```
NASA Contract Management: Improving the Use of DCAA's Auditing Services
(Letter Report, 09/30/94, GAO/NSIAD-94-229).

This report examines the National Aeronautics and Space Administration's
(NASA) management and use of audit support provided by the Defense
Department's Defense Contract Audit Agency (DCAA). NASA relies
extensively on DCAA to provide audit and financial advisory services on
the billions of dollars worth of contracts NASA awards.  GAO assesses
NASA's (1) need for an enforcement mechanism to deter contractors from
claiming unallowable costs, (2) use of DCAA proposal audit services, (3)
involvement in audit planning, (4) oversight of contract audit and
administration services, and (5) backlog of contracts awaiting closeout.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-229
     TITLE:  NASA Contract Management: Improving the Use of DCAA's 
             Auditing Services
      DATE:  09/30/94
   SUBJECT:  Auditing procedures
             Federal procurement
             Overhead costs
             Contract costs
             Audits
             Questionable payments
             Aerospace contracts
             Contract monitoring
             Management information systems
             Interagency relations

             
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Cover
================================================================ COVER

Report to the Chairman, Committee on Government Operations, House of
Representatives

September 1994

NASA CONTRACT MANAGEMENT -
IMPROVING THE USE OF DCAA'S
AUDITING SERVICES

GAO/NSIAD-94-229

NASA Contract Management

Abbreviations
=============================================================== ABBREV

  DCAA - Defense Contract Audit Agency
  DOD - Department of Defense
  FAR - Federal Acquisition Regulation
  NASA - National Aeronautics and Space Administration
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER

B-257877

September 30, 1994

The Honorable John Conyers, Jr.
Chairman, Committee on Government Operations
House of Representatives

Dear Mr.  Chairman: 

As you requested, we reviewed the National Aeronautics and Space
Administration's (NASA) management and use of audit support provided
by the Department of Defense's (DOD) Defense Contract Audit Agency
(DCAA).  NASA relies extensively on DCAA to provide audit and
financial advisory services on the billions of dollars of contracts
NASA awards.  This report assesses NASA's (1) need for an enforcement
mechanism to deter contractors from claiming unallowable costs, (2)
use of DCAA proposal audit services, (3) involvement in audit
planning, (4) oversight of contract audit and administration
services, and (5) backlog of contracts awaiting closeout. 

   BACKGROUND
------------------------------------------------------------ Letter :1

As the second largest civilian contracting agency in the federal
government, NASA depends on DCAA to ensure that contractors spend
government funds in accordance with laws and regulations.  DCAA
services are especially important to NASA due to the agency's
prominent use of cost reimbursement contracts, which accounted for
over 85 percent of the $10.2 billion worth of contracts awarded to
business firms in fiscal year 1993.  During each of the past 2 fiscal
years, NASA paid DCAA over $17 million to perform contract audit and
other financial advisory services, such as the following: 

  Evaluations of contractors' cost proposals prior to negotiating
     contracts, modifications, and subcontracts. 

  Audits of contractors' incurred costs to verify that the amounts
     billed to the government under cost reimbursement and incentive
     contracts agree with the contractors' records, are allowable
     under existing regulations, are reasonable, and are allocable to
     the contract. 

  Business system audits, such as reviews of contractors' accounting,
     budgeting, compensation, purchasing, and cost estimating
     systems, to ensure that contractors have adequate controls to
     effectively and efficiently manage government resources.  DCAA
     also performs operation audits to identify areas where
     contractors' practices are wasteful, careless, and inefficient
     and result in unreasonable costs. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Stronger sanctions are needed to reduce NASA contractors' unallowable
cost claims.  DCAA audits show that NASA contractors claim
reimbursement for unallowable costs in the millions of dollars, some
of which are expressly unallowable.\1 For example, at one contractor,
about $82,000 of expressly unallowable costs were allocated to NASA
and another civilian agency, including costs related to business
interruption insurance, charitable donations, consulting, and travel
in excess of amounts allowed by travel regulations.  Although NASA
can disallow contractor claims for such costs, it has not had the
authority to assess penalties to help enforce compliance with
regulations and to serve as a deterrent to contractors claiming
unallowable costs.  Legislation recently passed by the Congress
provides such authority. 

NASA procurement personnel obtained and used DCAA contract pricing
support as required or documented their reasons for not doing so. 
However, over 70 percent of the contracts we reviewed did not
properly document the status of contractors' business systems prior
to negotiations.  Knowing the status of such systems is important in
determining the extent to which NASA should rely on contractors'
proposals and in overseeing and evaluating their performance. 

NASA and DCAA have improved their communication and audit
coordination in recent years; however, NASA is still not sufficiently
involved in DCAA's audit planning process or aware of audit coverage
to ensure that contractors received appropriate and timely audits. 
