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Full text of "Space station contracting : hearing before the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce, House of Representatives, One Hundred Third Congress, second session, July 27, 1994"

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^^ Y 4. EN 2/3; 103-152 

Space Station Contracting, Serial H. . . 










JULY 27, 1994 

Serial No. 103-152 

Printed for the use of the Committee on Energy and Commerce 

APR 1 1 t995 


86-145CC WASHINGTON : 1995 

For sale by the U.S. Government Printing Office 
Superintendent of Documents. Congressional Sales Office. Washington, DC 20402 
ISBN 0-16-046546-X 


^^ , Y 4, EN 2/3; 103-152 

Space Station Contracting, Serial H... 










JULY 27. 1994 

Serial No. 103-152 

Printed for the use of the Committee on Energy and Commerce 

APR 1 t 199S 

86-145CC WASHINGTON : 1995 

For sale by the U.S. Government Printing Office 
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 
ISBN 0-16-046546-X 



HENRY A. WAXMAN, California 


EDWARD J. MARKEY, Massachusetts 

AL SWIFT, Washington 


MIKE SYNAR, Oklahoma 

W.J. "BILLY" TAUZIN, Louisiana 

RON WYDEN, Oregon 






JIM COOPER, Tennessee 

J. ROY ROWLAND, Georgia 



GERRY E. STUDDS, Massachusetts 


FRANK PALLONE, Jr., New Jersey 


LYNN SCHENK, Cahfornia 


MIKE KREIDLER, Washington 



Alan J. Roth, Staff Director and Chief Counsel 

Dennis B. Fitzgibbons, Deputy Staff Director 

Margaret A. Durbin, Minority Chief Counsel and Staff Director 

Michigan, Chairman 


THOMAS J. BLILEY, Jr., Virginia 






ALEX MCMILLAN, North Carolina 


FRED UPTON, Michigan 




SCOTT KLUG, Wisconsin 

GARY A. FRANKS, Connecticut 

JAMES C. GREENWOOD, Pennsylvania 


Subcommittee on Oversight and Investigations 

JOHN D,, DINGELL, Michigan, Chairman 



> . W*' 


HENRY A. WAXMAN, California 
RON WYDEN, Oregon , _j 
JOHN B-RYANT, Texas' ' 

FRED UPTON, Michigan 


Reid P.F. Stuntz, Staff Director I Chief Counsel 

Bruce F. Chafin, Special Assistant 

Robert L. Roach, Special Assistant 

Jeffrey L. Hodges, Research Analyst 

Dennis B. Wilson, Minority Counsel 




Testimony of: 

Abbey, George, Deputy Director, Johnson Space Center 35 

Dailey, General John R., U.S. Marine Corps, Retired, Acting Deputy 
Administrator, National Aeronautics and Space Administration 35 

Draper, Wayne, Comptroller, Johnson Space Center 35 

Easfey, Robert, Director of Procuremenr, Johnson Space Center 35 

Hesse, Terri, Director of Business Management, Johnson Space Center .... 35 

Holz, Arnold, Chief Financial Officer, National Aeronautics and Space 
Administration 35 

Lawrence, Jeff, Associate Administrator for Legislative Affairs, Johnson 

Space Center 35 

Lee, Deidre A., Associate Administrator for Procurement, Johnson Space 

Center 35 

McConnell, Michael S., Branch Manager, Houston Branch Office, Defense 

Contract Audit Agency 8 

Mclnerney, Pamela, Chief of Staff, Space Station Program Office, John- 
son Space Center 35 

Thibault, Michael J., Assistant Director, Policy and Plans, Defense Con- 
tract Audit Agency 8 

Trafton, Will, Program Director, Space Station, Johnson Space Center 35 

Material submitted for the record by: 

Letter from Bill D. Colvin, Inspector General, National Aeronautics and 
Space Administration, to Hon. John D. Dingell, Chairman, Subcommit- 
tee on Oversight and Investigations 126 

Letter from Hon. John D. Dingell, Chairman, Subcommittee on Oversight 
and Investigations, to Hon. Daniel S. Goldin, Administrator, National 
Aeronautics and Space Administration 127 

Letter from CaroljTi L. Huntoon, Director, National Aeronautics and 
Space Administration, to Robert L. Roach, Subcommittee on Oversight 
and Investigations 130 




House of Representatives, 
Committee on Energy and Commerce, 
Subcommittee on Oversight and Investigations, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 
2123, Rayburn House Office Building, Hon. John D. Dingell (chair- 
man) presiding. 

