United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Oversight of

Government Management and the

District of Columbia, Committee on

Governmental Affairs, U.S. Senate

December 1995 MILITARY SEALIFT

COMMAND

Weak Controls and

Management of

Contractor-Operated

Ships

GAO/NSIAD-96-41

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-265707 

December 12, 1995

The Honorable Carl Levin

Ranking Minority Member

Subcommittee on Oversight of

 Government Management and the

 District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Senator Levin:

This report responds to your request that we review the Military Sealift Command’s

management of its contractor-operated ships. Our review focused on whether the Military

Sealift Command has (1) an adequate system of management controls in place to oversee

contractors and prevent abuses and (2) sufficient oversight to ensure contractual requirements

are being met.

Unless you publicly announce its contents earlier, we plan no further distribution of this report

until 10 days after its issue date. At that time, we will send copies to the Secretaries of Defense

and the Navy; the Commander, Military Sealift Command; and other interested parties. We will

also make copies available to others upon request.

Please contact me on (202) 512-5140 if you or your staff have any questions. Major contributors

to this report are listed in appendix II.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues
Executive Summary

Purpose Two cases involving the Military Sealift Command’s (MSC)

contractor-operated ships illustrate the dangers of poor management

controls and the resulting too-heavy reliance on contractors’ integrity. One

case involved fraudulent overtime practices by the crew members of a

ship management company, and the second case involved the severe

deterioration and improper crewing of MSC’s sealift tankers. As a result of

GAO’s 1994 report on the sealift tankers,1 the Ranking Minority Member of

the Subcommittee on Oversight of Government Management and the

District of Columbia, Senate Committee on Governmental Affairs, asked

GAO to examine MSC’s contractor-operated ship programs. Specifically, GAO

determined whether MSC has adequate management controls (1) to oversee

contractors and prevent contract abuses and (2) to ensure contractual

requirements are being met.

Background To carry out its mission, MSC uses a combination of government and

privately owned ships with civilian crews who work either directly for MSC

or for MSC’s contract-operators. This report focused on 40 of MSC’s 

69 contractor-operated ships. These 40 ships were in the 5 programs where

MSC awarded long-term contracts for 3 or more ships. These programs

include maritime prepositioning ships, T-5 tankers, oceanographic survey

ships, T-AGOS surveillance ships, and fast sealift ships. MSC spends over

$400 million per year to operate and maintain these 40 ships. In fiscal year

1994 alone, MSC spent $93.8 million to maintain and repair these ships.

Results in Brief MSC’s internal controls are inadequate to oversee its contractor-operated

ship programs. As a result, MSC is vulnerable to contract abuse. MSC lacks

basic internal controls in its verification of crew-performed repairs, in its

review of invoices for subcontracts, and in its supervision of overhaul

work. MSC does not verify that it has received the goods or services it is

paying for, in part because there is a disconnect between headquarters

reviewers and field-level personnel, whose main concern is the operation

but not the cost of the ships’ repair. Also, though MSC’s Comptroller is

responsible for coordinating MSC’s internal control program, he does not

have the authority to ensure that MSC’s system of internal controls is

sufficient and is being adhered to.

MSC also lacks sufficient oversight to ensure that contractual requirements

are met. MSC has no guidelines for systematically establishing personnel

1

U.S. Navy/Military Sealift Command: Weak Contract Administration Led to Unsafe and Poorly

Maintained Ships (GAO/OSI-94-27, Aug. 31, 1994).

Page 2 GAO/NSIAD-96-41 Military Sealift Command
Executive Summary

requirements such as citizenship and security requirements. Neither does

it systematically compare contractual requirements with contractors’

performance in obtaining security clearances and trustworthiness

evaluations for crew members. Finally, MSC does not have a formal system

to identify and implement best practices that could be used to improve the

contractors’ performance or reduce the programs’ cost.

MSC’s fragmented lines of organizational authority represent a significant

impediment to sound management controls. MSC has acknowledged such

organizational problems and plans to designate program managers and

establish formal lines of accountability.

Principal Findings

MSC’s Internal Controls

Are Inadequate to Prevent

Overpayments for Ship

Repairs

In two programs, MSC does not require contractors to adequately document

that minor repairs are actually accomplished. GAO’s review of minor repair

reports, which list repairs to be applied toward contract-defined

thresholds, found that contractors for three programs were overstating

these reports in various ways. One contractor was billing MSC for the

straight time hours of its regular crew, when only overtime hours are

reimbursable. Another contractor was wrongfully claiming cleaning jobs

as reimbursable. A third contractor was billing twice for the same jobs.

After the contractors for two of these three programs met their minor

repair thresholds, they were reimbursed by MSC for all minor repairs. One

was paid $685,946 for fiscal years 1991 through 1995. The second was paid

$741,360 in fiscal year 1994 alone. At the time of GAO’s review, MSC had not

yet determined whether the contractor for the third program had met its

minor repair threshold.

For some programs, MSC’s review of invoices for subcontracted work is

also insufficient to prevent excessive payments by MSC. First, MSC does not

uniformly require contractors to provide invoices with supporting

documentation that would indicate that prices are fair and reasonable. For

example, GAO found that one contract required the contractor to submit

evidence of competitive bidding with every subcontract and that the MSC

field unit had deducted amounts from the contractor’s invoices for

inadequate documentation.

Page 3 GAO/NSIAD-96-41 Military Sealift Command
Executive Summary

For another contractor, on the other hand, GAO found no supporting

documentation with invoices that would indicate whether prices were fair

and reasonable. In one case, MSC had approved an invoice for $3,560 to

“provide labor, tools and material necessary to replace twenty

(20) lampshades . . . [and] relamp and repair as necessary” without any

evidence of whether this work had been awarded competitively, why it

had not been done by the ship’s crew, or how extensive the work was. GAO

also found that MSC had paid a subcontractor $260 per lamp to repair 

10 lamps and replace their lampshades, when it could have purchased new

lamps for $210 each (excluding the cost of installation). A qualified

electrician, who is part of the ship’s crew, could easily have performed this

repair at about half the labor rate charged by the subcontractor.

For two programs, MSC headquarters invoice reviewers could rely on

available field staff to verify that the subcontracted work was done or that

it was reasonably priced. However, in only one program are field staff

involved in the invoice review process.

One MSC contract requires that the contractor obtain MSC approval before

subcontracting for industrial assistance that costs more than $25,000.

However, this contractor split large jobs into smaller ones and thereby

circumvented this requirement. In one instance, the contractor submitted

71 separate invoices totaling $202,294 for welding-related work; 18 of these

invoices were submitted on the same day. MSC has known about this

practice since 1990 but has not taken any action to prevent it.

Also, even though a ship’s overhaul can cost MSC up to $6 million, MSC does

not always have assurance that repair work, particularly unforeseen

repairs not specified in overhaul contracts, is completed or is reasonably

priced. This lack of assurance is due in part to the fact that MSC has no

agencywide requirement for its representatives to be present during ship

overhauls. When an MSC representative is not present during an overhaul,

MSC is relying entirely on the integrity of the contract operator to protect

the government’s interest.

At MSC, internal controls to prevent contractor fraud and abuse are weak in

many cases. In response to the Chief Financial Officers Act of 1990, the

Secretary of Defense directed that senior managers play a more active role

in identifying, reporting, and correcting poor internal controls. However,

though MSC’s Comptroller is responsible for the coordination of MSC’s

internal control program, he does not have direct authority to ensure the

sufficiency of these controls or their implementation.

Page 4 GAO/NSIAD-96-41 Military Sealift Command
Executive Summary

Management Control

Weaknesses Impede MSC’s

Efforts to Effectively

Manage Its Ship Programs

MSC does not have standard procedures for developing personnel

requirements in its contracts. For example, while most contractors are

required to submit the resumes of key personnel to MSC for approval

before the personnel are assigned to a ship, one contractor is not. Also, a

similar inconsistency exists for the requirement that crew members be

U.S. citizens. Finally, MSC has not provided guidance or standardized

procedures to be used in establishing security requirements for crew

members. As a result, key contract requirements have inadvertently been

left out in some cases, and MSC has no assurance that its ships’ crew

members are qualified, trustworthy, and properly cleared.

No one person or office in MSC is responsible for tracking trustworthiness

evaluations and security clearances for all MSC’s contractor-operated ship

programs to ensure that contractors comply with contract requirements.

People from the Office of Security, the Operations Office, and the

Operating Contracts Division are involved with the security clearances and

trustworthiness evaluations of ship crews, but communication among

these offices is poor. As a result, MSC cannot ensure that contractual

requirements for crews to be trustworthy or appropriately cleared are

being met.

The contractor-operated ship programs GAO reviewed used two different

contracting methods to control ship maintenance and repair costs.

However, MSC has no formal system for comparing the two contracting

methods to determine whether one method is more cost-effective than the

other and therefore should be used for all of MSC’s contractor-operated

ship programs.

MSC’s program managers rely on legal, contracting, engineering,

accounting, and security personnel who are located in different

departments in MSC and report to the heads of their individual

departments. This fragmented organization has contributed to MSC’s failure

to ensure that its contractors comply with their contracts. MSC was

planning a reorganization beginning in October 1995 to “clarify

accountability, responsibility, and authority” for its ship programs.