Consequently, limited audit resources may not have been effectively
used, and NASA could not consider how areas that may require
increased audit coverage would be reviewed.  Such areas have been
identified by the NASA Inspector General in recent years, including
the lack of timely incurred cost audits and business system reviews
as well as insufficient numbers of operational or functional reviews
to identify contractor inefficiencies and decrease contract costs. 

NASA's contract audit tracking and follow-up systems were incomplete. 
For example, at one center, nine reports requiring follow-up were not
in the tracking system, including one that addressed about $495,000
in defective pricing.  Consequently, NASA managers did not know the
status of all significant audit findings and recommendations that
affected their contracts.  Further, NASA was largely unaware of the
status of the findings and recommendations on NASA contracts to be
resolved by DOD's administrative contracting officers. 

NASA has not taken timely action to close out contracts after work
has been completed, thus increasing its exposure to contractors'
financial and internal control problems and delaying corrective
actions needed to prevent them from billing excessive costs on
subsequent contracts.  Of more than 2,600 contracts awaiting closeout
at the end of 1993, over 1,500 exceeded the guidelines for timely
closeout.  Some of the contracts awaiting closeout were completed in
the late 1970s and early 1980s. 

--------------------
\1 Expressly unallowable costs are those specifically stated to be
unallowable under the provisions of an applicable law, regulation, or
contract. 

   NASA CONTRACTORS' UNALLOWABLE
   COST CLAIMS ARE A SIGNIFICANT
   PROBLEM
------------------------------------------------------------ Letter :3

Our review of DCAA audit reports showed that NASA contractors'
unallowable overhead cost claims are a significant problem,
especially among smaller contractors with whom NASA has significantly
increased the number and value of its contracts.  Unallowable costs,
including those that were expressly unallowable, that were found by
DCAA auditors in recent years included two cases of overstating
depreciation expenses by more than $1.6 million; five cases of
excessive travel and transportation claims totaling about $230,000;
six cases of alcohol and entertainment expenditures totaling about
$204,000; three cases of legal fees and settlements of over $124,000;
and five cases of improper claims for bonuses and other compensation
totaling over $515,000.  These and other examples of such costs found
on NASA contracts are in appendix II. 

Although unallowable cost claims can be disallowed, until recently,
NASA did not have the authority to assess penalties.  Legislation
recently passed by the Congress provides civilian agencies, including
NASA, with the authority to require their contractors to certify that
all indirect costs included in their claims are allowable and to
assess penalties when contractors claim expressly unallowable
costs.\2

Before this recent legislation, in situations where contractors
holding both DOD and NASA contracts included expressly unallowable
costs in their overhead claims, only the portion allocated to DOD was
subject to penalty.\3 For example, one contractor holding NASA and
DOD contracts claimed expressly unallowable costs totaling $212,000,
including costs related to business interruption insurance,
charitable donations, consulting, and travel in excess of amounts
allowed by travel regulations.  About $82,000 of these costs were not
subject to penalty because they were allocated to NASA and another
civilian agency. 

In August 1992, an interagency team tasked by the Office of
Management and Budget (OMB) to review NASA contracting practices and
regulations disclosed several instances where NASA contractors did
not identify and exclude unallowable costs from their government
contract billings and claims.\4 Some of these unallowable costs would
have been subject to a penalty if the recently passed legislation had
been in effect.  According to DCAA field office personnel, some NASA
contractors routinely claim unallowable costs.  It is then up to the
auditors to find and disallow them.  But, as we reported in recent
years, limited resources preclude DCAA from identifying all
unallowable costs claimed by cost reimbursement contractors.\5
Therefore, the full extent of unallowable costs claimed under NASA
contracts is unknown. 

In addition to requiring contractors to certify under penalty of
perjury that indirect cost claims do not include unallowable costs
and the prospect of paying an additional cost penalty, NASA could
take other actions to deter its contractors from claiming unallowable
costs.  These include considering such claims during the award fee
process or as part of contractors' past performance when awarding
future contracts. 

--------------------
\2 A penalty equal to the amount of the expressly unallowable costs
plus interest is imposed in addition to repaying such costs.  Where a
submitted settlement proposal contains a cost determined to be
unallowable before the proposal's submission, a penalty equal to
twice the expressly unallowable costs is imposed.  Penalties can be
waived under certain conditions. 

\3 DOD's penalty provision is found in 10 U.S.C.  2324. 

\4 SWAT Team on Civilian Agency Contracting -- Report on NASA (Aug. 
1992).  The team consisted of representatives from NASA headquarters,
NASA's Office of Inspector General, OMB's Office of Federal
Procurement Policy, and DCAA. 

\5 Contract Pricing:  Issues Related to DCAA Staff Levels
(GAO/NSIAD-93-225, July 1, 1993); and Contract Pricing:  Unallowable
Costs Charged to Defense Contracts (GAO/NSIAD- 93-79, Nov.  20,
1992). 