Mr. Dingell. The subcommittee will come to order. 

Pursuant to Rules X and XI of the Rules of the House of Rep- 
resentatives, the Subcommittee on Oversight and Investigation of 
the Committee on Energy and Commerce is continuing its long- 
standing investigation of the adequacy of disclosures under the se- 
curities laws by government contractors doing business with the 
Federal Government. 

In particular, the subcommittee is now examining the adequacy 
of those disclosures by major publicly held companies holding sig- 
nificant contracts for work on the NASA Space Station. We are also 
examining the adequacy of financial and management controls em- 
ployed by those contractors. 

Last year, the subcommittee investigated and held hearings on 
the DOE's $13 billion Superconducting Supercollider, the SSC pro- 
gram. It was shown that the SSC project suffered from gross mis- 
management by the prime contractor and total inattention by the 
government — in this case, the Department of Energy. 

This situation led to project cost overruns of billions of dollars. 
The Congress was constantly being misled on the cost of the 
Supercollider, which grew from about $4 billion to $8 billion to 
about $13 billion — with no end in sight. 

In addition, financial controls were so lacking at the SSC that it 
was doubtful whether anyone would have figured out a true cost 
estimate to complete the project. 

Today, the subcommittee will examine contractors involved in 
another program that suffers from confusing cost escalation — 
NASA's $30 billion Space Station. The Congress was initially told 
that the Space Station would cost $8 billion. Quickly the costs went 
to $12 billion. Then the scope of the project was cut back, but the 
costs rose to $18 billion. 

The project climbed further to the large figure of $38 billion, and 
the scope was again cut back and the cost was reduced to $31 bil- 
lion. Recently, it was again reduced to $28 billion. Now, these are 
estimates and estimates only. They are also estimates only for con- 
struction. They do not include launch costs or operating costs. 


According to the GAO, launch costs and other key station ele- 
ments would add another $10 billion. The GAO estimated that the 
total cost of the recently terminated Freedom version of the Space 
Station would be around $121 billion. 

Moreover, NASA has already spent over $11 billion on the Space 
Station and nothing has been built. Apparently we have bought 
rooms full of designs of papers and estimates and other documents, 
but these are all now largely worthless. That is bad enough, but 
now we learn that NASA and its contractors on the Space Station 
have been playing fast and loose with the American taxpayers' 
hard-earned dollars. 

NASA has been asleep at the switch and several of our largest 
defense contractors working on this project appear to be out of con- 

Audits conducted by GAO, NASA Inspector General, and by the 
DCAA have shown that the contractors were routinely submitting 
incomplete and inaccurate cost reports essential for monitoring and 
controlling costs. I note that without these, there is no possibility 
of really controlling or monitoring costs. 

NASA's own guidelines require its contractors to have fully func- 
tioning cost reporting systems. These systems are designed to an- 
swer questions fundamental to any project, especially one being 
paid for bj' the taxpayers: How much do we plan to spend? How 
much did we spend? What did we get for the money? How much 
more money do we need to spend to complete the project? 

Unfortunately, NASA is not in a position to answer those ques- 
tions because, as a recent DCAA audit reveals, NASA did not re- 
quire its contractors to follow the agency's cost reporting guide- 
lines. Essentially, the agency is flying blind on a multi-billion dol- 
lar project whose costs will be numbered in the many billions. 

Despite critical findings of the GAO, NASA's Inspector General, 
and DCAA since 1988, NASA has been either unable or unwilling 
to recognize its problems or the contractors' problems, much less 
correct these problems. As recently as last month, DCAA was so 
concerned about the failure of the Johnson Space Center to ac- 
knowledge or correct the problems DCAA had identified that DCAA 
had to take the unprecedented step of briefing NASA headquarters 
and issuing an audit alert to all DCAA field offices in the hope of 
forcing NASA to focus on the very serious management problems 
which that agency had. 

