United States General Accounting Office

GAO Report to Congressional Requesters

December 1994 NASA

PROCUREMENT

Contract and

Management

Improvements at the

Jet Propulsion

Laboratory

GAO/NSIAD-95-40

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-259019 

December 30, 1994

The Honorable John Glenn

Chairman, Committee on Governmental Affairs

United States Senate

The Honorable Carl Levin

Chairman, Subcommittee on Oversight of

 Government Management

Committee on Governmental Affairs

United States Senate

This is our third and final report on selected contract provisions and

internal controls at the Jet Propulsion Laboratory (JPL). As you requested,

we reviewed the current contract between the National Aeronautics and

Space Administration (NASA) and the California Institute of Technology

(Caltech) for the operation of the JPL and analyzed whether modifications

made to it and other management changes adequately address the

concerns raised in our previous reports.

Background JPL is NASA’s only Federally Funded Research and Development Center

(FFRDC) and is operated under contract by Caltech. JPL is NASA’s field

installation for solar system exploration and is a major operating division

of Caltech. Together, these overlapping roles contribute to unique JPL

management and oversight challenges.

FFRDCs are operated under agreements funded by sponsoring federal

agencies to provide for research or development needs that cannot readily

be met by the agencies or contractors. JPL work is primarily funded by

NASA; however, other sponsors can fund JPL efforts under reimbursable

arrangements with NASA. JPL’s total 1994 business base was just over

$1 billion.

JPL receives work projects directly from NASA program offices. It can also

submit proposals to, or respond to non-competitive requests from, other

work sponsors using up to 25 percent of the JPL direct workforce. Both the

NASA-directed work and the non-NASA work must be determined to be

appropriate for JPL to perform based on the scope of the sponsoring

contract. Caltech has operated JPL for NASA since NASA became an agency in

1958 and conducted work at the same site for other federal entities as

early as the 1930s. The current contract is in effect from 

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September 20, 1993, to September 30, 1998. It provides a framework of

procedures, regulations, and other guidance for funding specific tasks.

Rather than signing separate contracts for individual work projects,

funding for JPL is provided under “task orders” for specific work. Cost

allowability is governed by the contract and by the Office of Management

and Budget’s (OMB) Circular A-21, “Cost Principles for Educational

Institutions.”

In our first report to the Committee, we discussed JPL’s fixed fee, selected

cost controls, scope of work, food and beverage charges, and tuition

payments for dependents.1

 Our second report discussed the management

of NASA equipment by JPL, particularly loaning it to employees and

controlling it at Caltech’s campus.2

Results in Brief The current contract for operating JPL contains improvements in several

areas—award fee, selected cost controls, scope of work, and number of

contract deviations. In addition, actions have been taken to deal with

internal control concerns. For example, policy changes have drastically

curtailed the lending of computer equipment to employees and greatly

reduced meal and beverage costs.

NASA has not yet reviewed the reasonableness of paying the college tuition

of JPL employees’ dependents. However, in September 1994, NASA

requested that the Defense Contract Audit Agency (DCAA) perform a

comprehensive review of JPL’s compensation package and identified the

dependent tuition assistance benefit for special scrutiny.

The ultimate success of both the contractual and oversight changes at JPL

will depend on effective implementation. NASA’s Management Office at JPL

will be challenged by the demands of its oversight responsibilities. Better

coordination of audit resources could help in that challenging task.

Contract Concerns

Addressed

Changes have been made to address the concerns raised in our July 1993

report. First, the fixed fee under NASA’s previous contract with Caltech was

replaced with a fee structure that bases two-thirds of the fee award on

NASA’s assessment of JPL’s performance. Also, new reporting and review

1

NASA Procurement: Proposed Changes to the Jet Propulsion Laboratory Contract

(GAO/NSIAD-93-178, July 15, 1993).

2

NASA Property: Poor Lending Practices and Controls at the Jet Propulsion Laboratory

(GAO/NSIAD-94-116, Apr. 18, 1994).

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procedures could provide control over selected costs comparable to that

at commercial contractors. Similarly, although the scope of work was not

substantively modified for NASA tasks, it was narrowed and oversight was

increased for non-NASA work performed by JPL. Finally, the total number of

deviations from the Federal Acquisition Regulation (FAR) in the contract

was reduced.