   NASA'S USE OF DCAA PROPOSAL
   AUDIT SUPPORT
------------------------------------------------------------ Letter :4

NASA contract and pricing officials requested proposal pricing
support from DCAA in appropriate circumstances and adequately
considered DCAA's recommendations.  However, contracting officers did
not always document the status of contractor business systems in
negotiation memorandums as required by the Federal Acquisition
Regulation (FAR) and NASA FAR Supplement.\6

--------------------
\6 The prenegotiation position memorandum explains the contractor and
government positions and ultimately becomes the basis for contract
negotiations.  The price negotiation memorandum documents the
elements of the contract negotiated and the methodology and rationale
used. 

      NASA ADEQUATELY OBTAINED AND
      USED DCAA PRICING SUPPORT
---------------------------------------------------------- Letter :4.1

In 25 procurement actions we reviewed, NASA contracting officers
complied with FAR and NASA FAR Supplement requirements for requesting
DCAA audits on contractor proposals or documented the reasons for not
requesting audits.  In the six cases where DCAA pricing services were
not requested, contracting officials documented that other
information was available to determine a reasonable price.  Also, for
the actions we reviewed where DCAA audit assistance was requested and
received, NASA contracting officers almost always either adopted
DCAA's recommendations when establishing the government's negotiating
positions or adequately documented sufficient reasons for not
accepting them. 

      STATUS OF CONTRACTORS'
      SYSTEMS NOT PROPERLY
      DOCUMENTED
---------------------------------------------------------- Letter :4.2

The FAR and NASA FAR Supplement require that contracting officers
address the status of contractor business systems in negotiation
memorandums.\7 Specifically, the NASA FAR Supplement requires that if
systems do not apply to the procurement, the reasons for not
discussing their status must be explained in negotiation memorandums. 
The adequacy of contractor systems is important in establishing
negotiation objectives and in determining the extent of contract
management oversight. 

At the centers we visited, negotiation memorandums for over 70
percent (23 of 31) of the contracts we reviewed did not address the
status or nonapplicability of the four systems specifically mentioned
by the FAR--purchasing, accounting, estimating, and compensation. 
When systems were discussed, pertinent details as to who did the
reviews and the date of the most recent review were frequently
missing, as were reasons why some contracting officers determined the
FAR requirement was not applicable to their negotiations.  Also,
rarely did memorandums address any other contractor systems that also
might have affected negotiations or been pertinent to subsequent
oversight. 

NASA headquarters' procurement management surveys had previously
noted noncompliance with this requirement at the two centers we
visited.  Our review of 12 procurements awarded after headquarters'
reviews showed that, while compliance increased, the status of all
systems, or reasons for their nonapplicability, was still not always
addressed.  According to a headquarters' procurement official, NASA
will revise its form for requesting DCAA audit services to ask DCAA
to comment on the current status of all contractor systems that could
affect contract negotiations. 

The centers we visited have already begun to tailor their audit
requests to require that DCAA address the status of contractor
systems.  Both centers have also developed a checklist to assist
contracting personnel in preparing for negotiations that include the
requirement to address the status of contractor systems.  One center
issued a notice to all contracting personnel reminding them of the
documentation requirements.  The other center is developing a
centerwide database of contractor business systems and hopes to
implement the system within the next year. 

According to one center's procurement managers, although the status
of systems was not always documented as required, the information is
requested from contractors and verified with DCAA.  However, some
contracting officers told us they assumed contractor systems were
approved and current, and they did not verify their status with DCAA. 
Documenting their status in negotiation memorandums can help ensure
that contracting officials adequately consider contractor systems in
negotiations. 

--------------------
\7 The FAR lists four contractor business systems as examples that
might affect negotiations (i.e., purchasing, accounting, estimating,
and compensation).  However, there is no guidance on which other
contractor internal control systems also might affect negotiations. 
Such systems that could affect negotiations and subsequent contract
oversight include billing, pension and insurance, budget and
planning, government property, and material management and accounting
systems. 

   NASA NEEDS TO BE MORE INVOLVED
   IN AUDIT PLANNING
------------------------------------------------------------ Letter :5

NASA and DCAA have increased their coordination and improved their
working relations over the years.  For example, at one center, DCAA
recently established an audit liaison to respond to NASA concerns and
issues.  However, NASA procurement officials were not actively
involved in planning what DCAA audits would be done and were
generally unaware of DCAA's audit coverage of their contractors and
contracts.  Consequently, they did not know about some areas that may
require additional audit coverage and could not consider alternative
ways to obtain such coverage.  NASA's Office of Inspector General is
working to improve NASA's involvement in audit planning and
monitoring of audit activity. 

      NASA NOT ROUTINELY INVOLVED
      IN AUDIT PLANNING
---------------------------------------------------------- Letter :5.1

NASA generally relied on DCAA and DOD administrative contracting
officers to plan post-award audits, and NASA contracting officers
were generally unaware of DCAA's audit plans and schedules.\8
Contracting officers told us they periodically requested special
audits when they suspected problems, but did not typically get
involved in audit planning or assessing if additional audit coverage
was needed.  They told us DCAA knows best what audits to conduct and
when to conduct them and that they were unaware of contract audit
requirements.  In several instances, contracting officers told us
they did not know the status of their contractors' business systems,
when the systems were last reviewed, or whether audit coverage was
complete. 