NASA for years has been running this program like a hydra- 
headed beast with four contractors: McDonnell Douglas, Boeing, 
Rockwell, and Grumman. Lockheed worked as a major subcontrac- 
tor to three of the four primes. This contributed to the disarray, 
which, in turn, contributed to various schemes used to mask bil- 
lions of dollars of cost overruns. NASA was not only aware of these 
schemes, but condoned them. 

First, in McDonnell Douglas' cost report for the month of Janu- 
ary 1993, major subcontractor estimates at the completion were 
unilaterally lowered by McDonnell Douglas by about a half a billion 
dollars. It was clear that even the subcontractors were lowballing 
their costs. 

When the Inspector General raised this issue with NASA, NASA 
management argued that it was within the prime contractors' pur- 


view to lower subcontractors' estimates. NASA management held 
this view despite strong evidence that the subcontractor cost esti- 
mates themselves tended to be understated. 

Second, it has been a routine practice for NASA contractors to 
incorporate additional work into their contracts without NASA es- 
tablishing a price for that work. This technique made it possible for 
McDonnell Douglas to cover up substantial overruns. 

For example, McDonnell Douglas included about $1.5 billion in 
unnegotiated work as part of its $6 billion "authorized contract 
value." Consequently, by inflating its budget, McDonnell Douglas 
was able to report no cost overrun. 

However, if the negotiated contract baseline program was com- 
pared to the contractor's cost to complete the project, the program 
was, in fact, experiencing cost overruns of about $1.5 billion. When 
DCAA questioned this practice, McDonnell Douglas responded that 
NASA told them to report its budget that way. 

Third, another Space Station subcontractor, IBM, engaged in 
highly questionable billing practices. Of the $490 million of costs 
incurred by this contractor over 7 years, DCAA is questioning $107 
million as unallowable. 

IBM, without authorization, spent $40 million for equipment, 
among other things, that they knew were being provided by an- 
other contractor. DCAA found this "unnecessary and duplicative" 
and therefore unallowable. 

IBM also charged $20 million to the Space Station for leasing a 
building that IBM already owned. This matter is under criminal in- 
vestigation by the U.S. Attorney in Houston. 

Equally curious is the fact that NASA has been unable to supply 
the subcommittee with any data concerning management costs, 
award fees, or executive bonuses that have been paid by IBM dur- 
ing this fiasco. We must wonder why IBM is in a position where 
NASA does not even know how much money it has handed over to 

In December 1993, NASA terminated the four prime contracts 
and awarded an undefmitized letter contract for $2 billion to the 
Boeing Company to serve as the single prime contractor. Although 
going from four prime contractors to one appears to be an improve- 
ment, NASA has not yet demonstrated any capability to get a han- 
dle on any of the contractors. Neither Boeing nor the major sub- 
contractors have the fundamental business systems in place to 
monitor and control costs, schedule, and performance. 

Curiously, NASA's last four performance evaluations dem- 
onstrated that Boeing's financial controls have not been satisfac- 
tory and, in fact, were no better than other contractors. In addition, 
NASA appeared to be oblivious to Boeing's recent settlement for 
$75 million of the Department of Justice's decade-long criminal in- 
vestigation for mischarging on government contracts. Boeing, in 
fact, had mischarged on the Space Station contract. 

Also, the government has not audited Boeing's overhead since 
1986. While the criminal investigations of Boeing were ongoing, the 
Department of Justice prohibited DCAA from auditing Boeing's 
overhead. Between 1991 and 1992, Boeing's overhead doubled from 
56 percent to 106 percent. With no audits during this period, NASA 
has no idea what level of overhead is legitimate. 

NASA officials recently assured subcommittee staff that they 
considered Boeing's past performance as a government contractor 
in choosing them as the prime, and claimed that they were un- 
aware of any ongoing investigations by government agencies of 
Boeing. The subcommittee staff then contacted the Department of 
Defense Office of Inspector General concerning its ongoing inves- 
tigations of Boeing by the Defense Department. 