In addition, our concern regarding the tuition asistance benefit will be

addressed as part of NASA’s recent request to DCAA for a review of JPL’s

compensation package.

Award Fee Linked to

Performance

The previous contract provided Caltech with a fee range of between

$11.4 million and $15.4 million, based solely on the volume of work

conducted at JPL. This arrangement was contrary to NASA’s goal of

considering performance in awarding fee to contractors and counter to the

agency’s policy of not paying fee or profit on contracts with universities.

We recommended that NASA authorize a deviation from its policy against

paying fee to educational institutions only if its purpose and amount was

adequately justified and, if a fee was authorized, to base the amount on

performance.

For the new contract, NASA approved a policy deviation allowing fee

payment to a university and created a new fee structure. Under the

contract’s “Management Performance Incentive Plan,” Caltech is paid

$6 million plus an additional performance-based amount of up to

$12 million. The incentive criteria for the performance-based fee is

specified in the contract, with assigned weights of 65 for technical

performance, 25 for institutional management, and 10 for outreach

programs. Two evaluation boards and an award official will determine the

fee amount, based on ratings by individuals familiar with JPL’s work for

NASA and non-NASA sponsors. NASA’s award decision is not subject to the

contract’s dispute clause and no incentive fee is paid if performance is less

than satisfactory. NASA awarded a total fee of $16.5 million for 1994.

NASA may also indicate emphasis areas prior to each rating period. For

1994, no areas were emphasized due to extended contract negotiations.

Eight areas have been identified for 1995—including cost containment,

improved compliance with JPL policies, increased cultural and gender

diversity in senior management, and effective social and educational

outreach programs consistent with overall NASA and federal government

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initiatives in these areas. According to NASA officials, efforts pursued under

any emphasis area must still fall within the contract’s scope of work.

We noted in our July 1993 report that Caltech received a higher fee than

any of the other large FFRDCs administered by educational institutions that

receive fees. Based on past ratings, Caltech is unlikely to receive less fee

under the new fee structure. For example, Caltech could be scored one

point above a poor/unsatisfactory rating—61 out of 100—and still receive

an incentive payment of $7.3 million on top of the $6 million fixed fee. This

is more than the $13.1 million fee paid for the last year of the previous

contract.

Justifying and paying fee is an issue for all FFRDCs, not just JPL.

3 NASA

officials believe that JPL is the only FFRDC receiving a fee linked to

performance and intend the $12 million performance-based fee as a strong

incentive. If the incentive award fee concept is successful at JPL,

performance-based fees could be considered for other FFRDCs that receive

fees. Its success will depend largely on NASA applying a rigorous scoring

system to help ensure a fair evaluation clearly reflecting performance.

Greater Cost Visibility In our July 1993 report we noted that selected costs, called “burden” costs

at JPL, were not being thoroughly reviewed by NASA. The current contract

identifies DCAA as the responsible organization for reviewing JPL’s annual

submission of such costs and includes new reporting requirements for

them as proposed by Caltech. According to NASA, these new reporting

requirements improve the visibility of such costs. DCAA also believes the

current contract language and the new reporting requirements could

improve NASA’s control of these costs. The key is the “auditability” of JPL’s

cost submission and the supporting documentation. DCAA has asked for

specific cost data similar to that it requests from commercial contractors.

JPL officials intend to provide the requested data.

Broad Scope Remains, but

Monitoring Improved for

Non-NASA Work

The prior contract’s “description of work” was broadly written and was

characterized as “enabling language” by a NASA official. The broad scope

provided limited guidance for differentiating between work that JPL should

conduct because of its expertise and work that should be conducted by

others. For example, one area of activity was

3

Inadequate Federal Oversight of Federally Funded Research and Development Centers,

Subcommittee on Oversight of Government Management of the Committee on Governmental Affairs,

U.S. Senate, July 8, 1992.

Page 4 GAO/NSIAD-95-40 NASA Procurement
B-259019 

“Conducting (i) a program of supporting research and (ii) a program of advanced technical

development, designed to make contributions to space science, space transportation,

practical applications, technology and exploration.”

