Testimony

Before the Subcommittee on Criminal Justice, Drug

Policy and Human Resources

Committee on Government Reform

House of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at

10 a.m. EDT

Wednesday

August, 1, 2001

ANTI-DRUG MEDIA

CAMPAIGN

Aspects of Advertising

Contract Mismanaged by

the Government;

Contractor Improperly

Charged Some Costs

Statement of Bernard L. Ungar

Director, Physical Infrastructure Issues

GAO-01-1017T
Page 1 GAO-01-1017T Anti-Drug Media Campaign

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss our report entitled Anti-Drug

Media Campaign: Aspects of Advertising Contract Mismanaged by the

Government; Contractor Improperly Charged Some Costs (GAO-01-623,

June 25, 2001), which contains the findings from our most recent report

regarding our review of the Office of National Drug Control Policy’s

(ONDCP) advertising contract for Phase III of the National Youth AntiDrug Media Campaign. We first reviewed certain programmatic aspects of

the media campaign in a July 2000 report.1

 During that review, allegations

were made that the government was not adequately managing aspects of

the Phase III contract relating to costs incurred by the contractor (the

advertising agency of Ogilvy & Mather) and that the contractor was

overbilling the government. In October 2000, at the request of former

Chairman Mica, we testified before this Subcommittee about our initial

investigation of ONDCP’s actions after it received allegations that Ogilvy

was overbilling the government.2

 We reported that the former ONDCP

Director knew about these allegations, including possible fraudulent

conduct, in April 2000. We also reported that the Director agreed with the

need to audit the contract after ONDCP transferred contracting

responsibilities from the Department of Health and Human Services (HHS)

to the Navy.

Our June 2001 report discussed whether Ogilvy properly charged the

government for labor costs incurred under this contract, and whether the

government adequately managed aspects of the contract award and

administration related to costs incurred by the contractor. We focused on

labor charges submitted by Ogilvy because the allegations pertained to

labor costs. We reviewed these costs by examining the labor invoices that

were submitted to the government for work done under the ONDCP

contract, and then interviewing a sample of Ogilvy employees whose time

sheets were revised regarding the amount of time that was charged to the

government. We asked these employees about why the time sheets were

revised and who made the changes. We collected other information by

conducting interviews and reviewing contract-related documentation at

HHS, which awarded and administered the contract during the first 2 years

 1

Anti-Drug Media Campaign: ONDCP Met Most Mandates, but Evaluations of Impact Are

Inconclusive (GGD/HEHS-00-153, July 31, 2000).

2

Anti-Drug Media Campaign: Investigation of Actions Taken Concerning Alleged

Excessive Contractor Cost (GAO-01-34T, Oct. 4, 2000).
Page 2 GAO-01-1017T Anti-Drug Media Campaign

for ONDCP; the Navy, which assumed responsibility for administering the

contract for ONDCP in November 2000; the Defense Contract Audit

Agency (DCAA), which was asked by the Navy to review Ogilvy’s

accounting system and audit the contract; ONDCP; and Ogilvy. We did not

determine the contractor’s actual costs incurred under this contract.

Although we did not focus on the technical aspects of Ogilvy’s

performance, ONDCP officials said that they were very satisfied with

Ogilvy’s technical performance regarding the anti-drug media campaign.

Phase III of ONDCP’s National Youth Anti-Drug Media Campaign was

initiated in January 1999 as a 5-year effort to reduce youth drug use. The

campaign consists of nationwide print and broadcast advertisements that

are to run through December 2003. Although paid advertisements are the

centerpiece of the campaign, they are part of a broader ONDCP effort that

includes partnerships with community groups, corporate participation,

public information and news media outreach, collaboration with the

entertainment industry, and use of interactive media. Paid advertisements

for the campaign are to be supplemented by matching advertisements

donated by media outlets.