The following is the IG's rather alarming response: "Since its in- 
ception in 1982, the Defense Criminal Investigative Service, DCIS, 
the investigative arm of the Inspector General, Department of De- 
fense, IG DOD, has completed 24 criminal investigations involving 
the Boeing Company, and currently has eight open, ongoing crimi- 
nal investigations. The Air Force Office of Special Investigations, 
AFOSI, has an additional 13 ongoing criminal investigations. 

"The company has been convicted of criminal wrongdoing, specifi- 
cally securities violations, on one occasion in November 1989, 
which resulted in criminal fines and restitution totaling $5,220,100 
and suspension from government contracting until February 1990. 
In addition, Boeing entered into two civil settlement agreements 
with the Air Force in April 1994 and June 1994 to resolve two 
AFOSI criminal investigations. These agreements resulted in Boe- 
ing paying the government a total of $66 million in civil settle- 
ments. Overall, the firm has paid or repaid the government 
$161,003,450 in criminal, civil and administrative remedies in con- 
nection with closed and continuing investigations. 

"Most of the 24 closed investigations, 79 percent, involved pro- 
curement fraud allegations and most, 21 percent, also directly in- 
volved the parent firm, as opposed to a subsidiary or operating di- 
vision. Of the eight ongoing DCIS investigations and 13 ongoing 
AFOSI investigations, 38 percent and 68 percent, respectively, in- 
volve the Boeing Aerospace and Electronics operating unit and the 
Boeing Defense and Space Group." 

Is this the company that is best equipped to lead the Space Sta- 
tion out of its management morass? Government contractors should 
be held to high standards of performance, to cost control, to integ- 
rity, to disclosure, and to competence. 

We look forward to the testimony of DCAA and of NASA as we 
continue to examine whether additional administrative and/or stat- 
utory reforms are needed to address seemingly chronic problems 
suffered by major publicly held government contractors. NASA it- 
self recognizes that its contractors must do better if the Space Sta- 
tion is to survive. 

We look forward to our hearings today and hearing from persons 
interested in the matter and able to give answers to the committee 
which might be helpful in a thoughtful review of contractor per- 
formance, contractor reporting, and contractor disclosure. 

The committee is delighted to have the opening statement now 
of our dear friend from Colorado, Mr. Schaefer. 

Mr. Schaefer. Thank you, Mr. Chairman. 

I do appreciate the work that you and the subcommittee staff 
have done. This investigation has brought to light a lot of problems 
that this Congress should be looking at. 

The management of contractors by the government agencies for 
which they work has been a long-standing subject for this sub- 

committee is scrutiny. In the 1980's, the subcommittee examined 
the problems that the DOD experienced in managing its contrac- 

In 1992, the subcommittee examined how well the Environ- 
mental Protection Agency managed its contractors, and last year 
the subcommittee focused on a contractor management effort at 

Today the subcommittee looks at yet another agency's problems 
with managing its contractors, the National Aeronautics and Space 
Administration, or NASA. A recent audit by the DCAA disclosed 
that NASA's 10 top contractors have serious deficiencies in their 
business management systems. 

These systems, as presently being operated, are incapable of gen- 
erating reliable cost performance reports, which are the basis for 
NASA's ability to assess the cost and progress of its programs. 

But the contractor deficiencies run much deeper. The DCAA 
found that the contractors' business systems were incapable of, 
number one, measuring cost performance; two, maintaining a base- 
line; three, conducting variance analyses; and four, of generating 
reliable estimates to complete. 

The contractors' business systems could not tell them, or NASA, 
whether the projects were where they ought to be, given the time 
and the money spent on them. In congressional terms, these defi- 
ciencies mean that Congress needs to be very wary of NASA esti- 
mates of costs and of completion dates, since these numbers are not 
being generated accurately or reliably. 

The performance of NASA's flagship program, the Space Station, 
suggests just what effects these deficient management systems 
have had. NASA has spent a little over $11 billion on the Space 
Station which was estimated to cost the U.S. about $8 billion when 
first proposed to Congress. 

The Space Station is now in its seventh redesign and things got 
so bad in 1993 that NASA totally restructured the program and re- 
placed a principal contractor. Now after having spent $11 billion, 
NASA tells Congress that we need to spend an additional $7 billion 
to complete it. 

Until better business management systems are in place, all of 
these figures are little better than "guesstimates." 