NASA procurement managers also did not systematically assess whether
audit coverage was complete or if additional audits were needed.  At
one center, procurement officials met periodically with DCAA audit
managers to discuss ongoing reviews and future audit plans.  However,
discussions did not include the audit coverage on individual
contractors or the need for additional coverage.  At the other
center, procurement officials have historically provided little
contractor-specific input to the annual request for issues requiring
DCAA audits. 

--------------------
\8 NASA contracting officers delegate most contract administration
functions to other agencies'--primarily DOD's--contract
administration offices.  Such functions often include working with
DCAA. 

      SOME AREAS REQUIRE INCREASED
      AUDIT COVERAGE
---------------------------------------------------------- Letter :5.2

Data collected by NASA's Inspector General over the past 2 years
showed that DCAA did not always audit NASA's larger contractors on a
timely basis and that some areas required additional audit coverage. 
Due to DCAA and NASA audit priorities and limited resources, annual
audits, including incurred cost audits, and periodic business system
reviews were not always done when required.  Also, few operational or
functional reviews were done, even though DCAA experience has shown
that such reviews help improve contractor efficiencies and decrease
government contract costs.  According to DCAA headquarters'
officials, DCAA would provide additional audit resources and coverage
if NASA requested the reviews and provided more funds. 

According to NASA headquarters' Inspector General officials, field
inspector general staffs should work with center procurement managers
and contracting officers to discuss NASA audit priorities, including
areas requiring additional audit coverage.  Center officials should
then meet with DCAA to provide contractor-specific input into DCAA
audit plans.  However, center procurement managers and contracting
officers told us they were unaware of the results of these Inspector
General efforts. 

Since NASA is ultimately responsible for managing its contracts, it
should maintain better oversight of contract audit activities and be
more involved in planning audit coverage and setting priorities. 
More active involvement could result in better coordination with DCAA
auditors and DOD administrative contracting officers, more effective
use of DCAA resources, and an opportunity for NASA to determine if
additional DCAA resources are needed.  If these efforts indicate
DCAA's inability to provide audit coverage despite NASA's willingness
to pay, NASA could consider alternatives, such as using NASA pricing
analysts in lieu of DCAA auditors to do proposal pricing analyses,
having NASA Inspector General staff conduct contractor operational or
functional reviews, and engaging qualified public accounting firms to
do specified audits. 

   NASA AUDIT FOLLOW-UP SHOULD BE
   MORE COMPREHENSIVE AND TIMELY
------------------------------------------------------------ Letter :6

NASA did not comply with OMB and other guidance on audit report
tracking and follow-up.  Both NASA headquarters and center audit
follow-up systems were incomplete, which could preclude agency
officials from ensuring that significant audit issues are properly
resolved.  Further, NASA contracting officers often did not make
timely resolution decisions on contract audit report recommendations. 
NASA also did not consistently oversee and document DOD's resolution
of audit findings on those contracts where NASA had delegated
authority to DOD. 

      NASA AUDIT FOLLOW-UP EFFORTS
      WERE INCOMPLETE
---------------------------------------------------------- Letter :6.1

OMB Circular A-50, "Audit Follow-up," sets governmentwide policy on
responding to contract audit findings and recommendations.  OMB
requires agencies to, among other things, (1) track all audit reports
to ensure that findings and recommendations are properly resolved and
corrective actions taken, (2) report semiannually to agency
administrators on the status of unresolved audit reports over 6
months old,\9 and (3) periodically evaluate the follow-up system's
operations.  NASA was not fully complying with these requirements. 

NASA headquarters and center tracking systems did not contain all
reports requiring NASA officials to take corrective actions.  NASA
headquarters' tracking system did not include all audit reports
referred by DCAA as reportable.  Of the 32 new audit reports referred
to NASA by DCAA during fiscal year 1993, 9 were not in NASA
headquarters' tracking system or listed in its semiannual report to
the NASA Administrator.  For example, an August 1993 report that
questioned about $224,000 in defective pricing was not tracked. 

NASA did not track and report these "reportable" audits because
complete reconciliations between the headquarters' tracking system
database, center databases, and DCAA referrals had not been done.\10
Headquarters' policy was to not report these audits until the centers
confirmed that the reports were properly addressed to NASA for
follow-up action.  However, five of these missing reports had been
issued in 1992 and should have been either reported or referred to
DOD for tracking. 