In December 1998, on behalf of ONDCP, HHS competitively awarded a

cost-reimbursement contract to Ogilvy, with performance to begin in

January 1999. That contract has a base year and 4 option years, for a total

estimated value of $684 million. Of the $128.8 million value of the contract

award for the first year, $18.9 million was for Ogilvy’s labor costs, and the

remainder was for media and subcontractor costs. According to HHS, a

cost-reimbursement contract was used primarily because ONDCP’s

specific needs for the advertising campaign could not be determined in

advance and the cost of performing the work could not be forecast with a

reasonable degree of accuracy, and therefore a fixed-price contract was

impractical.

According to ONDCP officials, because the Executive Office of the

President, of which ONDCP is a part, did not have the procurement

resources to award and administer a large contract, ONDCP arranged for

HHS’ Program Support Center (PSC) to serve as its contracting agent. This

arrangement gave HHS overall responsibility for awarding and

administering the Phase III contract in return for a fee, and ONDCP was to

monitor technical aspects of the contractor’s performance.

In November 2000, attorneys representing Ogilvy disclosed to the Justice

Department’s Civil Division that they had conducted a preliminary review

Background
Page 3 GAO-01-1017T Anti-Drug Media Campaign

of Ogilvy’s ONDCP contract costs, and found certain “slices of

unreliability” in the company’s accounting system and employee time

sheets. The attorneys said that they disclosed to the Justice Department

deficiencies in the company’s timekeeping systems, which they said

resulted in possible underbilling of labor costs from January through June

1999, and possible overbilling of labor costs for the last quarter of 1999.

Also, in November 2000, ONDCP transferred contracting responsibilities

from HHS to the Navy after a breakdown in ONDCP’s working relationship

with HHS regarding the contract. In December 2000, the Navy asked DCAA

to review Ogilvy’s accounting system and conduct an historical audit of

costs incurred under the contract. In January 2001, the Navy exercised the

option to Ogilvy for the third year of the contract (Option Year 2), with an

estimated value of $137 million.

We found that Ogilvy did not properly charge the government for some of

the labor costs claimed under the contract, and did not have an adequate

accounting system that could support a cost-reimbursement government

contract of this value. Although the government disallowed nearly $7.6

million out of about $24.2 million in total labor charges submitted by

Ogilvy during the first 19 months of the contract, attorneys for the

company have proposed that about $850,000 be disallowed for that period.

The amount of money that the government overpaid or should reimburse

the contractor for labor costs incurred cannot be determined until DCAA

audits the costs claimed by Ogilvy. The Navy has asked DCAA to audit the

media campaign costs for 1999 and 2000, which it plans to start soon.

Some of Ogilvy’s labor invoices included charges for time that its

employees did not work on the contract. According to Ogilvy officials and

an internal company E-mail, after learning in the summer of 1999 that

revenue on the ONDCP contract was about $3 million lower than

projected, certain Ogilvy managers instructed some employees to review

and revise their time sheets. Ogilvy’s attorneys provided documents

indicating that these revisions added about 3,100 hours to the ONDCP

contract, which increased charges to the government by about $238,000.

We interviewed some of these employees, who told us that they initially

did not record all of the time that they worked on the ONDCP contract,

and that they revised their time sheets to increase the number of hours

that they claimed to have worked. However, some of the employees also

told us that they did not work the amount of additional time that was

Findings

Ogilvy Improperly Charged

for Some Labor Costs
Page 4 GAO-01-1017T Anti-Drug Media Campaign

added to their time sheets, or they could not fully explain why they

increased the number of hours to the ONDPC contract. For example, one

of the employees said that she did not work the 485 hours that she added

to the ONDCP contract, and another employee generally could not recall

the work that he did for ONDCP with respect to most of the 402 hours that

he added to his time sheets.