Recommendations GAO is making a number of recommendations to the Secretary of Defense

to strengthen MSC’s internal controls and to improve its oversight of

contractor operations. For example, GAO is recommending that MSC

institute procedures to improve its verification of crew-performed repairs

and its review of subcontractor invoices. To assist in the implementation

Page 5 GAO/NSIAD-96-41 Military Sealift Command
Executive Summary

of these and GAO’s other recommendations, GAO is also recommending that

MSC consider expanding the responsibilities of MSC’s Comptroller or

creating a new position, which would include the current Comptroller’s

duties. Further, GAO is recommending that MSC’s program managers assign

an individual responsibility for contract provisions, such as those dealing

with trustworthiness and security clearances. In addition, GAO is

recommending that the Commander of MSC instruct his personnel to

discuss and evaluate ways of identifying and implementing best practices

into their contractor-operated ship programs.

Agency Comments In official oral comments, the Department of Defense (DOD) generally

agreed with GAO’s recommendations. DOD partially concurred with the

findings but disagreed with the conclusion that internal controls are weak.

DOD did agree that there are opportunities for further improvements in the

internal controls applied to contractor operation of MSC ships and said it

has already implemented remedial measures. DOD also stated that in view

of the unusual procurement situations highlighted in the report, the

Commander of MSC is focusing additional attention on risk analysis and the

design of appropriate internal controls.

GAO continues to believe that MSC does not have an adequate system of

controls over its contractor-operated ships. Recent fraudulent practices of

a former MSC contractor and the continuing investigation by federal law

enforcement agencies into MSC operations support GAO’s conclusion that

MSC’s internal controls are inadequate.

Page 6 GAO/NSIAD-96-41 Military Sealift Command
Page 7 GAO/NSIAD-96-41 Military Sealift Command
Contents

Executive Summary 2

Chapter 1 

Introduction

10

MSC’s Contractor-Operated Ships 10

Maintenance and Repair of Contractor-Operated Ships 15

Objectives, Scope, and Methodology 15

Chapter 2 

MSC’s Internal

Controls Are

Inadequate to Prevent

Overpayments for

Ship Repairs

18

Inadequate Documentation and Review of Crew-Performed

Repairs Have Led to Overpayments

18

Documentation Submitted With Invoices Is Insufficient to Ensure

That Subcontractors’ Prices Are Fair and Reasonable

22

MSC Does Not Consistently Verify That Overhaul Work Is Done

and Prices Are Reasonable

28

MSC’s Internal Controls Are Weak 30

Conclusions 30

Recommendations 30

Agency Comments and Our Evaluation 31

Chapter 3 

Management Control

Weaknesses Impede

MSC’s Efforts to

Effectively Manage Its

Ship Programs

32

MSC Does Not Have Standard Procedures to Develop Personnel

Requirements

33

MSC Does Not Ensure That Contractors Comply With

Requirements for Crew Trustworthiness and Security Clearances

35

No Systematic Approach to Identify and Implement Best

Practices

38

Fragmented Lines of Authority Impede Sound Management

Controls

40

Conclusions 41

Recommendations 42

Agency Comments and Our Evaluation 42

Appendixes Appendix I: Ships Visited During Our Review 44

Appendix II: Major Contributors to This Report 45

Tables Table 1.1: MSC’s Fleet as of June 1, 1995 10

Table 3.1: Processing Time for 29 Trustworthiness Evaluations 37

Table 3.2: Trustworthiness Evaluations for One Contractor 37

Page 8 GAO/NSIAD-96-41 Military Sealift Command
Contents

Figures Figure 1.1: Contractor-Operated Ships 12

Figure 2.1: Example of the Type of Lamp Repaired by a

Subcontractor

25

Abbreviations

CFO Chief Financial Officer

DCMC Defense Contact Management Command

DOD Department of Defense

GAO General Accounting Office

MSC Military Sealift Command

Page 9 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

The Military Sealift Command (MSC) provides ships for fleet support;

special missions; and strategic sealift of equipment, supplies, and

ammunition to sustain U.S. forces worldwide. While MSC uses a

combination of government and privately owned ships to carry out this

mission, all these ships have civilian crews who work either directly for

MSC or for MSC’s contract operators.

MSC’s

Contractor-Operated

Ships

This report deals with contractor-operated ships, which account for 69 of

the 200 ships in MSC’s fleet (see table 1.1). Our review specifically focused

on 40 ships in the 5 programs where MSC awarded long-term charter

contracts for 3 or more ships.1

 These programs include maritime

prepositioning ships, T-5 tankers, oceanographic survey ships, T-AGOS

surveillance ships, and fast sealift ships (see fig. 1.1). MSC spends over

$400 million per year to operate and maintain these 40 ships. This figure

includes payments for leasing the 18 privately owned ships in the group.

Table 1.1: MSC’s Fleet as of June 1,

1995

Force

Total

number

of ships

Contractoroperated

ships

Type of ship

reviewed

Number

of ships

reviewed

Strategic sealifta

Active 56 43 T-5 tankers 5

Maritime

prepositioning

13

Inactive 89 10 Fast sealift 8

Naval fleet auxiliaryb 39 10 T-AGOS 10

Special mission support c 14 4 Oceanographic 4

Miscellaneous 2 2 0

Total 200 69 40

aThe strategic sealift force rapidly transports U.S. military forces and their equipment in the event

of a war or contingency, and then transports the supplies needed to keep the forces armed, fed,

and supplied for combat.

bThe naval fleet auxiliary force provides support and services to U.S. Navy combatant ships

worldwide. Services include towing, underway replenishment, and submarine detection.

cThe ships of the special mission support force carry out a variety of highly specialized missions,

including missile tracking, cable laying and repairing, and oceanographic and hydrographic

surveying.

1

Twenty of the contractor-operated ships that we did not review are under short-term charters. The

remaining nine ships are operated by seven different contractors.

Page 10 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

Page 11 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

Figure 1.1: Contractor-Operated Ships

Page 12 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

Page 13 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

Maritime Prepositioning

Ships

Maritime prepositioning ships rapidly deliver urgently needed Marine

Corps equipment and supplies to a theater of operations during a war or

contingency. These 13 privately owned ships are divided into three

squadrons located in the Atlantic, Pacific, and Indian Oceans and carry

everything from tanks and ammunition to food, water, and fuel. Each

squadron can support a U.S. Marine Corps Expeditionary Brigade of 

17,300 troops for 30 days. The maritime prepositioning ships were among

the first ships to arrive in Saudi Arabia during Operation Desert Shield and

in Somalia during Operation Restore Hope.

T-5 Tankers The primary mission of the five privately owned T-5 tankers is

point-to-point delivery of refined petroleum products to Department of

Defense (DOD) users throughout the world. In addition, two of the tankers

are equipped with modular fuel delivery systems, which allow them to

refuel combatant ships at sea. At 30,000 tons displacement, the T-5 tankers

are 3,000 tons larger than the contractor-operated sealift tankers that we

reported on last year.2

 In addition, the T-5s have ice-strengthened hulls and

are approximately 10 years newer than the sealift tankers.3

 During

Operations Desert Shield and Desert Storm, MSC tankers provided fuel to

naval fleet units operating in the Red Sea, the Persian Gulf, and the Gulf of

Oman.

Fast Sealift Ships The mission of the eight government-owned fast sealift ships is to provide

rapid surge capability to U.S. armed forces throughout the world. They are

the fastest roll-on/roll-off cargo ships in the world and are designed to

carry bulky Army equipment such as tanks and helicopters. Combined, the

eight ships can carry almost a full Army mechanized division.

The fast sealift ships are normally maintained in a reduced operating

status, with skeleton crews who perform preventive and corrective

maintenance and basic operational checks. All eight ships are assigned to

Fast Sealift Squadron One, in New Orleans, Louisiana, and they can be

activated and underway from ports on the U.S. East and Gulf Coasts in 

96 hours. Each of the fast sealift ships made up to seven trips to Saudi

Arabia during Operations Desert Shield and Desert Storm. They were also

involved with Operation Restore Hope.

2

U.S. Navy/Military Sealift Command: Weak Contract Administration Led to Unsafe and Poorly

Maintained Ships (GAO/OSI-94-27, Aug. 31, 1994).

3

By the time we completed our review, the sealift tankers were no longer part of MSC’s active fleet.

Page 14 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

T-AGOS Ocean

Surveillance Ships

The mission of 7 of the 10 government-owned T-AGOS ships is to locate

and track submarines. The remaining three have been converted to do

counterdrug missions. These ships are homeported in Little Creek,

Virginia, and Pearl Harbor, Hawaii, and are monitored by MSC field

organizations located at these homeports. The T-AGOS ships operate

towed array sensor systems to gather submarine acoustical data,

especially to locate new and quieter submarines.

Oceanographic Ships The mission of the four government-owned oceanographic ships is to

support worldwide oceanographic survey programs with acoustical,

biological, physical, and geophysical research. Their precision sonar

systems permit continuous charting of a broad strip of ocean floor. The

research conducted by these ships helps to improve the Navy’s undersea

warfare and enemy ship detection capabilities.