In response to our request in July 1994, NASA headquarters followed
up on the nine missing reports and found that four of them should
have been tracked by NASA headquarters and included in its semiannual
report; three had already been closed or were in the process of being
closed; and two were incorrectly referred by DCAA as reportable audit
reports.  Center tracking systems were also incomplete.  One center's
tracking system only included reportable audits, although other
audits required contracting officer attention and center procedures
required that all system and expenditure audits be tracked.  The
center's audit follow-up official questioned the benefit of centrally
tracking nonreportable audit reports and said such reports are
tracked by individual contracting officers and to a small extent by
the Inspector General.  However, central tracking of all post-award
contract audit reports requiring NASA action would help ensure
appropriate management oversight and timely resolution of issues
affecting NASA contracts. 

Another center's system tracked both reportable and nonreportable
audits but, based on our limited review, nine reports that required
contracting officer action were missing from the tracking system. 
For example, one missing report dated October 1993 questioned about
$80,000 of the claimed costs on two cost reimbursement contracts and
noted that the contractor had claimed over $198,000 in unallowable
costs since the inception of the two contracts.  Another missing
report dated April 1993 questioned $494,500 of claimed costs as being
defectively priced.  The center audit follow-up official said that
the missing reports should have been tracked and added them to the
system.  The official said the reports would have been tracked had
cognizant contracting officers notified him of the reports.  As a
result of our review, the center's Director of Procurement issued a
notice on procedures for tracking contract audit reports and
resolving audit recommendations. 

According to NASA headquarters' procurement officials, the adequacy
of each center's contract audit follow-up system is supposed to be
reviewed during headquarters' procurement management surveys. 
However, recent surveys at the centers we visited did not assess
whether all appropriate reports were being tracked.  According to
headquarters' officials, NASA's procurement survey guide will be
modified to include an evaluation of center procedures for
identifying and tracking audit reports. 

--------------------
\9 NASA is required to report audits with significant unresolved
findings to the NASA Administrator.  According to the NASA Audit
Follow-up Handbook (NHB 9970.2), reportable audit reports include (1)
expenditure audits that contain findings and recommendations totaling
$100,000 or more and (2) all business system reviews. 

\10 Under this system, DCAA field auditors refer reports meeting the
reportable audit criteria to NASA for resolution by attaching an
audit follow-up sheet to the original copy of the audit report.  DCAA
also sends copies of these sheets monthly and summary lists of
referred audit reports semiannually to the NASA headquarters'
follow-up official for reconciliation.  This reconciliation process
is meant to ensure the comprehensive identification and timely
resolution of significant audit issues for which NASA has resolution
responsibility.  Beginning in late 1994, DCAA headquarters plans to
provide NASA with a monthly list of reportable contract audit
reports. 

      TIMELY ACTION NOT TAKEN ON
      SOME AUDIT REPORTS
---------------------------------------------------------- Letter :6.2

OMB Circular A-50, NASA's FAR Supplement, and the NASA Audit
Follow-up Handbook require contracting officers and procurement
officials to pursue timely management resolution and disposition of
contract audit reports.\11 Work recently concluded by NASA's
Inspector General showed that NASA procurement officials did not
aggressively pursue the resolution of audit reports and frequently
did not meet requirements for resolving audit recommendations within
6 months after the audit report was issued. 

In a May 1994 report, NASA's Inspector General found that 53 percent
of the audit reports sampled did not meet the 6-month resolution
requirement, with some taking as much as 30 months to resolve.\12 In
the Inspector General's opinion, 48 percent of the reports exceeding
the resolution requirement could have been resolved and corrective
actions could have been taken more promptly.  Delays were attributed
to insufficient oversight and emphasis by higher level headquarters
and center acquisition officials, and center procurement officials
did not have clear and formal performance standards to provide
effective contract audit follow up. 

In its response to the Inspector General's report, NASA's Office of
Procurement agreed to more closely monitor center contracting officer
timeliness in resolving audit report findings, revise the
headquarters' procurement survey guide to include specific steps for
evaluating contract audit follow-up in future procurement reviews,
and include standards for audit follow-up in contracting officers'
performance plans. 

--------------------
\11 OMB and NASA require resolution of post-award audits within 6
months of report issuance and disposition as soon as possible after
resolution.  Resolution occurs when the audit resolution
official--either the procurement contracting officer or the
administrative contracting officer--in consultation with the auditor,
decides on the appropriate action to take.  Disposition occurs when
the contractor implements the audit recommendation or the contracting
officer's decision. 

\12 NASA Audit Follow-up Process:  Headquarters Center (HQ-94-009,
May 26, 1994). 

      NASA NOT ADEQUATELY
      MONITORING AUDITS TO BE
      RESOLVED BY DOD
---------------------------------------------------------- Letter :6.3

NASA contracting officers generally did not monitor the status of
DCAA audit reports sent to DOD for follow-up, did not always document
the resolution of such reports in contract files, and were often
unaware of DOD actions that affected their contracts.\13
Consequently, NASA could not ensure that audit findings and
recommendations were resolved on a timely basis and that the
resolutions were in NASA's best interest.  NASA's contract audit
follow-up systems also do not track the status of audit reports DOD
is responsible for resolving.\14

In certain cases, some monitoring of actions taken by DOD was being
done.  For example, at one center, two procurement branches tracked
all DCAA reports affecting their contracts, including those for which
DOD held resolution responsibility.  Contracting officers in these
two branches said that tracking such reports improves their oversight
of contractor operations.  Also, center Inspector General staffs
require center procurement officials to follow up on a small number
of reports that were sent to DOD for resolution.\15

Although NASA's policy is to optimize the use of contract
administration services of other government agencies, this does not
relieve NASA contracting officers of their oversight
responsibilities.  Increased monitoring of DOD's audit resolution
activities would allow NASA to (1) determine the current status of
all significant unresolved audits, (2) judge the appropriateness of
the audit resolution actions taken by DOD personnel, and (3) better
understand the quality of their contractors' business operations. 