The basic broad content and lack of specificity in the prior contract

remains in the current contract for NASA work. However, there was a

change in the scope of non-NASA work. The contract previously specified

that tasks undertaken for non-NASA agencies at JPL would “focus on” efforts

applying JPL developed technologies. The new contract replaces the words

“focus on” with “be confined to.”

However, the contract guidelines for non-NASA work remain broad.

Therefore, the NASA Management Office at JPL—which reviews and

approves non-NASA task orders—becomes the key control for ensuring the

unique contribution of JPL to the work. Beginning last year, that office

increased its oversight of the appropriateness of non-NASA task orders,

particularly for those involving computer purchases. The Management

Office has delayed approving tasks until further justifications have been

provided and has asked JPL to notify potential non-NASA task sponsors early

in the process of the need to document why JPL should do the work.

Fewer Deviations From

Standard Contract

Requirements

NASA has reduced the number of contract deviations from standard clauses

established in the FAR and NASA’s FAR supplements. The number of FAR and

NASA FAR deviations that were in the old research and development

contract4

 were decreased from 22 to 15, and the total number of standard

clauses incorporated in the contract have increased from 74 to 98. For

example, the standard “Payment of Overtime Premiums” clause was

restored. As a result, a request for overtime premiums must document

factors associated with the request, the effects of denial, and why other

options would not be appropriate.

NASA’s current contract with Caltech contains two new deviations from

prescribed cost allowability provisions. The FAR defers to OMB’s Circular

A-21, “Cost Principles for Educational Institutions,” to prescribe which

costs incurred by educational institutions may be recovered under

government contracts and which may not. Under the Circular, costs

incurred under an employee lawsuit under Section 2 of the Major Fraud

Act of 1988, including amounts paid to the employee, are unallowable. The

4

Previously, two contracts governed the Caltech-NASA relationship—one for the research and

development effort, the other for management of the facilities. The two are combined in the new

contract. Most deviations were related to the research and development effort and we limited our

review of deviations to this component of the old and new contracts.

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Circular also provides that, in general, fines and penalties resulting from

violations of the law are unallowable costs. NASA’s contract with Caltech,

however, provides that if Caltech litigates a third party suit and is found to

have violated federal law, Caltech’s legal and judgment costs will be

allowed if Caltech can demonstrate that it had a reasonable expectation of

prevailing on the merits.

A-21 also limits payment for advertising and public relations costs. The

contract provides that this A-21 restriction does not apply to JPL

disseminating public information on NASA programs or activities. For

example, costs associated with JPL public events marking NASA

accomplishments or the printing of program-related materials are

expressly allowable. Similarly, the contract specifically allows costs for

promoting technology transfer to the private sector—a NASA

mandate—stating these costs are not a “cost of selling and marketing,”

which A-21 does not allow.

Dependent Tuition Benefit

to Be Reviewed

Dependents of JPL employees accepted at Caltech attend the university

tuition free, with the annual per student tuition—$15,900 in fiscal year

1994—charged to NASA. In addition, approximately 150 senior JPL

employees are eligible for tuition assistance of up to half Caltech’s tuition

when their dependents attend other universities.5 JPL considers this

Caltech employee benefit a key element for recruiting exceptional

employees. In 1994, 39 dependents of 30 senior employees received

assistance for attending other schools.

As our July 1993 report stated, dependent tuition is an allowable cost

under Circular A-21, if the benefit is granted according to university policy.

NASA’s 1980 approval of tuition reimbursement for JPL dependents

attending other than Caltech was conditioned on Caltech limiting cost

increases. However, as figure 1 shows, JPL’s employee dependent tuition

costs have continued to increase significantly in recent years.

5

Senior JPL employees include upper-level management in the $72,800-$202,000 salary range, JPL

Executive Council members, and heads of divisions.

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Figure 1: JPL Employee Dependent

Tuition Costs Tuition Cost

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1990 1991 1992 1993 1994

Fiscal Year

Other school tuition

Caltech tuition

We recommended that NASA decide whether and to what extent it should

continue paying dependent tuition support. The NASA Administrator

responded that the tuition benefit is part of Caltech’s general

compensation and benefit plan and that it would be reviewed as part of a

comprehensive JPL compensation review that NASA would conduct during

fiscal year 1994. No review was conducted that year but, in

September 1994, NASA requested DCAA perform a comprehensive review of

JPL’s compensation system. The request noted that various parts of the

system had been reviewed by DCAA over the last 2 years and asked that

those results be incorporated into the comprehensive review, together

with additional areas of compensation that had not been audited. JPL’s

dependent tuition assistance program was specifically targeted for review.