Maintenance and

Repair of

Contractor-Operated

Ships

MSC’s contract operators are tasked with providing personnel, equipment,

tools, and supplies to maintain MSC’s ships. They use three different levels

of maintenance and repair to keep MSC’s ships operational. The first level

of maintenance and repair is performed by the ship’s crew. It includes

preventive maintenance and minor mechanical and electrical repairs. This

work may be done during regular or overtime hours, and it may or may not

be reimbursable under the terms of the applicable contract.

The second level of maintenance and repair is industrial assistance, which

is done by subcontractors. This work is beyond the capability of the ship’s

crew but does not require an overhaul. The subcontractors may actually

maintain or repair the ship’s equipment, or a technical representative may

provide expertise to the ship’s crew. Industrial assistance is usually

reimbursable, either directly or through a budgeted system of payments.

Overhauls are the third level of maintenance and repair. They can be

scheduled, as required by Coast Guard regulations, or unscheduled, for

example, to repair a damaged propeller. Since none of the MSC contract

operators we reviewed function under firm fixed-price contracts,

overhauls are directly reimbursable.

Objectives, Scope,

and Methodology

The Ranking Minority Member of the Subcommittee on Oversight of

Government Management and the District of Columbia, Senate Committee

on Governmental Affairs, asked us to examine the Military Sealift

Page 15 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

Command’s contractor-operated ship programs. Specifically, we

determined whether MSC has adequate management controls (1) to oversee

contractors and prevent abuses and (2) to ensure contractual

requirements are being met.

To determine whether MSC has adequate oversight of the maintenance and

repair work done on its contractor-operated ships, we reviewed MSC’s

engineering and maintenance and repair instructions, files, and manuals,

including the Engineering Operations and Maintenance Manual. We also

reviewed maintenance and repair invoices, visited a sample of ships, and

interviewed responsible MSC personnel. We used the ships’ operational

schedules to visit ships that were about to complete an overhaul. For four

of the five programs we were able to visit a ship that was in for overhaul,

but this was not possible for the T-5 tankers. Therefore, we visited a

tanker that was in its full operational status. (App. I lists the ships that we

visited.) During our ship visits, we interviewed crew members, contractor

and shipyard officials, MSC field personnel, and Coast Guard and American

Bureau of Shipping inspectors. We visited several fast sealift ships because

they were all located at the same port.

To determine MSC’s effectiveness in establishing and administering

contract requirements, we reviewed the contracts for each of the ship

programs and compared and contrasted the requirements contained in

those contracts. We then discussed the contract differences with cognizant

MSC officials to determine why the differences existed and to determine

what, if any, standardized procedures these officials used to establish and

administer program requirements. We also reviewed numerous MSC

instructions dealing with funding, billing, and invoice certification. We

reviewed the Department of Defense’s National Industrial Security

Program Operating Manual and MSC’s security and crew qualification files

to verify the suitability of the crew members on MSC’s contractor-operated

ships.

To determine the effectiveness of MSC’s current organizational structure,

we met with various MSC officials and discussed their responsibilities with

regard to MSC’s contractor-operated ship programs. We also reviewed MSC’s

Standard Operating Manual, the draft proposal “Reinventing MSC,” and the

MSC Commander’s June 1, 1995, update to the reinvention proposal. We

then discussed the reorganization initiative with MSC’s current program

managers. We did not address this area in depth because MSC’s reinvention

management team and its working groups had not developed the program

Page 16 GAO/NSIAD-96-41 Military Sealift Command
Chapter 1 

Introduction

management organization’s structure by the time we completed our audit

work.

We conducted our work between July 1994 and August 1995 in accordance

with generally accepted government auditing standards.

Page 17 GAO/NSIAD-96-41 Military Sealift Command
Chapter 2 

MSC’s Internal Controls Are Inadequate to

Prevent Overpayments for Ship Repairs

An ongoing joint investigation by the Federal Bureau of Investigation and

the Naval Criminal Investigative Service has led to guilty pleas by four

former employees of MSO, Inc., an MSC contractor that operated 

10 oceanographic vessels. The investigation revealed that these employees

had fraudulently altered overtime records of other MSO employees (crew

members), changing nonreimbursable overtime charges to overtime

charges that are reimbursable. It is estimated that these fraudulent

overcharges amounted to millions of dollars during a 3-year period. This

case shows that oversight and basic internal controls are fundamental for

any entity to ensure that payments are made accurately and correspond to

goods and services actually received.

During our review of MSC’s contractor-operated ship programs, we found

that those who approve and pay bills do not verify that MSC has received

the goods or services it is paying for. Part of the reason for this practice is

a disconnect between headquarters-level invoice reviewers and field-level

personnel, whose main concern is the operation but not the cost of the

ships’ repair. In fiscal year 1994 alone, MSC spent $93.8 million to maintain

and repair the ships in the five contractor-operated programs we reviewed.

Given the large amounts of money spent on maintenance and repairs, it is

imperative that MSC have effective controls over these expenditures. MSC

lacks controls in three general areas: verification of crew-performed

repairs, review of invoices for subcontracts, and oversight of repair work

performed during overhauls. Though MSC’s Comptroller is responsible for

coordinating MSC’s internal control program, he does not have the

authority to ensure that MSC has a sufficient system of internal controls

that is being adhered to.

Inadequate

Documentation and

Review of

Crew-Performed

Repairs Have Led to

Overpayments

For three of MSC’s contractor-operated ship programs, MSC has included in

its contracts predetermined dollar amounts for crew-performed minor

repairs that are to be done as part of the contracts’ fixed price. According

to the contracts, these predetermined amounts, or “minor repair

thresholds,” can be met in three ways. Contractors can apply toward the

thresholds (1) overtime and straight time performed by extra crew

(beyond those normally required), (2) overtime by the regular crew

performing minor repairs, and (3) industrial assistance (work done by

subcontractors, not by the ships’ crews). Contractors are to report how

they meet their thresholds in minor repair reports. After contractors meet

these minor repair thresholds, they can be reimbursed by MSC for all minor

repairs. According to the contracts, the cleaning of the ship and preventive

Page 18 GAO/NSIAD-96-41 Military Sealift Command
Chapter 2 

MSC’s Internal Controls Are Inadequate to

Prevent Overpayments for Ship Repairs

maintenance are part of the fixed price. They are not to be included in the

contractors’ minor repair reports.

In our review of minor repair reports, we found that, because of either

inadequate supporting documentation, inadequate review, or both,

contractors were meeting their thresholds in ways that are not allowed by

the contracts or listing the same jobs more than once. Contractors for

these three programs were essentially overstating their minor repair

reports in the following ways:

• The contractor for one ship program was including in its minor repair

reports the straight time hours of its regular crew.

• The contractor for a second program was including cleaning jobs in its

minor repair reports.

• The contractor for a third program was listing the same jobs twice in its

minor repair reports.

For all three programs, the contractors were not submitting supporting

documentation that matched their minor repair reports. According to an

MSC instruction, proper knowledge of receipt or disposition of

goods/services during the invoice certification process will reduce the

chances of fraudulent claims being paid. However, MSC reviews minor

repair reports and invoices for over-threshold repairs without adequate

supporting documentation to show that work was done.

Contractors for two of the three programs had been paid by MSC for

over-threshold repairs. As of October 10, 1995, one of the contractors had

received $685,946 from MSC for over-threshold repairs for fiscal years 1991

through 1995. MSC paid a second contractor $741,360 for over-threshold

repairs for fiscal year 1994 alone. At the end of our review, MSC had not yet

calculated whether the contractor for the third program had met or

exceeded its minor repair thresholds. MSC had no plans to recover amounts

for jobs that should not have been included as minor repairs.

MSC Failed to Detect

Overstatement of Minor

Repair Reports

The contract operator for the first of the three programs we discussed

above included in its minor repair reports the straight time hours of its

regular crew, but at the end of the 5-year contract period, MSC was not

aware of this practice. MSC had never requested or reviewed the complete

supporting documentation for the contractor’s minor repair reports during

the 5-year contract period that would have uncovered this practice. For

the life of the contract, the contractor reported nearly $6 million in

Page 19 GAO/NSIAD-96-41 Military Sealift Command
Chapter 2 

MSC’s Internal Controls Are Inadequate to

Prevent Overpayments for Ship Repairs

crew-performed repairs in their minor repair reports. Of this amount, MSC

reimbursed the contractor $685,946 for over-threshold minor repairs.

MSC’s contract allows its contractor to apply to the minor repair threshold

repairs done by the ship’s regular crew while on overtime but not during

straight-time work hours. Because MSC does not require the contractor to

submit supporting documentation, however, it has no proof that the

contractor has not manipulated the reporting of overtime.

Field staff for this program told us that, at a recent meeting with MSC

headquarters personnel, they had recommended that the contractor be

required to submit crew overtime sheets as supporting documentation for

its minor repair reports. However, MSC headquarters personnel have taken

no action in response to this recommendation.