--------------------
\13 NASA contracting officers often delegate the resolution of audit
findings on NASA contractors to DOD administrative contracting
officers. 

\14 These reports should be tracked on DOD systems. 

\15 According to DCAA's Contract Audit Manual, NASA centers'
Inspector General staff should receive copies of audit reports on
contractors located in their geographic area.  Center Inspector
General staffs review these reports for significant impact on NASA. 

   DELAYS IN CLOSING CONTRACTS
   NEED TO BE ADDRESSED
------------------------------------------------------------ Letter :7

NASA has not met FAR guidelines on closing out physically completed
contracts.\16 As of December 1993, NASA had over 2,600 contracts
awaiting closeout, some of which related to work completed in the
late 1970s and early 1980s.  Of these, 70 percent of the 449
fixed-price contracts, 57 percent of the 2,115 contracts requiring
settlement of indirect cost rates, and 9 percent of all other
contracts exceeded the FAR guidelines for closeout. 

Excessive delays were due to a variety of reasons, including NASA
placing a low priority on closing contracts; DCAA's backlog in
completing audits of contractor- and subcontractor-incurred costs;
contractors placing low priority on submitting required closing
documentation; and contracts being litigated or under criminal
investigation.  DCAA has established an initiative to prioritize
audits in an effort to reduce the large backlog of completed
contracts to be closed. 

Excessively delaying contract closeout is not a good business
practice because it increases the government's exposure to
contractors' financial and internal control problems, delays
corrective actions needed to prevent contractors from billing
excessive costs, and increases the government's risk that contractors
owing money may go out of business or lose records.  Also,
contractors may use unaudited historical data containing unallowable
costs in negotiating future fixed-price contracts with the government
and may gain interest-free use of government funds if overpayments
were made.  Delaying contract closeout also increases the risk of
using current year funds to pay for prior year obligations and
requires government financial management personnel to perform
additional work to avoid losing expiring funds. 

Although NASA headquarters' procurement management survey guidelines
cover contract closeout, delays were not mentioned in 1993 survey
reports for the centers we visited.  NASA has not reviewed closeout
delays agencywide and relies on its centers to address closeout
issues.  NASA has emphasized using "quick closeout" procedures, but
very few contracts had been closed using this method at the centers
we visited.\17

--------------------
\16 FAR guidelines for closing out physically completed contracts are
6 months for fixed-price contracts and 36 months for
cost-reimbursement contracts. 

\17 Quick closeout procedures may be used on a contract that is
physically completed; has unsettled indirect costs of $500,000 or
less; and has a value, excluding fee, of $2 million or less. 

   RECOMMENDATIONS TO THE NASA
   ADMINISTRATOR
------------------------------------------------------------ Letter :8

We recommend that the NASA Administrator do the following: 

  Develop, test, and implement initiatives to help deter NASA
     contractors from claiming unallowable costs, such as considering
     prior unallowable cost claims as part of contractors' past
     performance when awarding future contracts.  These initiatives
     would be in addition to the recently passed legislation on
     certification and penalty provisions. 

  Re-emphasize the requirement that contracting officers document the
     status or nonapplicability of all contractor business systems in
     negotiation memorandum, including those not specifically
     mentioned as examples in the FAR. 

  Coordinate with the NASA Inspector General, and DOD administrative
     contracting officers where applicable, annually assess and
     prioritize audit coverage of NASA contractors and provide
     contractor-specific input to DCAA's audit planning process.  If
     necessary, develop and consider alternatives or strategies to
     achieve more complete and timely contract audits. 

  Track and follow up on contract audit reports in the timely and
     comprehensive manner required by OMB Circular A-50. 

  Monitor audit findings and recommendations that could affect NASA
     contracts that are resolved by DOD administrative contracting
     officers and document their status and disposition in contract
     files. 

  Develop, test, and implement initiatives to reduce existing
     backlogs of delinquent physically completed but unclosed
     contracts, and direct NASA personnel to periodically report to
     senior management on the results of these initiatives. 

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

DOD's and NASA's comments are included in appendixes III and IV.  DOD
concurred with the report.  NASA generally agreed with it but offered
several comments on our findings and recommendations. 