In another audit step, we reviewed time sheets that Ogilvy submitted to

ONDCP as support for the labor invoices in 1999, and found hundreds with

scratch-outs, white-outs, and other changes to the amount of time billed to

the ONDCP contract. These changes all lacked the employees’ initials. We

interviewed 12 Ogilvy employees whose time sheets were changed to add

time to the ONDCP contract about why the changes were made.3

 Four of

the 12 employees said that they did not make the changes indicated on

their time sheets regarding ONDCP and did not know who made the

changes, which added at least 55 hours to the ONDCP contract.4

 The other

8 employees said that they made the changes for various reasons, such as

making corrections for mathematical errors, charging time to the wrong

account, and recording the wrong office departure times.

We found other problems associated with Ogilvy’s billing the government

for its ONDCP work. Ogilvy inconsistently charged the government for

paid absences and training and incorrectly billed fringe benefits for

temporary contract employees. In June 2000, a consultant retained by

Ogilvy to review the company’s billing on the ONDCP contract reported

that employee timesheets contained problems such as erasures, scratchouts, and white-outs without the employees’ initials on the changes. The

next month, Ogilvy suspended billing the government for its labor and has

not submitted another labor bill to the government from July 2000 to the

present. We referred our findings regarding Ogilvy’s improper billing under

this contract to the Justice Department.

The government did not adequately manage aspects of the contract award.

HHS awarded a cost-reimbursement contract to Ogilvy before sufficiently

determining whether Ogilvy had an adequate accounting system to support

this type of contract. HHS also did not obtain a required statement from

 3

These were not the same employees who revised their time sheets after certain Ogilvy

managers instructed them to do so.

4

More hours may have been added, but it was not possible to determine what numbers had

been whited-out or marked-out on some time sheets.

The Government

Mismanaged Aspects of

the Contract
Page 5 GAO-01-1017T Anti-Drug Media Campaign

Ogilvy that would have disclosed the cost accounting practices that the

company planned to use. The disclosure statement would have increased

the likelihood that deficiencies in Ogilvy’s cost accounting practices would

have been identified and addressed earlier.

The government also did not adequately administer the contract by

resolving billing problems when they arose or by auditing the contractor,

despite clear indications that Ogilvy’s cost accounting system and

timekeeping procedures were deficient. The HHS contracting officer

followed the technical representative’s recommendations to disallow

nearly one-third of the labor charges that Ogilvy submitted during the first

19 months of the contract without reviewing the appropriateness of those

disallowances or arranging to audit the contract.

As we reported to this subcommittee last October, ONDCP’s technical

representative wrote a memorandum in April 2000 to the then-ONDCP

Director about Ogilvy’s billing irregularities, including a former Ogilvy

employee’s suspicions of fraudulent conduct. In this memorandum, the

technical representative recommended an immediate audit of the base

year of the contract. However, the HHS contracting officer informed us

that ONDCP did not provide her with a copy of this memorandum or any

other credible evidence of improper time charges and, therefore, an audit

was not needed. The technical representative said that it was an ONDCP

management decision not to share the unsubstantiated allegations of

improper time charges with HHS contracting officials. ONDCP said that it

lacked evidence substantiating the allegations and that an audit of the

questioned billings was expected to occur immediately after the

responsibility for contract administration was transferred from HHS to the

Navy.

Contract administration was also impeded because the HHS contracting

officer and the ONDCP technical representative did not have an effective

working relationship, which eventually led to the transfer of contracting

responsibilities from HHS to the Navy. The contracting officer said that the

technical representative did not work within the boundaries of his

appointment. However, ONDCP indicated that the technical representative

started performing duties normally done by the contracting officer only

because the contracting officer was not actively engaged in the

administration of the contract, gave the technical representative

permission, or acquiesced to the technical representative’s performing the

duties. Further, the technical representative said that his working

relationship with HHS contracting officials deteriorated because he

refused pressure from the contracting officer to recommend payment for
Page 6 GAO-01-1017T Anti-Drug Media Campaign

costs that he believed to be questionable or unsupportable. In some

instances, we found documentary evidence to support the different

parties’ accounts of events, although with regard to other incidents, we

found no documentation to resolve the differing views.

