United States General Accounting Office

GAO Report to the Chairman, Legislation and

National Security Subcommittee,

Committee on Government Operations,

House of Representatives

November 1994 ENVIRONMENTAL

CLEANUP

Defense

Indemnification for

Contractor Operations

GAO/NSIAD-95-27

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-259130 

November 25, 1994

The Honorable John Conyers, Jr.

Chairman, Legislation and

 National Security Subcommittee

Committee on Government Operations

House of Representatives

Dear Mr. Chairman:

As requested, we are examining selected actions taken by the Department

of Defense (DOD) under Public Law 85-804.1

 Specifically, this interim report

provides information on (1) how the military services used Public Law

85-804 to indemnify contractors for environmental cleanup in selected

cases and (2) how DOD described the resulting actions in required reports

to Congress.

Background Public Law 85-804, as implemented, authorizes DOD and other federal

agencies to indemnify contractors against losses from unusually hazardous

or nuclear risks. The law requires that if any actions are taken under the

law, they be reported to Congress annually. Reported actions can include

specific contractors’ claims for costs already incurred or the inclusion of

indemnification clauses in contracts to protect DOD contractors from

future risks.

The Comprehensive Environmental Response, Compensation, and

Liability Act (CERCLA), as amended, commonly known as Superfund 

(42 U.S.C. 9601-75), imposes liability for cleanup on a variety of potentially

responsible parties, including owners, facility operators, and generators of

hazardous substances. Under CERCLA, DOD is included among parties

responsible for environmental cleanup of its facilities. If DOD pays cleanup

costs related to a contractor’s activities, the contractor remains a

potentially responsible party under CERCLA, and DOD could seek

reimbursement or possible contribution from the contractor or its insurer.

1

Under P.L. 85-804, the National Defense Contracts Act of 1958, as implemented by Executive Order

10789 and the Federal Acquisition Regulation, three major types of actions may be taken: advance

payments; contract adjustments; and any other actions under authority of the act, referred to as

residual powers. A frequently reported action under residual powers is indemnification of contractors

against losses from unusually hazardous or nuclear risks that are not otherwise insured.

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In May 1993, we testified that DOD officials had stated that indemnification

of contractors for environmental cleanup would seldom, if ever, occur.2

However, we also noted that the Army has included indemnification

clauses in contracts at facilities where environmental cleanup is

necessary. We expressed concern about the substantial costs that could be

involved and suggested that DOD expand guidance to the services to fully

describe the types of situations that might warrant contractor

indemnification for environmental cleanup.

In November 1993, a House Committee Report on contractor

reimbursement issues cited DOD’s position that it uses Public Law 85-804 to

indemnify certain contractors against unusually hazardous or nuclear

risks, not for environmental cleanup costs.3

 In July 1994, we reported that

the Army was paying for environmental cleanup costs at its Army

ammunition plants.4

 Army headquarters officials stated that the Army was

paying because it owns the facilities and is one of the parties responsible

for cleanup under CERCLA, although field officials said they believed Public

Law 85-804 was the basis for payment.

Results in Brief The Army granted relief under Public Law 85-804 to a contractor for

$5 million for environmental restoration at a plant in Eau Claire,

Wisconsin. Also, the Army included the Public Law 85-804 clause in

contracts with operators at 20 of its ammunition plants in the early 1990s

to indemnify against unusually hazardous risks (defined as including, in

certain circumstances, environmental releases of hazardous substances).

The presence of this clause in a contract does not mean that all of a

contractor’s environmental cleanup costs would be indemnified. Such a

determination in certain cases could only be made based on the

assessment of whether a contractor’s claim is consistent with the

definition of unusually hazardous risk contained in the clause. DOD expects

cleanup at these plants to total $800 million. The Army has not determined

the amount for which contractors could be liable, and the portion, if any,

affected by these indemnification clauses is unknown. The Navy includes

Public Law 85-804 nuclear indemnification clauses in its nuclear-related

2

Environmental Cleanup: Unresolved Issues in Reimbursements to DOD Contractors

(GAO/T-NSIAD-93-12, May 20, 1993).