NASA agreed that certification and penalty provisions would be
effective tools for deterring contractors from claiming unallowable
costs.  However, it noted that the alternatives we
offered--considering prior unallowable cost claims during the award
fee process and as part of the contractor's past performance when
awarding future contracts--would be less effective and would not
provide sufficient incentives for contractors to ensure all
unallowable costs are excluded from overhead claims.  We did not
intend such actions as substitutes for a penalty.  Rather, such
actions represent additional ways to deter contractors from claiming
unallowable costs.  Our intention is that they be considered in
addition to any applicable penalty, and we clarified our
recommendation accordingly. 

NASA agreed that it needs to become more involved in DCAA's audit
planning process but noted that it is DCAA's role, as the
government's prime audit representative, to perform audit planning
functions and consider the needs of all of its customers, including
NASA.  Although DCAA is responsible for developing its own audit
plan, NASA is responsible for managing its contracts.  Therefore,
NASA has responsibility for ensuring that its contractors receive
appropriate audit coverage and, where necessary, using alternative
means to achieve such coverage when DCAA cannot provide it. 

NASA agreed that its audit tracking and reporting systems need
improving.  However, NASA expressed concern that we were recommending
that its contract audit follow-up systems track the status of audit
reports that DOD also tracks and is responsible for resolving.  We do
not want NASA to duplicate DOD's work.  Our point is that NASA should
understand and evaluate the adequacy of the service it is receiving
in this area.  That is what we mean when we recommend that NASA
"monitor" audit resolution and document its status and resolution in
contract files. 

Other NASA comments have been incorporated throughout the report
where appropriate or addressed at the end of appendix III. 

---------------------------------------------------------- Letter :9.1

The scope and methodology of our work is described in appendix I. 
Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after its issue date.  At
that time, we will send copies of this report to other appropriate
congressional committees; the NASA Administrator; and the Director,
OMB.  We will also provide copies to others upon request. 

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix V. 

Sincerely yours,

Donna M.  Heivilin
Director, Defense Management
 and NASA Issues

SCOPE AND METHODOLOGY
=========================================================== Appendix I

To identify unallowable costs claimed on National Aeronautics and
Space Administration (NASA) contracts, we reviewed Defense Contract
Audit Agency (DCAA) reports, NASA and Department of Defense (DOD)
regulations, and legislation regarding certification and penalty
provisions.  We interviewed DCAA and NASA officials to address the
significance of unallowable cost claims and to determine the
deterrents available or needed to reduce such claims. 

To test compliance with the Federal Acquisition Regulation (FAR) and
NASA FAR Supplement requirements for obtaining pre-award pricing
support and using DCAA recommendations, we judgmentally selected 7
fixed-price and 18 cost-reimbursement procurement actions valued at
between $515,000 and $481 million.  We reviewed DCAA proposal audit
reports and NASA pricing reports and negotiation memorandums, and
interviewed cognizant procurement personnel.  We judgmentally
selected and reviewed negotiation memorandums for 31 procurement
actions to determine if NASA adequately documented the status of
contractor business systems. 

To assess NASA's involvement in planning contract audits and in
determining if additional audit coverage was needed, we interviewed
NASA headquarters, center procurement, NASA Inspector General, and
DCAA officials.  We also reviewed NASA contract files, DCAA's
Contract Audit Manual, and the Inspector General's analysis of DCAA
audits on NASA's top 25 contractors. 

To assess NASA's compliance with Office of Management and Budget
(OMB) Circular A-50, the NASA FAR Supplement, and other guidelines on
audit tracking and follow-up, we interviewed NASA headquarters and
center procurement officials about their procedures and review
activities.  We compared reports on NASA headquarters' audit
follow-up system to those on lists generated by DCAA and compared
center systems to reports received by center Inspector General
staffs.  We did not evaluate NASA's compliance with FAR timeliness
requirements for resolving DCAA report recommendations since the NASA
Inspector General recently reviewed this issue.  Results of the
Inspector General's audit are included in this report. 

To assess NASA's contract closeout activities, we obtained summary
reports from NASA headquarters and detailed reports from centers on
the status of physically complete contracts that were not closed.  We
discussed reasons and potential impacts of delays with contract
closeout, procurement, financial management, DCAA, and contractor
officials.  We also reviewed closeout files for 12 contracts that
were physically completed between August 1982 and January 1988 but
not closed out as of November 1993. 

We conducted our audit work at NASA and DCAA headquarters, two NASA
field centers (Johnson Space Center in Houston, Texas, and Goddard
Space Flight Center in Greenbelt, Maryland), and two DCAA field audit
offices.  We conducted our work between May 1993 and July 1994 in
accordance with generally accepted government auditing standards. 

EXAMPLES OF UNALLOWABLE COSTS
CLAIMED ON NASA CONTRACTS
========================================================== Appendix II

DCAA found the following examples of unallowable costs in claims made
by NASA contractors in recent years.  For the costs DCAA determined
to be expressly unallowable, the portion allocated to NASA contracts
may have been subject to unallowable cost penalties if DOD had
awarded the contract. 