In November 2000, Ogilvy hired PricewaterhouseCoopers to restructure its

accounting system to meet government contracting standards. This

included developing a disclosure statement regarding Ogilvy’s accounting

system, which was required to be submitted at the beginning of the

contract. On March 9, 2001, more than 2 years after the contract award,

Ogilvy submitted a disclosure statement. Ogilvy was also required to

submit an incurred cost proposal to establish final costs incurred for 1999,

which was originally due no later than June 30, 2000, and an incurred cost

proposal for 2000, by June 30, 2001. On March 2, 2001, Ogilvy provided an

“advance copy” of an incurred cost proposal to the Navy, which was not

certified, for 1999. On July 11, 2001, Ogilvy provided a certified incurred

cost proposal for 1999 and 2000.

Ogilvy also indicated that it has taken actions to improve the preparation

of employee time sheets. In January 2001, Ogilvy issued its employees

revised time sheet guidance prepared by PricewaterhouseCoopers

containing detailed time sheet procedures and penalties for falsifying

them. Also in January 2001, PricewaterhouseCoopers began providing

time sheet training to Ogilvy employees.

For its part, ONDCP indicated that it has taken actions to improve the

administration of the contract with Ogilvy, such as transferring the

contracting responsibilities from HHS to the Navy. ONDCP also indicated

that it split the technical representative’s duties so that the Media

Campaign Office will have various technical representatives, rather than

having one technical representative, handling all of the media campaign

contracts. In addition, ONDCP said that its media campaign staff have

been trained and certified as technical representatives. According to

ONDCP, since contracting responsibilities were transferred to the Navy,

communication has been substantially enhanced between the technical

representatives and the contracting officer, and regular meetings are

scheduled with the technical representatives, the contracting officer, and

the contractor to resolve issues.

With regard to the next contract option year, which begins in January

2002, ONDCP officials said that they are considering options and

contingencies. In late July 2001, ONDCP officials said that they are

Actions Taken Since

the October 2000

Hearing
Page 7 GAO-01-1017T Anti-Drug Media Campaign

conducting market research with the Navy to determine whether the

contract should be resolicited, are developing a statement of work for a

possible new contract, and are considering whether any new contract

should be fixed-price. ONDCP expects to decide by August 30, 2001,

whether to exercise the next option year or whether reprocurement

should be initiated.

DCAA, which began reviewing Ogilvy’s accounting system in March 2001,

determined last week that the company’s accounting system was adequate

with regard to the ONDCP contract. DCAA also plans to routinely review

Ogilvy’s future labor invoices when the company resumes submitting

them, and soon will begin to audit Ogilvy’s 1999 and 2000 costs.

Ogilvy did not properly charge the government for some of its labor costs

incurred under this contract. Its submission of time sheets claiming hours

that some employees said they did not work on the anti-drug media

campaign was clearly improper. In addition, the company did not make

substantial progress toward restructuring its accounting system to meet

government requirements until nearly 2 years after the contract was

awarded.

The government poorly managed aspects of the award and administration

of the contract. HHS should not have awarded this cost-reimbursement

contract without determining whether the contractor had an adequate cost

accounting system. In addition, HHS should have reviewed the

appropriateness of the large amount of money that the technical

representative recommended be disallowed from the contractor’s invoices,

or arranged for an audit of the contract. The technical representative

appropriately brought allegations of improper billing to the attention of

ONDCP management, but ONDCP management did not take prompt action

to investigate the allegations.

Because the contract has not yet been audited, the appropriateness of the

disallowed charges and Ogilvy’s actual incurred costs under this contract

remains unknown. In assuming contracting responsibilities for the ONDCP

contract, the Navy must determine the allowability of costs charged to the

contract, including Ogilvy’s nonbillable hours. We believe that the

government should not exercise the next contract option year with Ogilvy

unless substantial progress has been made toward resolving these issues

and ONDCP has considered both Ogilvy’s administrative and technical

performance under the contract to date.