3

Reimbursement of Defense Contractors’ Environmental Cleanup Costs: Comprehensive Oversight

Needed to Protect Taxpayers, Fifth Report by the House Committee on Government Operations 

(Nov. 22, 1993).

4

Environmental Cleanup: Inconsistent Sharing Arrangements May Increase Defense Costs

(GAO/NSIAD-94-231, July 7, 1994).

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B-259130 

contracts. According to the Navy, the clause contractually obligated the

Navy to pay the three contractors’ share of the costs for cleaning up

low-level radioactive waste at Maxey Flats, Kentucky. The Navy has

obligated $5.8 million for its own share of this cleanup and currently

estimates the contractors’ share will be another $2 million. Air Force

officials stated they were generally not in favor of indemnifying

contractors against environmental cleanup costs.

Our review of DOD’s reports to Congress for 1962 through 1993 indicated

that the reports generally do not provide sufficient detail to determine

whether the contracts or actions listed are environment related. The Army

reported its payment of $5 million for cleanup at Eau Claire, Wisconsin,

providing a detailed justification.5

 Also, the Army reported the inclusion of

indemnification clauses in contracts for 18 of the above 20 ammunition

plants. The report did not specify whether the clauses encompassed

environmental cleanup and cited potential cost as zero, explaining that the

costs could not be determined. Navy officials stated that the contingent

liability provisions in the Maxey Flats contracts were reported in the

1960s, but they have not yet identified the specific year reported. We found

no reports showing projected or incurred costs on behalf of contractors

involving Maxey Flats.

Environmental

Indemnification

Under Public 

Law 85-804

In at least two instances, the Army and Navy have used Public Law 85-804

to grant relief to contractors for environmental cleanups. In the cases

examined, the Air Force has not.

Army Has Used Public 

Law 85-804 Authority to

Indemnify Environmental

Cleanup

The Army used Public Law 85-804 in 1988 to reimburse the National

Defense Corporation for $5 million in environmental cleanup costs it had

incurred at the Eau Claire, Wisconsin, facility. The relief was granted to

ensure the corporation could continue to produce parts deemed essential

to the national defense.6

 According to the Public Law 85-804 report,

payment was to be funded from an Army procurement account.

5

An Army official recently stated that the $5-million indemnification may not have been an action

under the law and the Army was further researching this case.

6

Public Law 85-804 authorizes extraordinary relief when the President or a designee “deems that such

action would facilitate the national defense.”

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The Secretary of the Army issued memorandums of decision in 1990 and

1992 authorizing the inclusion of Public Law 85-804 clauses in contracts

with ammunition plant operators, as well as other contractors,

subcontractors, and third party contractors whose ultimate customer is

the government.7

 The Army included the Public Law 85-804 clause in 20

contracts with ammunition plant operators. DOD expects cleanup at these

plants to total $800 million.8

 The Army has not determined the amount for

which contractors could be liable, and the portion of funding, if any,

affected by these indemnification clauses is unknown.

The Secretary of the Army’s memorandums define unusually hazardous

risks in part as including “. . . the risk of release, including threatened

release, whether on-site or off-site, sudden or nonsudden, of any substance

or material . . . .” Also, documents supporting the decision show that

“environmental releases of hazardous substances” are included in this

definition. Headquarters officials acknowledged that the Army’s definition

of unusually hazardous risks could encompass environmental

contamination.

As discussed in our July 1994 report, there is confusion among Army

officials as to whether relief had actually been granted under

indemnification provisions. Command and field officials told us that the

Army is paying the cleanup bill at the ammunition plants because the

operators could be indemnified for such costs under Public Law 85-804

anyway. Headquarters officials, however, said that the contract

indemnification provisions are not invoked because the Army is paying the

cleanup costs directly. Under CERCLA, the Army has assumed responsibility

for environmental cleanup of its facilities. For that reason, plant operators

have not incurred costs and therefore have had no reason to submit claims

for environmental relief.