  An officer's personal auto expenses of $2,487 described as salary
     expense; $3,581 for rental of a personal residence for other
     than government business; $4,000 in lobbying costs, $5,516 in
     entertainment costs; and, over a 2-year period, $98,047 in
     unapproved deferred compensation. 

  Travel expenses of $10,296 in excess of amounts allowed by travel
     regulations; $41,632 for unsupported public relations costs;
     $1,774 for penalties; $1,910 for gifts and donations; unapproved
     bonuses of $11,200 to employees; $3,000 in bank fees related to
     lines of credit; $7,224 for bad debt expenses; $4,943 in
     management and legal fees, including personal legal fees for
     marital matters; $12,380 in cost overruns on other contracts;
     and $20,000 in severance pay to an employee who resigned. 

  Bank charges of $28,238 for maintaining insufficient funds, $41,516
     in overstated depreciation charges, $45,465 in overstated
     medical insurance costs, $12,537 in overstated profit sharing
     costs, and $86,588 in unallowable life insurance benefits. 

  Over a 3-year period, legal fees and settlements of $9,815 incurred
     in commercial contract and federal income tax disputes; $30,858
     for federal income taxes and penalties; $3,065 for charitable
     contributions; $1,461 for social activities; $47,824 in interest
     expenses; and $49,691 in unallowable bonuses to the
     owner/president. 

  Entertainment expenses of $16,162 while traveling in Mexico,
     France, and elsewhere; $9,873 for maintaining a ski resort
     condominium used solely for entertainment purposes; $47,815 for
     executive fringe benefits while engaged in expressly unallowable
     entertainment activities; lease costs for a luxury vehicle of
     $9,060 in excess of what the contractor had agreed to in the
     prior year; $14,443 in legal fees unrelated to the contract;
     unallowable distribution of profits of $136,000 to key officers;
     and $53,816 in officers' salaries when engaged in unallowable
     entertainment activities. 

  Retroactively revising the useful lives of assets, thus overstating
     depreciation costs by over $1.5 million--about 15 percent of
     total depreciation costs claimed--and travel expenses of $14,650
     in excess of amounts allowed by travel regulations and for
     spouses to accompany employees on business trips. 

  Contributions of $10,269, entertainment costs of $66,866, alcoholic
     beverage costs of $41,068, and $7,405 in excess travel costs. 

  Unallowable travel costs of $57,076 over a 3-year period.  All
     claimed costs were questioned because the contractor refused to
     provide supporting documentation after the auditor identified
     significant irregularities during an initial review of selected
     sample items.  The contractor also claimed a security deposit of
     $9,841 as rental expense. 

  Alcohol and unreasonable entertainment costs totaling $13,445 and a
     payment of $100,000 to settle a lawsuit brought by a former
     employee who alleged retribution for disclosure of information
     suggesting the contractor was violating safety and other
     regulations during performance under a space shuttle contract. 

  Business interruption insurance of $15,592, donations of $50,197,
     lobbying costs of $6,378, entertainment costs of $49,255, and
     travel costs over amounts allowed by travel regulations and
     other unsupported travel costs of $139,853. 

  Travel costs over amounts permitted by government travel
     regulations and other unallowable costs totaling $25,252.  While
     penalties were assessed on the unallowable costs allocated to
     seven DOD contracts, the portion allocated to a NASA contract
     was not subject to penalty. 

  Marketing costs, including the costs of exhibits and conventions,
     and entertainment, totaling $24,344. 

(See figure in printed edition.)Appendix III
COMMENTS FROM THE NATIONAL
AERONAUTICS AND SPACE
ADMINISTRATION
========================================================== Appendix II

See comment 1. 

(See figure in printed edition.)

See comment 2. 

(See figure in printed edition.)

The following are GAO's comments on NASA's letter dated September 20,
1994. 

GAO COMMENTS

1. We believe that the report clearly indicates the process through
which NASA or other government representatives can disallow
unallowable costs identified during audits.  Also, we only partly
agree with NASA's statement that "the system has been working to
identify and exclude unallowable expenses." While the system finds
unallowable costs such as those described in this report, limited
audit resources preclude DCAA from assuring that all unallowable
costs claimed by contractors are identified.  Work by NASA, DCAA, and
GAO show that, although the full extent of the problem remains
unknown, NASA contractors continue to make unallowable cost claims. 
Therefore, auditors must detect them in order to disallow them. 

2. As NASA stated, this information can be obtained from
administrative contracting officers, as well as DCAA.  We did not
intend to focus on only one source of information about the status of
contractors' systems.  However, DCAA has a significant role in
reviewing and commenting on the status of several of the systems
included in our review, including estimating, accounting, and
compensation. 

(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II

MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

David R.  Warren
Frank Degnan
Raymond H.  Denmark, Jr. 

DALLAS OFFICE

James D.  Berry, Jr.
Eric Erdman
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