For this program, we requested supporting documentation from the

contractor for one ship’s minor repair report, which totaled $25,859 and

covered about 5 months. We reviewed this documentation to verify that

the crew had actually listed this overtime work on their timesheets. We

found that for this minor repair report, $8,406 of repairs had been

performed by the ship’s regular crew during straight-time hours. Another

$860 was unsupported by crew overtime sheets. When we disclosed our

findings to program officials, they stated that they were unaware that the

contractor was not complying with the contract and said that they would

investigate the matter further.

It is particularly important that MSC fully review supporting documentation

for the minor repair reports because the Naval Criminal Investigative

Service has found erroneous overtime documentation practices on the

part of ship contract operators. These practices involved (1) ship officers’

fraudulent rewriting of crew members’ overtime sheets, (2) the

contractor’s application of nonreimbursable work toward the minor repair

thresholds, and (3) the doublebilling of MSC for the same hours of work.

During our review, we also found instances of doublebilling and the

application of nonreimbursable work toward minor repair thresholds.

MSC Allows Inclusion of

Cleaning Jobs in Minor

Repair Reports

Another contractor was including cleaning jobs, which are

nonreimbursable, in its minor repair reports. MSC did not require

documentation that would have allowed it to verify that the contractor’s

crew had actually done the work or that the work was in fact minor

repairs, rather than cleaning and maintenance work. The contracting

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officer told us that MSC did not request this documentation because the

paperwork was excessive and burdensome for MSC. According to the

contract, the cleaning and maintenance of the ship are paid for in the

fixed-price portion of the contract. Cleaning and maintenance work is not

to be included in the contractor’s listing of minor repairs; nor is it to be

billed as a reimbursable expense.

While the contract contains a list of sample minor repairs, it does not

contain a similar list of cleaning jobs. We asked contracting officials

whether such lists might clarify what jobs can and cannot be claimed as

minor repairs and therefore be reimbursable. They told us that the

contract was already too specific and that adding such a list would be

adversarial to the contractor because distinguishing between cleaning and

minor repairs is by nature subjective.

During our review, we requested that the contractor for this second ship

program provide supporting documentation for one of its minor repair

reports. We reviewed this documentation for three ships for a 3-month

period. We traced the contractor-generated list of minor repairs back to

original timesheets filled out by the crew members. For one ship, we

found that of the $15,897 the contractor claimed to meet its minor repair

threshold, $3,202 (or 20 percent) was unsupported by crew overtime

sheets.

In addition to this unsupported work, we found that at least 24 of the 

131 jobs listed as minor repairs appeared to be cleaning or preventive

maintenance. That is, 24 jobs—which cost $2,445—were for wiping up oil;

defrosting the icebox; cleaning the galley, oven, staterooms, and pantry;

lubricating hoses; rotating stores; waxing floors; sweeping the deck;

entering timesheet data; and other similar cleaning and preventive work.

When MSC’s invoice reviewer approved this list of minor repairs, he

deducted only one job, which entailed waxing the decks. This deduction

was for $487.65.

For the other two ships’ lists of minor repairs, we found that the

contractor had similarly claimed cleaning and maintenance jobs as minor

repairs. These included sweeping, picking up trash, removing dust and

dirt, stripping and waxing decks, and cleaning the galley and a shower,

among others. For these two ship reports, the MSC reviewer made no

deductions at all.

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MSC’s Invoice Review

Process Does Not Ensure

Minor Repair Reports’

Accuracy

In our review of minor repair reports for a third ship program, we found

numerous instances in which the supporting documentation did not match

the jobs listed in the minor repair reports. For example, we found

instances in which the contractor had listed the same jobs twice. In

addition, we found instances in which the contractor had claimed work

done by individual crew members, but its minor repair report did not

include timesheets as documentation to verify that these crew members

were actually aboard the ships and had done the work as claimed.

MSC personnel for this ship program review minor repair reports for

“engineering content only.” That is, they review these reports only to verify

that the costs are reimbursable under the contract, not to verify the

accuracy of the reports or to take steps that would detect duplicate

listings.

Documentation

Submitted With

Invoices Is

Insufficient to Ensure

That Subcontractors’

Prices Are Fair and

Reasonable

Not only is MSC’s oversight of crew repairs inadequate, but its review of

invoices for subcontracted work (second-level maintenance) is insufficient

to prevent excessive payments by MSC. First, MSC does not uniformly

require contractors to provide supporting documentation with their

invoices that would indicate that prices are fair and reasonable. Second,

MSC headquarters invoice reviewers generally do not rely on available field

staff to verify that the subcontracted work was done or that it was

reasonably priced.

Requirements for

Supporting Documentation

for Invoices Are

Inconsistent

Included in all of MSC’s contracts for the operation of its ships are clauses

stating that the government is obligated to pay only the costs it deems are

“fair and reasonable.” In only one of its contracts, however, does MSC

include requirements for the contractor to submit documentation with its

invoices that would allow the invoice reviewer to determine whether the

price of the goods or services is fair and reasonable. In this one contract,

MSC states that without such documentation, it will not reimburse the

contractor.

According to MSC, its subcontract review for one contractor was

heightened because this contractor’s purchasing system is not reviewed by

the Defense Contract Management Command (DCMC), which is part of the

Defense Logistics Agency. DCMC declined to review this contractor’s

purchasing system because the dollar value of its subcontracts was so low.

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MSC stated that for all but this one contract, MSC has required the

contractors to maintain DCMC-approved purchasing systems.

We analyzed the April 1995 DCMC audit of a contractor for two of the ship

programs in our review. The DCMC auditors evaluated, among other things,

whether the contractor had awarded subcontracts competitively and

performed adequate price analysis and negotiations. At the end of its

review, DCMC approved the contractor’s purchasing system. However, it

noted several weaknesses in this system and recommended corrective

action. For example, DCMC found that only 54.5 percent of the contractor’s

purchase orders had been awarded competitively. For purchase orders

under $25,000, only 48 percent had been awarded competitively. Finally,

DCMC found that for awards without competition, 63 percent of the

purchase order files neglected to include detailed evidence of effective

price analysis or negotiation. Among the agency’s recommendations was

that the contractor “assure that effective price analysis is performed for

each applicable single-sole source purchase order over $10,000 and to a

lesser degree those under $10,000.” The contractor notified MSC that it

intended to implement DCMC’s recommendations.

Despite the weaknesses revealed in the DCMC audit of this contractor, MSC

has not adjusted its oversight of the contractor’s awarding of subcontracts

under $25,000. On the basis of what is submitted by the contractor to

support subcontract invoices, the MSC invoice reviewer has no way of

knowing whether the subcontract was awarded competitively or not.

Neither does the supporting documentation show whether or how the

contractor determined that prices were fair and reasonable. We asked the

invoice reviewer for this program whether he had ever made deductions

based on his determination that the price charged was not reasonable. He

said that he only remembered questioning the reasonableness of price in

two cases, in 1991 and 1992. One involved whether a technical

representative had flown first class or coach, and the other involved

whether the technical representative had rented the appropriate rental car.

In neither case did the invoice reviewer determine that a deduction was

necessary. We believe that these cases involved determining allowability

of costs rather than reasonableness of costs. That is, under the terms of

MSC’s contracts with its ship operators, government regulations on travel

apply. Allowing a technical representative to fly first class and drive a

luxury rental car would violate the terms of MSC’s contracts.

On the other hand, during our review of invoices for the ship program that

does require documentation of fair and reasonable prices, we found that

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invoices consistently included evidence of competitive bidding or a

justification for a sole-source subcontract. We also found several cases in

which an MSC field unit had deducted amounts from the contractor’s

invoices for inadequate documentation. For example, the field unit had

deducted amounts for repairs and for repair parts because documentation

did not indicate that the charges were fair and reasonable. We also saw a

case in which the field unit deducted fax and telephone charges because

the contractor had not submitted a statement explaining the nature of calls

made to ensure the calls had been made for official government business.

By contrast, for the contractor whose subcontracting weaknesses were

cited by DCMC, we saw an invoice for $1,456.73 for telephone calls for a

3-day period. The invoice contained no indication of whether any of these

calls were for official government business, yet the invoice was approved

for payment.

In our review of this same contractor’s invoices, we found an invoice

whose price appeared excessive. This invoice was for $3,560 to “provide

labor, tools and material as necessary to replace twenty (20) lampshades 

. . . [and] relamp and repair as necessary.” The invoice included no

evidence of whether this work had been awarded competitively, why it

had not been done by the ship’s crew, or how extensive the work was.

Before approving this invoice for payment, the MSC invoice reviewer did

not seek further information from the contractor. When we asked for an

explanation of this invoice, the invoice reviewer said that he did not know

whether the lamps had been repaired or whether the lampshades had

simply been replaced.

After we requested supporting documentation from the contractor on this

invoice, we found that MSC had paid $260 per lamp to repair 10 lamps and

replace their lampshades, when it could have purchased new lamps for

$210 each (excluding the costs of installation). Work on the other 10 lamps

was less extensive, ranging from simply replacing the lampshades to

replacing the toggle switches and/or modifying the lamp bases. (See fig. 2.1

for an example of the type of lamp repaired.) We also found that the ship’s

crew includes a qualified electrician whose overtime labor rate is about

half that charged by the subcontractor.

