160 Unfunded* 73,197 None

M8MG112 280,000 194,235 Inadequate explanatory statement, and

missing description of actions to compete

future procurements

M7MB110 374,400 373,482 Untimely or inappropriate justification

M8SJ039 7,000 7,000 None

8FB048 125,000 100,016 Inadequate explanatory statement, and

missing description of actions to compete

future procurements

M8FB200 28,000 16,439 None

M9FB009 28,194 28,194 None

M8FB190 40,000 40,000 Inadequate explanatory statement, and

missing description of actions to compete

future procurements

M8FB174 3,695 3,695 None

M8FB235 440,850 252,858 Untimely or inappropriate justification, and

inadequate explanatory statement

8FB012 26,500 24,230 Inadequate explanatory statement, and

missing description of actions to compete

future procurements

M8FB172 40,000 36,961 None

Total $1,437,639 $1,175,354

* Unfunded subcontracts state a ceiling for the subcontract amount but do not state a specific dollar value because the

specific dollar value is unknown at the time of the award.
11

Appendix C. Summary of Prior Reviews and Findings

NASA Office of Inspector General (OIG) Reviews. The NASA OIG issued two audit

reports and a management letter report on subcontract management. (Copies of the two audit

reports are available at www.hq.nasa.gov/office/oig/hq/issuedaudits.html.)

“Allied-Signal Subcontract Management,” Report Number IG-99-042,

September 16, 1999, and “Raytheon Subcontract Management,” Report Number IG00-002, December 21, 1999. Purchasing department buyers for the two contractors did not

maintain documentation to support justifications for noncompetitive procurements. The

contractors' purchasing policies did not require contractor personnel to keep supporting

documentation. Additionally, Government oversight reviews of the contractors’ procurement

systems did not include examinations of supporting documentation for noncompetitive

procurements. As a result, NASA had reduced assurance that the contractor maximized the

competition of its subcontracts. In response to our recommendations, NASA management

instructed the contractors to maintain adequate documentation in support of noncompetitive

procurements. NASA management also took actions to include reviews of supporting

documentation in future reviews of the contractors’ purchasing systems.

"Management Letter Regarding Procurement Issues Identified in the Shuttle-Mir

Rendezvous and Docking Missions and International Space Station Operational

Readiness Task Forces Report," February 18, 1998. A NASA subcontractor providing

technical support to a NASA Task Force may have lacked the impartiality needed to make

independent assessments and recommendations concerning the organizations funding their

efforts. Also, the noncompetitively awarded subcontract and subcontract extension did not

have adequate justification for a noncompetitive procurement. The contractor submitted

inadequate explanatory statements for the initial award, did not conduct a market survey or

submit a written justification for the subcontract extension, did not perform an adequate price

analysis, and did not obtain the required approvals. Because the management letter report

contains sensitive and proprietary contractor information, we are not providing additional details

regarding the report's recommendations and management's response to the recommendations.

DOD Reviews. The DOD Office of Inspector General issued two audit reports on consultant

service contracts.

“Contracts for Professional, Administrative, and Management Support Services,"

Report Number D-2000-100, March 10, 2000, and “Use of Unpaid Consultants by the

DOD Exchange Services,” Report Number D-2001-005, October 16, 2000. Report

Number D-2000-100 discusses a review of procurement procedures for professional,

administrative, and management support service contracts at 15 DOD contracting activities and

program offices. The report identified problems in each of 105

Appendix C
12

sampled contract actions. Problems included undefined requirements, inadequate technical

reviews, inadequate negotiation memorandums, inadequate competition, and lack of cost

control. Report Number D-2001-005 discusses the Army and Air Force Exchange Service

inappropriate engagements of consultants who had financial affiliations with the Exchange

Service. The Exchange Service did not require unpaid consultants to file financial disclosure

reports, which could have assisted in identifying potential conflicts of interest.
13

Appendix D. Management's Response
14

Appendix D
15

Appendix D
16

Appendix E. Report Distribution

National Aeronautics and Space Administration (NASA) Headquarters

A/Administrator

AA/Chief of Staff

AI/Associate Deputy Administrator

B/Acting 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/Director, Management Assessment Division

L/Acting Associate Administrator for Legislative Affairs

M/Associate Administrator for Space Flight

NASA Centers

Chief Counsel, John F. Kennedy Space Center

Non-NASA Federal Organizations and Individuals

Assistant to the President for Science and Technology Policy

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

 Budget

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

 of Management and Budget

Director, Acquisition and Sourcing Management Team, General Accounting Office

Professional Staff Member, Senate Subcommittee on Science, Technology, and Space

Director, Defense Contract Audit Agency

Director, Defense Contract Management Agency
17

Appendix E

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 Efficiency, Financial Management, and

 Intergovernmental Relations

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

House Subcommittee on Technology and Procurement Policy

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

Reader Survey

The NASA Office of Inspector General has a continuing interest in improving the usefulness of

our reports. We wish to make our reports responsive to our customers’ interests, consistent

with our statutory responsibility. Could you help us by completing our reader survey? For your

convenience, the questionnaire can be completed electronically through our homepage at

http://www.hq.nasa.gov/office/oig/hq/audits.html or can be mailed to the Assistant Inspector

General for Auditing; NASA Headquarters, Code W, Washington, DC 20546-0001.

Report Title: Thiokol’s Use of Professional and Consultant Services

Report Number: Report Date: 

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Thank you for your cooperation in completing this survey.
Major Contributors to the Report

Lorne Dear, Program Director, Procurement Audits

Nora Thompson, Program Manager, Procurement Audits

Doug Orton, Auditor-in-Charge

Bobbie Wells, Staff Auditor

Nancy C. Cipolla, Report Process Manager

Debbie Schuerger, Program Assistant