Conclusions
Page 8 GAO-01-1017T Anti-Drug Media Campaign

In our June 2001 report, we recommended corrective action to ONDCP

and HHS to address the problems we identified. We recommended that the

ONDCP Director should direct ONDCP staff to work with the Navy to

• review the appropriateness of the disallowed costs and temporary

contract employee labor charges from Ogilvy’s invoices and determine the

amount of money that the government overpaid or should reimburse the

contractor regarding these invoices;

• ensure that Ogilvy has an adequate cost accounting system for continued

performance under the contract;

• coordinate the roles and responsibilities of the contracting officer and the

technical representative and ensure that these roles and responsibilities

are effectively carried out.

Further, we recommended that ONDCP request that the Navy not exercise

the next contract option year with Ogilvy until the company has

adequately restructured its accounting system to meet government

requirements and ONDCP has considered the contractor’s administrative,

as well as technical performance, under the contract to date. In this

regard, ONDCP and the Navy should immediately begin to plan

contracting alternatives for the subsequent Phase III media campaign

should they decide not to exercise the next contract option year with

Ogilvy.

To improve HHS’ compliance with contracting procedures and prevent the

awarding of cost-reimbursement contracts covered by the Cost

Accounting Standards (CAS) to companies lacking adequate accounting

systems to support that type of contract, we recommended that the

Director of the HHS Program Support Center (PSC) direct that PSC’s

controls over contracting procedures be assessed to ensure that they are

adequate for awarding and administering CAS-covered costreimbursement contracts. These controls would include ensuring the

adequacy of potential contractors’ cost accounting systems, obtaining the

required disclosure statements, arranging for audits of contracts when

significant billing problems arise, and resolving billing disputes involving

substantial disallowances on a timely basis.

In providing comments on our draft report, ONDCP agreed with our

recommendations and said that significant progress has been achieved

toward resolving the problems that we identified. The HHS Program

Support Center agreed with our recommendation that controls over

contracting procedures should be reexamined, particularly with respect to

Recommendations

Agency Comments
Page 9 GAO-01-1017T Anti-Drug Media Campaign

assessing an offeror’s accounting system. Ogilvy’s attorneys did not

comment on the recommendations.

We met with ONDCP officials on July 25, 2001, to discuss additional

progress made since our report was issued and incorporated in this

statement what ONDCP officials told us. ONDCP officials indicated that

they are working to implement our recommendations and provided a July

20, 2001, letter from the ONDCP Acting Director to the Navy stating that

ONDCP and the Navy should jointly conduct market research as a basis

for deciding whether to exercise the next option year with Ogilvy or

resolicit the contract. The letter also indicated that unless market research

indicates that the contract should remain cost-reimbursable, either in full

or in part, the contract should be fixed-price. In addition, ONDCP

informed the Navy that Ogilvy cannot be retained under a cost-type

contract unless it has an accounting system that complies with the Federal

Acquisition Regulation.

Although ONDCP is working to implement our recommendations, much

remains to be done to settle the problems existing with this contract. The

1999 and 2000 costs need to be audited, the amount of labor costs to be

paid for those years must be determined and possibly negotiated, and

labor costs incurred since July 2000 have to be billed and determined.

Moreover, the government has to decide if it is prudent to continue this

contract or seek other contractual means to carry out the media campaign.

For information about this testimony, please contact Bernard Ungar,

Director, Physical Infrastructure Issues, on (202) 512-8387. Individuals

making key contributions to this testimony included Bob Homan, John

Baldwin, and Adam Vodraska.

This concludes my prepared statement. I will be happy to respond to any

questions you or other Members of the Subcommittee may have.

Recent Actions Taken

on Recommendations

Contacts and

Acknowledgments

(543006)