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Figure 2.1: Example of the Type of

Lamp Repaired by a Subcontractor

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On another ship in this program, lampshades were replaced by the third

assistant engineer, also at an hourly overtime rate about half that charged

by the subcontractor. The master and the chief engineer on this ship stated

that they could see no reason to use subcontractors to repair lamps

because it is such a simple task and fully within the crew’s capability.

MSC Field Staff Generally

Not Involved in the Invoice

Review Process

MSC headquarters personnel who review invoices do not know whether

goods have been delivered or services provided, as dictated in MSC invoice

certification instructions. In their review of invoices, headquarters

personnel are ensuring that what is charged by the contractors is

allowable under the terms of the contract. However, they are not ensuring

that parts were actually delivered or work was actually done. In effect,

these reviewers are relying heavily on the integrity of the contractors and

are essentially approving all invoices for items or services allowed by the

contract.

Field personnel, who could be used to personally verify that work has

been done at reasonable costs, are primarily concerned with the condition

and operation of the ships. A senior-level official from one field unit told

us that when he wants something fixed, cost is not his main concern. On

one program, MSC field personnel do not see invoices reflecting the cost of

work performed as a result of their recommendations.

In two of the five contractor-operated ship programs, field staff are located

near the ships and visit them regularly. These personnel could be used to

verify that work billed MSC has been done and is reasonably priced. They

could easily check work performed on the ships as part of their routine

inspections. For one program, field staff are already reviewing invoices.

No Controls to Prevent

Contractors From

Circumventing

Requirement to Receive

MSC’s Prior Approval for

Subcontracts

The MSC contracting officer has no visibility over many large-dollar repair

expenditures for one ship program. MSC’s contract with its contract

operator on this program requires that the contractor first obtain MSC

approval before subcontracting for industrial assistance that costs more

than $25,000. This requirement is intended to help MSC ensure that it

receives fair and reasonable prices for large repair jobs and that the work

is needed. Because the contractor for this program breaks large jobs down

into multiple smaller ones, it is evading the contractual requirement to

obtain the contracting officer’s prior approval. Contractor officials told us

that they routinely split jobs into segments because these ships needed to

be ready to go to sea with 4 days’ notice. They said that they split jobs into

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pieces because obtaining the MSC contracting officer’s approval delays

payment to the subcontractor.

During our review, we found that MSC has known about this practice since

1990. In a 1990 memorandum to MSC’s Contracts and Business

Management Directorate the former director of engineering at MSC stated

that “although Contractors are required to obtain Contracting Officer

approval for subcontracts in excess of $25,000, there are many instances

where Contractors have instituted procedures that evade compliance.”

These procedures, he said, included issuing multiple work orders, each

less than $25,000, to a single subcontractor. During our review, we asked

MSC officials whether they had taken any action to prevent contractors

from issuing multiple work orders and thereby evade the requirement to

seek MSC’s prior approval. They said they had not.

In one case, the contract operator split a job totaling $143,740 into 

18 separate jobs, each under the $25,000 threshold. This work was for ship

cleaning1

 that was done by the same subcontractor on the same ship over

a 3-month period. After we requested that the contractor provide us with

evidence that this work had been competitively awarded, we found that

the contractor had obtained quotations from three subcontractors on the

price per square foot for cleaning the ship. The contractor awarded the

work to the lowest bidder based on a single price quotation. It then split

the job into 18 smaller ones involving the cleaning of different parts of the

ship.

In another case, this same contractor submitted 71 separate invoices

totaling $202,294 for welding-related work done by one subcontractor on

one ship over a 4-month period. In many cases, multiple invoices were

submitted to MSC on the same day. For example, 9 invoices were submitted

on December 2, 1994; 12 were submitted on December 30, 1994; 18 were

submitted on January 5, 1995; and 12 were submitted on February 10, 1995.

Despite this pattern of billing, the MSC person responsible for reviewing

these invoices said that he was not aware of the contractor’s practice of

splitting large jobs into smaller ones.

During our review, we asked the contractor to provide documentation

showing which of these 71 jobs had been competitively bid or justified as

sole source. He was able to show that only 30 had been awarded

competitively and that 7 had been awarded sole source because they were

1

Normal ship cleaning is covered by the per diem payment under the contract, but in this case, the

cleaning was required due to stevedore damage and was therefore reimbursable.

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related to competitively bid work. The contractor did not supply

documentation on the other 34 jobs.

MSC Does Not

Consistently Verify

That Overhaul Work Is

Done and Prices Are

Reasonable

MSC headquarters personnel review overhaul work packages and discuss

them in detail with representatives from the contract operators’

engineering staffs before overhaul subcontracts are solicited and awarded.

However, even though a ship’s overhaul can cost MSC up to $6 million, MSC

does not always have an MSC representative on-site during the overhauls to

ensure that work contained in these work packages is actually done and

that unforeseen repairs not specified in overhaul contracts are completed

or are reasonably priced. This lack of assurance is due at least in part to

the fact that MSC has no agencywide requirement for its representatives to

be present during ship overhauls. This presence during an overhaul

enables a representative of MSC to observe the condition of items of

equipment when these items are opened and inspected and to determine

the extent of needed repairs. In addition, the presence of an MSC

representative enables MSC to monitor the extent of the repairs to prevent

unneeded work. When an MSC representative is not present during an

overhaul, MSC is relying entirely on the integrity and professionalism of the

contract operator to protect the government’s interest.

Even when MSC representatives are present, the amount of involvement

among them, contract operators’ representatives, and shipyard personnel

varies because MSC has no written guidelines governing the authority and

responsibilities of its representatives. For the three contractor-operated

programs whose ships are owned by the government, we found that some

MSC representatives significantly contributed to the contracting officer’s

ability to enforce the terms of MSC’s contracts and to ensure that repairs

were made in the best interest of the government. Other MSC

representatives’ contributions were not as significant.

Even though an MSC presence during overhauls helps to protect the

government’s interest, having an MSC representative on-site did not always

ensure that MSC obtained negotiated prices on change orders. During one

overhaul, we found that for $271,755 of a total $544,135 (about 50 percent)

in change orders, the contract operator’s and the shipyard’s estimates

were identical. For $427,111 of this change order work (about 78 percent),

the “negotiated” prices between the shipyard and the contract operator

were the shipyard’s estimated prices. The lack of clear written guidance on

the authority and responsibilities of the MSC representative contributed to

MSC’s failure to obtain negotiated prices on this overhaul. Because the MSC

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representative did not independently estimate change orders, MSC had no

assurance that it did not pay excessive prices.

During this overhaul, the MSC representative was simply providing the

administrative contracting officer with a statement that funds were

available for the work. He was not preparing independent government

estimates. Such independent estimates form the basis on which the

government can challenge prices charged by the shipyard.

MSC does not have written guidance to address the oversight of work done

by its contract operators’ “extra” crew members during overhauls. During

overhauls, MSC’s ships maintain skeleton crews to monitor alteration,

maintenance, and repair work and to provide security for the ships.

However, MSC sometimes authorizes its contractors to retain additional

crew members during overhauls when the contractors can provide

justification for the special work requiring their retention. MSC has no

written guidance regarding oversight responsibilities for this work, and it

has not established procedures for taking deductions if the authorized

work is not completed.

An MSC representative for one ship program told us that he routinely

inspects the work of additional crew members during overhauls. However,

the benefit of these inspections is questionable for two reasons. First, MSC

does not use these inspections as a basis for taking contract payment

deductions. The MSC representative who actually inspects the approved

work items does not receive or review the bill for this work, and no one at

MSC asks for the results of his inspection when the bill for the work is

reviewed. Second, MSC does not require the contractor to obtain prior

approval when changing the work items used to justify the extra crew

members. The contracting officer for this program told us that she does

not see why the contractor cannot deviate from the special work items it

submitted as justification for its extra crew members.

We visited one ship from this program on the last day of its overhaul.

During that visit we observed, as did an MSC representative, that many of

the work items used to justify the ship’s extra crew had been only partially

completed or not completed at all. According to the MSC representative,

this was not an isolated case, since on other overhauls he found that the

work used to justify the extra crew had not been completed. Later that day

we were told by the ship’s master and chief mate that the work items had

changed, and we were given a handwritten list of changes that had not

been approved by MSC. Until that time, the MSC representative had not

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known what jobs the extra crew members were actually doing. At the end

of our review, MSC had still not received a bill for this work, 10 months

after the completion of the overhaul.

MSC’s Internal

Controls Are Weak

As we discuss in this chapter, MSC’s internal controls to prevent the

possibility of contractor fraud and abuse are weak in many cases. MSC’s

Comptroller is responsible for the coordination of MSC’s internal control

program. However, according to the MSC Comptroller, he does not have

direct authority to ensure the sufficiency of these controls or their

implementation.

In 1990, Congress mandated governmentwide financial management

reform by enacting the Chief Financial Officers (CFO) Act (P. L. 101-576).

This act was based at least in part on the finding of Congress that “billions

of dollars are lost each year through fraud, waste, abuse, and

mismanagement among the hundreds of programs in the Federal

Government.” The Secretary of Defense has recognized that the CFO Act is

a vehicle for improving DOD’s financial operations. He has therefore

directed that senior managers throughout DOD play a more active role in

identifying, reporting, and correcting poor internal controls. This does not

appear to have occurred at MSC.