Some Internal

Controls Strengthened

NASA and JPL responded quickly to our concerns and recommendations to

rectify internal control weaknesses in the management of NASA equipment.

Policies and procedures for employee equipment loans and the tracking of

equipment at Caltech have been improved. Also, changes in JPL’s policies

Page 7 GAO/NSIAD-95-40 NASA Procurement
B-259019 

on charging NASA for food and beverages have substantially reduced those

costs.

Rapid Action to Control

Property

In our April 1994 report we recognized that employee home use of

equipment can be valuable, but noted that the frequency, duration and

growth of equipment on loan called for review. We recommended that

NASA look at its employee loan policy to limit the type of equipment and

conditions for borrowing and that JPL’s policy be made consistent with

NASA’s policy.

Both NASA and JPL have revised their policies. JPL issued new guidance on

June 9, 1994, that severely restricts off-site use of property. They also

initiated a recall of equipment not meeting the new conditions. Under the

new criteria, equipment loans, including overnight use of a portable

computer, is not allowed without meeting a critical need test and

obtaining the approval of a division manager. The number of equipment

items on loan dropped 88 percent from 4035 (valued at $7.6 million) in

September 1993 to 451 items (valued at $760,000) by October 1994. NASA’s

property manager at JPL believes there will be a reduction in the future

procurement of new computer equipment, in part as a result of the

returned equipment being available for use at JPL.

NASA’s loan policy, issued July 18, 1994, allows for mission-essential home

loans of 30 days, or up to 180 days after signing a loan agreement in which

the employee assumes responsibility for the equipment. Both loans can be

renewed once and require approval by the property custodian, immediate

supervisor, and the division director/chief. Loan renewal requests beyond

360 days need approval by the Center Director or Director of Operations

for NASA headquarters.

We also recommended that NASA require JPL to review and improve its

property control system, and evaluate and revise its procedures for

keeping track of inventory, including equipment located at Caltech. In

response, JPL formed advisory groups to study and address property

control issues, and established a deadline of December 31, 1994, for the

groups’ recommendations to be implemented.

NASA requested JPL conduct a wall-to-wall property inventory, which is now

underway. All equipment has been scanned, both at JPL and Caltech, and

NASA identification tags have been placed on all JPL equipment at Caltech.

NASA’s Property Manager noted losses are much lower at this point in the

Page 8 GAO/NSIAD-95-40 NASA Procurement
B-259019 

inventory than they were when property was last inventoried in 1992.

Then, 12,000 items were not located after initial scanning, compared to

3,593 this time. The reasons for the differences will not be known until the

1994 inventory is complete.

Our final recommendation—that JPL identify and dispose of obsolete or

excess equipment—will be addressed by one of the JPL advisory groups in

coordination with the NASA Management Office. As part of NASA’s review of

the JPL property system, NASA asked JPL to change its procedures to speed

disposal of equipment purchased for reimbursable sponsors.

Meal Charges to NASA

Curtailed

We reported in July 1993 that food and beverages charged to the NASA

contract had been growing rapidly and internal controls were weak. We

specifically questioned the allowability of “working meals” and

recommended that they be identified in the new contract as unallowable

costs. NASA agreed that the costs were unallowable but decided against

specific contract language due to new JPL policies severely limiting food

and beverage costs.

According to the new JPL policies, working meals are not allowable

contract charges. Restrictions were also placed on charges for cafeteria

services, which totaled almost $145,000 for fiscal years 1991 and 1992. The

new policy limits cafeteria charges to beverages, and only for meetings

over 3 hours that include non-JPL employees. The new policies strictly limit

chargeable meals and refreshments at JPL functions, and prohibit these

charges for government employees. Food and beverage costs for the first 6

months under the new policies were $35,000. Almost three times that

amount was charged to NASA for the 6 months prior to the policy change.