Navy Has Used Public 

Law 85-804 Authority to

Indemnify Contractors for

Low-Level Radioactive

Waste

According to Navy officials, the Navy uses Public Law 85-804 to indemnify

contractors only under limited circumstances. The Navy authorizes Public

Law 85-804 clauses in contracts for procurement of nuclear-powered

vessels, missiles, and components or subcomponents because these

contracts involve nuclear or unusually hazardous risks for which the

7

According to one official, the Army is currently drafting a memorandum to eliminate indemnification

for third parties because the Army believes that private insurance coverage is available to such

contractors.

8

Defense Environmental Cleanup Program, Annual Report to Congress for Fiscal Year 1993 (Mar. 31,

1994).

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B-259130 

contractor cannot obtain insurance. They believe the Navy has no need to

indemnify its facility operators because their operational risks are not

considered unusually hazardous.

The Navy also used Public Law 85-804 to indemnify three

contractors—Newport News, Electric Boat/General Dynamics, and

Ingalls/Litton Systems—for disposal of low-level, nuclear waste at a site at

Maxey Flats, Kentucky. These three contractors were identified, along

with the Navy, as potentially responsible parties under CERCLA. The Navy

assumed all three contractors’ shares of remediation costs, stating that it

was contractually obligated to do so.

A Navy official stated that the Navy has not yet paid any money pursuant

to an indemnification claim. The total cost to the Navy for the Maxey Flats

cleanup will not be known until the Navy signs a consent decree with the

Environmental Protection Agency. However, the Navy is responsible for

12.4 percent of the cleanup bill, of which 4.5 percent represents the three

contractors’ portion. A Navy attorney stated that this 4.5 percent is

currently estimated to be $2 million. According to a Navy Facilities

Command official, the Navy has obligated $5.8 million for its share of the

cleanup at Maxey Flats since 1987, and the money has been funded

through the Defense Environmental Restoration Account.

Air Force Has Not Used

Public Law 85-804

Authority to Indemnify

Environmental Cleanup

According to Air Force officials, activities under facilities-use contracts at

contractor-operated facilities do not involve unusually hazardous risks

and, therefore, do not need to be indemnified under Public Law 85-804.

We reported in July 1994 that a 1987 memorandum from the former Air

Force Systems Command said that Plant No. 44’s operator, Hughes Missile

Systems Company, was indemnified from responsibility for past

groundwater contamination. However, according to an Air Force official,

further investigation showed that the operating contract between the Air

Force and Hughes made no reference to Public Law 85-804 and the 1987

document “. . . in no way was, or was intended to be, an indemnification of

liability for future remediation costs occasioned by contamination of the

groundwater at the facility.”

The Air Force recently negotiated a lease with Hughes that replaced the

facilities-use contracts that have governed Hughes’ operations at the

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B-259130 

Tucson, Arizona, plant since 1951.9 Under the lease, the government will

continue funding remediation projects for contamination that occurred

prior to the lease. However, according to Air Force officials, the decision

to fund the remediation at Plant No. 44 has nothing to do with determining

ultimate liability for cleanup costs. Air Force Systems Command officials

stated that the Air Force intends to seek contributions from the

contractors that operated its facilities.

The lease between the Air Force and Hughes does contain a Public Law

85-804 indemnification clause. Air Force officials stated that the clause is

not intended to grant relief for environmental cleanup. We are continuing

to review the above issues in our ongoing work.

Public Law 85-804

Reports

Pursuant to Public Law 85-804, each agency using the indemnification

authority must report its actions in the annual report to Congress. If an

action involves actual or potential costs in excess of $50,000, the report

must include the contractor’s name, actual or estimated potential costs,

description of property or service involved, and circumstances justifying

the action. In reviewing the Public Law 85-804 reports for 1962 through

1993, we found that 2,874 actions had been reported.10 Two types of

actions were reported: one type includes a description of the action and

justification, and the other lists only the number of contracts with

contingent liability provisions by contractor name. Only one action of the

first type, in Eau Claire, Wisconsin, cited environmental restoration.