Conclusions MSC’s oversight of ship repairs for its contractor-operated ships is

inadequate to prevent overcharges. MSC lacks basic internal controls that

would help to ensure that MSC is paying reasonable prices for work that is

actually being done. Specifically, MSC lacks basic internal controls in its

supervision of overhaul work, in its verification of crew-performed repairs,

and in its review of invoices for subcontracts. Furthermore, though MSC’s

Comptroller is responsible for coordinating its internal controls, this

person has no authority over internal controls throughout the agency.

Recommendations We recommend that the Secretary of Defense direct the Commander of

MSC to take the following actions:

• Institute MSC-wide procedures to ensure that contractors are (1) accurately

reporting how they meet contract-defined thresholds for crew-performed

minor repairs, (2) submitting adequate documentation with invoices for

MSC to determine that prices are fair and reasonable, and (3) obtaining

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prior MSC approval for subcontracted work above thresholds required by

the contracts.

• When practical, require that MSC representatives verify, through

spotchecks, that minor repairs and industrial assistance paid for by MSC

have actually been done and recommend deductions if necessary. These

spotchecks could be done by MSC personnel as part of their normal

inspections.

• When practical, require an MSC representative to verify, based upon

physical observation, the satisfactory completion of work performed at

various stages of overhauls of MSC contractor-operated ships.

• Provide written guidance defining the roles, responsibilities, and authority

of MSC representatives in protecting the government’s interests during

overhauls and other major repair work.

• Consider expanding the responsibilities of MSC’s Comptroller or creating a

new position for a financial management expert to oversee the

implementation of the above recommendations. If a new position is

created, this person should report directly to the Commander of MSC. In

addition to the existing duties of the Comptroller, this person would be

responsible for setting minimal internal controls for all aspects of financial

management throughout MSC and overseeing the implementation of these

controls. The responsibilities of this position would be similar to those of a

Chief Financial Officer established under the CFO Act of 1990.

Agency Comments

and Our Evaluation

In official oral comments, DOD partially concurred with the report and

generally agreed with our recommendations. However, DOD generally

disagreed with the details of the report and the conclusion that internal

controls are weak. DOD did agree that there are opportunities for further

improvements in the internal controls applied to contractor operation of

MSC ships and said it has already implemented remedial measures. DOD also

stated that in view of the unusual procurement situations highlighted in

the report, the Commander of MSC is focusing additional attention on risk

analysis and design of appropriate internal controls.

We continue to believe, based on the findings discussed in this chapter,

that MSC does not have an adequate system of internal controls in place.

Recent fraudulent practices of a former MSC contractor and the continuing

investigation by federal law enforcement agencies into MSC operations

support our conclusion that MSC’s internal controls are inadequate.

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MSC’s Efforts to Effectively Manage Its Ship

Programs

Effectively managed programs have three things in common. First,

program requirements are carefully and systematically established based

on past experience and input from customers and knowledgeable people

throughout the organization. Second, responsibility for monitoring

program performance and ensuring that programs meet the established

requirements is clearly delineated. Third, program managers are

constantly looking for ways to improve program performance and to

reduce costs. During our review, however, we found that MSC does not

have the organizational structure or the standardized procedures

necessary to effectively manage its contractor-operated ship programs.

MSC does not have guidelines for systematically establishing personnel

requirements such as citizenship and security requirements. Neither does

it systematically compare contractual requirements with contractors’

performance in obtaining security clearances and trustworthiness

evaluations for crew members. Finally, MSC has no formal system to

coordinate ideas to improve the contractors’ performance or reduce the

programs’ costs.

Because its own management controls are weak, MSC relies heavily on its

operating contractors to prevent contract abuses. The dangers of such a

heavy reliance on contractors have been demonstrated through MSC’s past

experiences. For example, a now defunct ship management company

billed and collected payments from MSC for fraudulent overtime aboard

MSC’s oceanographic ships. In another case, MSC management’s poor

oversight resulted in the deteriorated and unsafe condition of its sealift

tankers and in the crewing of these ships with significant numbers of

personnel who had been convicted of felonies. We reported on the

condition of the sealift tankers and their crews in a 1994 report.1

MSC’s fragmented lines of organizational authority represent a significant

impediment to sound management controls. MSC recognized the problems

caused by its current organizational structure and planned to begin

implementing a new program management structure on October 1, 1995.

Under MSC’s new structure, accountability that was previously divided

among various MSC headquarters departments and field levels will reside

with a single individual, the program manager.

1

U.S. Navy/Military Sealift Command: Weak Contract Administration Led to Unsafe and Poorly

Maintained Ships (GAO/OSI-94-27, Aug. 31, 1994).

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MSC Does Not Have

Standard Procedures

to Develop Personnel

Requirements

Despite the fact that MSC’s contract provisions can affect a ship program’s

operation for 20 years or more,2 MSC does not have standard procedures to

develop personnel requirements in its contracts. The personnel from MSC’s

Operations Office, who are responsible for coordinating contract

requirements with the ship’s sponsors, told us they do not follow

checklists or standard procedures to ensure that important personnel

requirements are not overlooked. Neither do they routinely consult

existing contracts for other programs prior to the award of new contracts.

As a result of this lack of standard procedures, MSC failed to review the

resumes of some ships’ crews, and some ships did not have U.S.

citizenship, security clearance, or trustworthiness requirements for their

crews.

Guidelines to Establish

Crew Qualification

Requirements Are Lacking

MSC has no guidelines to ensure that crew qualification requirements are

consistently established. Qualified crew are critical, especially in

situations such as underway refueling, where the chance of a collision at

sea is significantly increased. Therefore, it is essential for ship owners,

operators, and those who charter ships to take precautions to ensure that

the crews are qualified.

Although four of the five ship program contracts we reviewed require

contractors to submit the resumes of key personnel to MSC for approval

before the personnel are assigned to a ship, the fifth ship program’s

contracts do not. An MSC official in charge of the fifth ship program told us

that MSC did not need to review the resumes of crew members. He said that

contractors should not crew their ships with improperly licensed crew

members because they could be fined by the Coast Guard. However, for

one program that required resumes, the contractor did attempt to crew its

ships with improperly licensed crew members. After its review of resumes,

MSC rejected two of the contractor’s nominees for master positions

because they did not have the proper licenses and had never served as

chief mates on the program’s ships.

Citizenship Requirements

Overlooked

MSC’s lack of standard procedures contributed to a routine citizenship

requirement clause being left out of the contracts for one

contractor-operated ship program. While contracts for four of the ship

programs we reviewed included clauses requiring all crew members to be

2

The T-5 tanker contracts run for 20 years, and the maritime prepositioning ship contracts run for 

25 years. Contracts for both these programs were written as 5-year contracts with a series of 5-year

options. However, MSC generally exercises the options because it would incur large termination costs

if it did not.

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Programs

U.S. citizens, the fifth program did not include this clause. The contracts

for this fifth program were signed in October 1982 and April 1983, just

months after one of the other programs had signed contracts requiring all

crew members to be U.S. citizens, in August 1982. Military and civilian

officials in MSC’s Pacific and Far East Offices expressed concern that all

personnel aboard T-5 tankers were not U.S. citizens, and following the

Persian Gulf War, MSC tried to add citizenship clauses to the T-5 contracts.

When the contractor refused, MSC dropped the issue. The contract for this

program still does not require all its crew members to be U.S. citizens, and

only Coast Guard regulations limit the number of foreign nationals on

these ships.3

While MSC’s contracts for its other four contractor-operated ship programs

require all the contractors’ personnel assigned to ships to be U.S. citizens,

they do not require the contractors’ shore personnel to be U.S. citizens.

MSC field personnel for one program said that MSC’s failure to include this

clause for shore personnel was an oversight on MSC’s part. These field

personnel said that the contractor, aware of this loophole, had proposed a

port engineer who was not a U.S. citizen. However, this person was

disapproved because a foreign national cannot hold a security clearance

and thus would not have been able to deal with any ship maintenance or

repair work that involved classified material.

MSC Has No Guidelines for

the Establishment of

Security Clearance

Requirements in Contracts

Contracts for all five of the ship programs we reviewed require at least

some security clearances for the ships’ crew members. However, no one at

MSC has established guidelines for the inclusion of security clearance

requirements in contracts. As a result, a key contract requirement was

inadvertently left out in one case.

Four of the ship programs we reviewed had security clearance

requirements in their original contracts. The fifth program added security

clearance requirements during the ninth year of its contracts through

contract modifications. These modifications required all corporate officers

and the master, chief mate, and radio operator of each ship to have secret

clearances.

3

Coast Guard regulations allow 25 percent of the unlicensed crew members on U.S. flag ships to be

foreign nationals.

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Programs

No Trustworthiness

Evaluations for Three Ship

Programs Despite

Concerns About Sabotage

Although the contracts for all five ship programs require some crew

members to hold security clearances, only the T-AGOS and oceanographic

ships’ contracts require noncleared crew members to pass trustworthiness

evaluations.4

 Some MSC officials stated that these two ship programs have

more stringent requirements for trustworthiness evaluations because of

their sensitive missions.