NASA requested a DCAA audit of all JPL food and beverage costs for fiscal

years 1991 and 1992. The resulting report questions almost $329,000 of the

$406,650 in estimated costs for that period. In response, Caltech withdrew

the questioned amount from NASA contract charges, stating that it did this

so that the government would not be at a disadvantage while JPL evaluates

the questioned costs. As of September 1994, none of the costs have been

resubmitted to NASA. Subsequently, NASA requested an audit of food and

beverage costs for fiscal years 1989, 1990, and 1993. This report is

expected to be completed by January 1995.

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NASA Oversight

Resources

The flexibility in the JPL contract places increased importance on oversight

by the NASA Management Office. Improved coordination of audit resources

could complement that oversight.

JPL’s multiple roles—NASA center, a division of a university, a contractor,

and an FFRDC—subject it to oversight by a variety of audit organizations.

Two of these maintain offices at JPL—the NASA Office of the Inspector

General and DCAA. Under authority of the Inspector General Act, NASA’s

Inspector General is responsible for providing an effective audit program

to review NASA activities. DCAA conducts contract audits of JPL and other

NASA contractors, as requested by NASA. As shown in table 1, operational

audit oversight is provided by these two audit entities, as well as Caltech’s

internal audit organization, on an ongoing basis.

Table 1: JPL Audit Oversight Profile

Inspector

Generala DCAA

Caltech

internal audit Total

Number of

auditors

6 7 5 18

Fiscal year

1993 budget

$549,700 $568,000 $537,200 $1,654,900

Fiscal year

1993 reports

5 30 4 39

aThe Office of the Inspector General responsibility also includes NASA activities in southern

California, Hawaii, and Arizona, although most of its effort are at JPL.

Other audit groups are also engaged at JPL periodically or are peripherally

involved with JPL through their Caltech affiliation. We perform periodic

audits, usually in response to requests from congressional committees.

Other organizations, such as the Small Business Administration and the

Army Corp of Engineers, conduct special reviews. Further, a public

accounting firm annually audits Caltech’s financial statement and DCAA is

the cognizant audit agency for Caltech’s campus activities.

Recently, NASA has taken a more active role in coordinating audit efforts.

Coordination between the Inspector General staff and DCAA had previously

been limited.6

 Over the last year, the NASA Management Office has

increased its role in coordinating audit efforts by sponsoring meetings

between the Inspector General and DCAA staffs to reduce duplication and

request that its needs be incorporated into their audit plans. That office

also arranged for Caltech’s internal audit staff to participate in audit

6

However, DCAA officials told us that, consistent with their agency’s policy, they have provided their

audit plan to other organizations.

Page 10 GAO/NSIAD-95-40 NASA Procurement
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coordination meetings with the Inspector General and DCAA in

October 1994.

Scope and

Methodology

The scope of this review was limited to following up on those issues

addressed in our July 1993 and April 1994 reports.

To analyze how NASA handled contractual and oversight concerns, we

compared its current contract with Caltech to the previous one and to

NASA’s Request for Proposal for the current contract. We also reviewed the

contract’s negotiation files, applicable FAR and NASA FAR supplement

provisions, award fee training materials, and JPL’s policies on meals and

equipment.

We collected and summarized cost information on dependent tuition from

JPL’s financial accounting division and the JPL Director’s office. We also

reviewed selected compensation reports from 1993 and 1994.

We interviewed NASA Management Office officials and staff, NASA General

Counsel personnel, and JPL officials responsible for meal accounting and

equipment policies. We also held discussions with DCAA representatives at

JPL and Caltech, Inspector General officials at JPL and NASA headquarters,

and the Caltech Internal Audit Director.

We conducted our work from April 1994 to October 1994, in accordance

with generally accepted government auditing standards. As requested, we

did not obtain agency comments on a draft of this report. However, we

discussed the information in the report with both NASA and JPL officials and

considered their comments in preparing it.

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

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

will send copies of this report to other appropriate congressional

committees, the NASA Administrator, and Director of OMB. We will also

provide copies to others upon request.

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

questions concerning this report. The major contributors to this report

were Allan Roberts, Assistant Director; Frank Degnan, Assistant Director;

and Monica Kelly, Evaluator-in-Charge.

Sincerely yours,

Donna M. Heivilin, Director

Defense Management and NASA Issues

(709060) Page 12 GAO/NSIAD-95-40 NASA Procurement
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