The annual reports generally do not provide specific information on

indemnification that could include environmental and associated costs.

Other than the $5-million action, we found no cases where any

environmental cleanup costs had been specified in a report. The current

reporting system does not provide a mechanism for linking the actions

with descriptions and justifications to those previously reported as having

contingent liability provisions.

The information in DOD’s report is submitted by the services and other DOD

agencies to the Office of the Secretary of Defense. The data is computed

and reported annually to Congress in a document entitled “Extraordinary

Contractual Actions to Facilitate the National Defense.”

9

Since the Air Force is trying to divest itself of its contractor-operated facilities and will not receive

funding to maintain them in the future, the Air Force decided to lease the plant to Hughes.

10Actions may involve one or more services or DOD agencies.

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Army Reporting Only 1 of the Army’s 255 reported actions cited environmental

restoration—the Eau Claire site. In 1990, the Army reported an action

regarding 18 of the 20 ammunition plants, and the annual report’s narrative

did not indicate that the action could cover environmental risks. We were

not able to identify where actions had been reported for the other two

ammunition plants.

When the Army reported the inclusion of the indemnification provision in

the contracts of the ammunition plant operators, it cited “actual or

estimated potential costs” as zero, stating that the costs could not be

determined. According to DOD, it had spent about $300 million for cleanup

at the 20 plants, as of the end of fiscal year 1993, and total costs are

expected to be about $800 million. According to an Army official, the Army

has not determined what portion, if any, could be attributed to contractor

activities.

In 1988, the Army reported granting relief for environmental cleanup costs

to the contractor at Eau Claire, Wisconsin, and disclosed $5 million in

costs. As discussed previously, the Army’s justification for this

indemnification was based on national defense concerns.

Navy Reporting The Navy reported 2,035 actions. None of the reported actions cited

environmental cleanup. Because the report format does not specify the

individual risks covered by the contingent liabilities, we could not

determine whether any were specifically intended to cover environmental

cleanup. For the same reason, we could not identify the three actions the

Navy states it reported between 1962 and 1967 for Maxey Flats. A Navy

headquarters official stated they could not identify the specific annual

report in which these three contractors were listed.

Air Force Reporting The Air Force reported 567 actions. We found no indication that any of the

actions were related to environmental cleanup.

Scope and

Methodology

This interim report provides information about selected cases of

indemnification for environmental cleanup and is based on prior and

ongoing work. Our work was conducted at the Washington, D.C., area

headquarters offices of DOD, the military services, and selected commands.

Information in this report was augmented with data from our May 1993

and July 1994 reports and follow-up with the above organizations. We

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B-259130 

reviewed historical and projected environmental cleanup costs, site status,

and related contractual provisions.

In addition, we reviewed Public Law 85-804 reports to Congress for 1962 to

1993 to identify whether they showed examples where indemnification for

environmental cleanup was known to be an issue.

As requested, we did not obtain written agency comments on a draft of

this report. However, we discussed our results with agency officials and

included their comments where appropriate. We performed our work from

August 1994 to October 1994 in accordance with generally accepted

government auditing standards.

Unless you publicly announce its contents earlier, we plan no further

distribution of this report until 30 days after its issue date. At that time, we

will send copies to appropriate congressional committees; the Secretaries

of Defense, the Army, the Navy, and the Air Force; and the Director of the

Office of Management and Budget. We will also make copies available to

others upon request.

Please contact me on (202) 512-8412 if you or your staff have any

questions concerning this report. Major contributors to this report are

listed in appendix I.

Sincerely yours,

Donna M. Heivilin

Director, Defense Management

 and NASA Issues

Page 8 GAO/NSIAD-95-27 Environmental Cleanup
Page 9 GAO/NSIAD-95-27 Environmental Cleanup
Appendix I 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

David Warren

Uldis Adamsons

Patricia Foley Hinnen

Leticia C. Villarreal

Bruce Brown

(709087) Page 10 GAO/NSIAD-95-27 Environmental Cleanup
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