However, the program manager for another program stated that security

requirements for his ship program were based on the fact that the ships

are subject to sabotage. Trustworthiness evaluations determine the loyalty

of an individual by checking whether the individual has committed any

prior act of sabotage, espionage, treason, or terrorism. For the three ship

programs that do not require trustworthiness evaluations for their

unlicensed crew members, MSC does not collect or review any background

information about these crew members. The Coast Guard does require

mariners working aboard U.S. vessels to hold merchant mariner

documents that include a criminal record check every 5 years. However,

MSC does not spot-check these documents. If MSC ships are subject to

sabotage, trustworthiness evaluations should be required of all its ship

crew members.

MSC Does Not Ensure

That Contractors

Comply With

Requirements for

Crew Trustworthiness

and Security

Clearances

No office in MSC is responsible for tracking trustworthiness evaluations

and security clearances for MSC’s contractor-operated ship programs to

ensure that contractors are complying with contract requirements. MSC’s

Office of Security, Operations Office, and Operating Contracts Division are

involved with the security clearances and trustworthiness evaluations of

ship crews,5

 but communication among these offices is poor. As a result,

MSC cannot ensure that its crews are trustworthy or appropriately cleared,

and untrustworthy individuals may be assigned to ships with sensitive

missions for extended periods of time before they are removed. Though

we did not document any unauthorized disclosures of classified material

by contractor employees, we did find that 300 crew members who were

later found to be untrustworthy had been assigned to MSC’s ship programs

for the time it took to conduct the trustworthiness evaluations. In one

4

Like security clearance investigations, trustworthiness evaluations involve national agency checks of

Federal Bureau of Investigation and other agency records to divulge negative information such as drug

and alcohol abuse and felony convictions. However, trustworthiness evaluations do not require the

extensive follow-up that security clearances require because crew members undergoing these

evaluations do not have access to classified material.

5

MSC makes its trustworthiness evaluations after receiving input from the Defense Investigative

Service Personnel Investigations Center, which conducts background investigations.

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case, it took 23 months to determine that a crew member was

untrustworthy.

Trustworthiness

Evaluations Completed

Years After Crew Are

Allowed to Sail on Ships

Three separate offices in MSC headquarters have distinct roles in

maintaining information on contractor-operated ship crews. The Operating

Contracts Division and the Operations Office maintain crew lists. The

Office of Security maintains a list of trustworthy contractor personnel.

However, no one from any of these three offices compares these lists to

ensure that all crew members are trustworthy. In addition, the Office of

Security does not track the length of time between the date the contractor

submits the crew members’ original paperwork to MSC and the date MSC

completes trustworthiness evaluations. As a result, crew members who

may sail aboard MSC contractor-operated ships as soon as their

trustworthiness paperwork has been submitted may be found much later

to be untrustworthy.

Over the last 8 years, MSC’s Office of Security has completed

trustworthiness evaluations for approximately 2,900 of the crew members

on its contractor-operated ships. It has found that 300 of these crew

members did not meet the trustworthiness criteria contained in the Navy’s

security instruction and thus had to be removed from MSC’s ships.

Because the Office of Security destroys its original records after it makes

trustworthiness determinations, we could not determine how long these

300 untrustworthy individuals had been assigned to the MSC ships with

sensitive missions before they were removed. We were able, however, to

determine how long it took to do 29 evaluations. We did this by matching a

contractor’s active crew list to MSC’s trustworthiness file. Until MSC makes

its trustworthiness evaluation, the contractor’s active crew list contains

the dates the crew members’ forms were submitted. Once the evaluation is

made, these original dates are lost because they are changed to the date of

the completed evaluation. Therefore, we had to match an old crew list

(containing the dates the forms had been submitted) to recently completed

evaluations in MSC’s trustworthiness file. Eight of the 29 evaluations were

completed within 4 months. However, in three of the five cases in which

MSC determined that the crew members were untrustworthy, the

evaluations took 10 or more months to complete (see table 3.1). During the

intervening months, the untrustworthy crew members were eligible to sail

on MSC ships with the most sensitive missions. Crew members who require

security clearances are not assigned to MSC’s ships until their clearances

have been completed.

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Table 3.1: Processing Time for 29

Trustworthiness Evaluations

Time to process evaluations

Trustworthy

crew members

Untrustworthy

crew members

2 to 3 months 4 0

4 months 4 0

5 to 9 months 9 2

10 to 15 months 7 2

23 months 0 1

Total 24 5

Even though more than 10 percent of the crew members MSC evaluated

over the last 8 years were found to be untrustworthy and were removed

from its ships, trustworthiness evaluations are still processed slowly. For

example, when we matched one contractor’s August 1994 crew list to MSC’s

trustworthiness evaluation file (updated through March 1995), we found

that MSC had completed 255 of the 341 evaluations required for the

contractor’s crew members, but it had not completed the remaining 

86 evaluations (see table 3.2). The trustworthiness evaluation forms for 

21 of the 86 crew members were submitted in 1994. However, the forms

for one crew member had been submitted in August 1989, and MSC had still

not completed its evaluation in March 1995, almost 6 years later.

Table 3.2: Trustworthiness Evaluations

for One Contractor

Year

Number of evaluations

completed by year

Number of evaluation

packages submitted but

not completed by year

1995 8 a

1994 47 21

1993 44 17

1992 30 21

1991 45 17

1990 20 9

1989 or earlier 61 1

Total 255 86

aBecause we used an August 1994 crew list, our analysis did not contain any packages

submitted in 1995. However, eight packages for members of the 1994 list who had submitted

their paperwork in 1994 or earlier were completed in 1995.

In addition, four of the contractor’s shore personnel had access to the

ships with sensitive missions, even though they did not have security

clearances and were not required by the contract to undergo

trustworthiness evaluations.

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MSC’s trustworthiness evaluations for crew members on ships in MSC’s

other sensitive program were delayed as well. We reviewed January 1995

crew lists for all four ships in this program and found that MSC had

completed only 39 of the 94 required trustworthiness evaluations.

MSC Does Not Ensure That

Contractual Requirements

for Security Clearances

Are Complied With

While we did not document any unauthorized disclosures of classified

material by the employees of MSC’s contract operators, we found that MSC

is vulnerable to unauthorized disclosures because it is not consistently

enforcing requirements for its security clearances. All of MSC’s contract

operators must obtain their required clearances from the Defense

Industrial Security Clearance Office, but MSC does not monitor all its

contract operators to ensure that they are complying with this

requirement. For one program, MSC keeps lists of the contractors’ cleared

personnel in three different places—the Office of Security, the Operating

Contracts Division, and the Operations Office. However, for another

program, no one at MSC keeps track of the contractor’s cleared personnel.

There was confusion about who was responsible for this tracking, and

when we interviewed personnel from MSC’s Office of Security, Operating

Contracts Division, Engineering Directorate, and Operations Office, we

found that none of them had documentation showing that the officers on

the ships held the proper clearances. In addition, when we visited one of

this program’s ships, the master told us that only he and the radio officer

had secret clearances. The contract required the chief mate to have a

secret clearance as well.

Even when MSC does receive clearance letters from the contractors, it does

not verify the clearances with the Defense Industrial Security Clearance

Office or compare the clearance letters with the contractor’s active crew

lists to ensure the clearance lists are complete. Therefore, MSC cannot

verify that all its contractor personnel and crew members have

appropriate security clearances.

No Systematic

Approach to Identify

and Implement Best

Practices

When we talked to MSC’s program managers, they told us that MSC does not

have a formal system for them to get together, share ideas, and evaluate

the costs of different contracting techniques. As a result, MSC may be

missing opportunities to implement best practices. For example, the

contractor-operated ship programs we reviewed used two different

contracting methods to control ship maintenance and repair costs.

However, no one at MSC has compared the two contracting methods to

determine whether one method is more cost-effective than the other and

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therefore should be adopted for all of MSC’s contractor-operated ship

programs.

Under one method, MSC uses a yearly budget to predict the maintenance

and repair costs of its T-5 tankers. The operating contractor submits a

proposed budget to MSC 30 days prior to each annual operating hire period.

This proposed budget is based on historical costs and planned

maintenance that will be completed in the following year. Personnel from

MSC’s Engineering and Contracting Directorates review the proposed

budget and develop their own estimates. MSC and the contractor then

negotiate a final budget through a contract modification. The contractor

must submit quarterly reports that separate parts and technical

representative services for 24 different maintenance and repair categories.

At the end of the year, the Defense Contract Audit Agency audits the

contractor’s actual maintenance and repair costs based on a stratified

statistical sample of invoices. If actual costs exceed budgeted costs, MSC

reimburses the contractor. If budgeted costs are higher than actual costs,

the contractor credits MSC.

When we reviewed one year’s records for the T-5 tankers we found that

three ships were under budget, and two were over budget. The actual

maintenance and repair cost for all T-5 tankers combined was within

6 percent of the budget. According to the contracting officer, because this

process worked so well on the T-5 tankers, he later incorporated it into

most of his contracts for the maritime prepositioning ships.

In awarding contracts for three other contractor-operated ship programs,

MSC uses a threshold method to control its maintenance and repair costs.

This method, however, has not accurately predicted maintenance and

repair costs, and it does not attempt to do so. It attempts only to set a

fixed price for a portion of the repair costs.

Under the threshold method, MSC sets a level of maintenance for the

contractor to accomplish each month. This threshold is generally

expressed in terms of a number of overtime hours of work to be done by a

particular crew member—often the second engineer. The threshold

method of controlling costs offers less flexibility than the budget method

used on the T-5 tankers and maritime prepositioning ships because unlike

the budget, the threshold remains constant over the life of these

short-term6

 contracts.

6

While the maritime prepositioning ships and T-5 tankers have 25- and 20-year contracts, respectively,

the fast sealift, T-AGOS, and oceanographic ships have 3- to 5-year contracts.

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Contractors do not always submit monthly maintenance reports, as

required under the threshold method, and the level of maintenance and

repair reported is rarely close to the threshold level. Consolidated

maintenance and repair figures vary among programs and contractors, but

the fiscal year 1994 figures for one ship program were almost twice the

threshold level. The maintenance and repair cost for each ship in that

program was 59 to 175 percent more than the ship’s threshold level. The

second program was 13 percent over threshold for the contract period. MSC

awarded a new contract for the third program on May 23, 1995, but as of

October 10, 1995, MSC still could not determine whether the operator under

the previous contract was over or under the threshold. This was largely

due to contractor delays in submitting reports.

While the threshold method controls costs by setting a fixed price for all

work up to the threshold level, maintenance and repair work above the

threshold is fully reimbursable, and the contractors are not required to

obtain prior approval for this work. MSC plans to expand its thresholds in

the future by including preventive maintenance, cleaning, and other work

that is excluded under the current thresholds. However, if MSC does not

accurately predict the costs of this excluded work and increase the

threshold amounts appropriately, the contractors could quickly reach the

threshold levels and then be fully reimbursed for all additional work.

Fragmented Lines of

Authority Impede

Sound Management

Controls

Until November 28, 1994, MSC had not formally designated program

managers for any of its contractor-operated ship programs. However, on

that date MSC’s Commander directed the head of the Operations Office to

formally appoint program managers for several ship programs. As a result,

two individuals from the Operations Office were designated as program

managers for the five contractor-operated ship programs we reviewed.

One individual was designated as the program manager for the T-5 tankers

and the fast sealift ships. The other was designated as program manager

for the oceanographic, maritime prepositioning, and T-AGOS ships.

Since these program managers are not assigned any staff outside the

Operations Office, they rely on MSC’s various headquarters and field

organizations to cooperate in developing and administering their program

requirements. That is, the legal, contracting, engineering, accounting, and

security personnel who administer various parts of the

contractor-operated ship programs are all located in different departments

in MSC and report to the heads of their individual departments. Also, ship

programs that are contractor-operated are not collocated but, rather, are

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spread out over several departments. Such an organization is not

conducive to the uniform administration of contracts or to the

dissemination of best practices. Ultimately, it has contributed to MSC’s

failure to ensure that its contractors comply with their contracts.

Specifically, MSC’s fragmented lines of authority have hindered

enforcement of trustworthiness and security provisions.

Personnel Frustrated by

MSC’s Organization

Some MSC personnel we talked to were very frustrated with MSC’s unclear

lines of authority, especially with the chain of command for contracting

issues. The contracting officer’s representative for one program told us

that upper-level management provides minimal leadership and the

contracting officer’s representative has little authority to act

independently.

Until recently, another program did not even have a contracting officer’s

representative. The contracting officer for that program designated a

person in the Operations Office to serve as his contracting officer’s

representative on October 28, 1994. However, this person did not sign his

authorization letter until August 29, 1995, the day after we had discussed

our completed review with MSC officials.

MSC’s Proposed Actions to

Improve Accountability

MSC is planning a reorganization to “clarify accountability, responsibility,

and authority” for its ship programs. Under the proposed reorganization,

six program managers will oversee MSC’s ship programs. Unlike the current

program managers, these new program managers will have authority over

staff members assigned to their programs from the field and from the

Operating Contracts Division and the Engineering Directorate. MSC’s new

program management structure was scheduled for implementation

beginning in October 1995.

Conclusions MSC’s plan to designate program managers and to establish formal lines of

accountability from personnel in the field and from the Operating

Contracts Division and the Engineering Directorate directly to the

program managers will improve communication within ship programs and

should improve MSC’s ability to monitor contractors’ compliance with the

terms of their contracts. However, MSC still will not have a system in place

to systematically establish personnel requirements and to identify and

implement best practices. The use of standardized procedures and best

contracting practices is important for all ship programs, but it is especially

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critical for contractor-operated ship programs where a single contract may

remain in effect for 20 years or more.

Recommendations We recommend that the Secretary of Defense direct the Commander of

MSC to take the following actions:

• Develop and require the use of standardized procedures by program

managers and their staffs whenever possible to establish personnel

requirements in their contracts.

• As part of MSC’s upcoming reorganization, direct program managers to

clarify accountability by (1) assigning a specific individual responsibility

for each contract requirement and (2) periodically checking that contract

provisions, such as those dealing with trustworthiness and security

clearances, are correctly administered and met.

• Instruct program managers and contracting personnel to meet to discuss

and evaluate ways to identify and implement best practices into their

contractor-operated ship programs.

Agency Comments

and Our Evaluation

DOD concurred with the recommendations contained in this chapter.

However, it did not concur with our findings that (1) MSC does not have

standard procedures to develop personnel requirements and (2) MSC has

no systematic approach to identify and implement best practices. In

addition, DOD only partially concurred with out findings that (1) MSC does

not ensure that contractors comply with requirements for crew

trustworthiness and security clearances and (2) fragmented lines of

authority impede sound management.

In disagreeing with the finding concerning standard procedures for

personnel requirements, DOD stated that MSC evaluates lessons learned

from operating contracts before issuing solicitations for new contracts. It

also stated that while MSC does not require 100 percent of its tanker crews

to be U.S. citizens, currently, all of them are. We maintain that MSC’s failure

to require 100 percent citizenship on its T-5 tankers indicates that MSC does

not always evaluate lessons learned from other ship operating contracts.

In contracts signed less than a year before the T-5 tanker contracts, MSC

required that 100 percent of the maritime prepositioning ships’ crews be

U.S. citizens. Furthermore, in contracts signed after the T-5 tanker

contracts, MSC required that all crew members be U.S. citizens on T-AGOS,

fast sealift, and oceanographic ships. Although all the crew members now

on the tankers are U.S. citizens, this was not the case in the past. For

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example, past crews have included citizens from Romania and Yemen. In

addition, there is no guarantee 100 percent of the future crew members

will be U.S. citizens, since that is not an MSC requirement.

In disagreeing with the finding concerning best practices, DOD stated that

best practices are shared, but the budgeting system used for the maritime

prepositioning ship and T-5 tanker programs is not appropriate for other

ship programs because the circumstances and contract terms are different.

In our report, we acknowledged the differences between the T-5 tankers

and maritime prepositioning ships and the rest of the contractor-operated

ships we reviewed. However, these differences do not preclude the

sharing of best practices between the programs. Furthermore, MSC has not

done a cost comparison between the two different methods of controlling

maintenance and repair costs.

Although DOD partially concurred with our finding concerning MSC’s

tracking of crew trustworthiness and clearances, it said that

trustworthiness evaluations are done by the Defense Investigative Service

and the reports should be destroyed following final action. As our report

points out, trustworthiness determinations are made by MSC, not by the

Defense Investigative Service. Although the Defense Investigative Service

reports MSC uses during the trustworthiness evaluation process must be

destroyed after a final determination is made, MSC can and should track

whether or not crew members have trustworthiness evaluations.

Although DOD partially concurred with our finding concerning fragmented

lines of authority, it stated that lines of authority have always delineated

responsibilities for contractor-operated ships. We maintain that the lines

of authority and responsibility were not always clearly delineated in the

past, particularly regarding contracting officers’ representatives.

Page 43 GAO/NSIAD-96-41 Military Sealift Command
Appendix I 

Ships Visited During Our Review

Name Type Location

USNS Bold T-AGOS Norfolk, Va.

USNS Kane Oceanographic Jacksonville, Fla.

M/V 2nd Lt. John P.

Bobo

Maritime

prepositioning Norfolk, Va.

M/V Richard G.

Matthiesen T-5 tanker Charleston, S.C.

USNS Altair Fast sealift New Orleans, La.

USNS Algol Fast sealift New Orleans, La.

USNS Bellatrix Fast sealift New Orleans, La.

USNS Pollux Fast sealift New Orleans, La.

USNS Regulus Fast sealift New Orleans, La.

Page 44 GAO/NSIAD-96-41 Military Sealift Command
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Sharon A. Cekala

Joan B. Hawkins

Joseph P. Walsh

Michael J. Ferren

Beverly C. Schladt

Martin E. Scire

(703061) Page 45 GAO/NSIAD-96-41 Military Sealift Command
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