Mr. Chairman, contract management is not the most glamorous 
of oversight activities, but it is one of the most necessary to ensure 
that the American taxpayers get full value for their hard-earned 

I commend you and the staff. Minority and Majority, for holding 
this hearing today and look forward to working with you to ensure 
that government dollars spent on contractors return the value that 
we certainly do expect. 

I yield back the rest of my time, Mr. Chairman. 

Mr. DiNGELL. The Chair thanks the gentleman. 

The Chair recognizes the distinguished gentleman from Texas, 
although he is not a member of the committee, we will permit him 
to make an opening statement — I am sorry, the Chair is going to 
recognize members of the committee first. 

The gentleman from Texas, Mr. Barton. 

Mr. Barton. I would be happy to yield to my distinguished 
friend from Texas, Mr. Hall. 

Mr. DiNGELL. The Chair recognizes the gentleman. The Chair is 
proceeding by the rules. 

Mr. Barton. Mr. Chairman, I appreciate the opportunity to par- 
ticipate in the hearing. I think it is an important hearing. 

The Space Station is an important scientific venture for this Na- 
tion and the world. Obviously we want all the contractors and 
prime contractors to spend the taxpayers' dollars wisely and appro- 

I think there are some concerns that there may not have been 
adequate oversight of their activities. That is why we would like to 
hear from DCAA and NASA themselves. 

At the appropriate tim.e, I will ask a series of questions. I appre- 
ciate the opportunity to be here this morning. 

Mr. DiNGELL. Mr. Brown. 

Mr. Brown. I have no opening statement, Mr. Chairman. Thank 

Mr. DiNGELL. The Chair recognizes the gentlewoman from Penn- 

Ms. Margolies-Mezvinsky. Thank you, Mr. Chairman and 
thank you for conducting these hearings this morning. 

I am concerned with the budget and financial control systems in- 
volving the Space Station and I am very concerned with the seem- 
ing disregard of taxpayers' dollars with regard to the Space Station 
project. We have now spent $11 billion and what do we have to 
show for it? 

I support the goals of the scientific community to keep the Unit- 
ed States a world leader in scientific research and exploration and 
I believe that work on the Space Station may result in spin-off new 
technologies. However, I do think that plans and funding for the 
station must be reviewed in light of our current deficit crisis and 
we must become more fiscally responsible. 

It is my hope that we can work to continue the advancements of 
research and exploration in the scientific community, but in a fis- 
cally sound and responsible way. 

Thank you. I yield back the balance of my time. 

Mr. DiNGELL. The Chair thanks the gentlewoman. 

Although the gentleman from Texas is not a member of the sub- 
committee, we will under the rules exercise discretion of the Chair 
and permit him to be recognized for an opening statement. 

Mr. Hall. I prefer someone be recognized that may be a member 
of the committee. 

Mr. DiNGELL. We have recognized everyone here that is a mem- 
ber of the subcommittee. 

Mr. Hall. Mr. Chairman, while I am not a member of the Over- 
sight and Investigation Subcommittee, I thought that it would be 
somewhat important that I participate in today's hearings. 

As you know, I serve as chairman of the Space Subcommittee on 
the Committee on Science, Space, and Technology with jurisdiction 
over NASA space projects. The Space Subcommittee has taken its 
oversight of NASA's programs very seriously, and in particular, has 
devoted significant attention to the need for procurement reform 
and better cost management at NASA. 

Over the last 5 years alone, the subcommittee has held at least 
5 hearings on NASA procurement reform, contract management is- 
sues, and potential Space Station overruns, in addition to specific 
hearings on the Station program and on the budget. 

The subcommittee has also developed legislation to address 
major contracting and procurement issues and has pushed the chief 
financial officer for the space agency. I believe all the activities 
have helped strengthen NASA's accountability to the American tax- 
payer and that is the importance — and certainly I recognize that 
the chairman knows and believes and has always practiced that ac- 
countability to the American taxpayer is number one, not for just 
your oversight committee, but for your leadership in the Energy 
and Commerce Committee and here in the Congress. 

I think that accountability needs to be by the contractors, by 
NASA. Also we need to be accountable, for example, FBI stings. We 
had a leak there that there was massive criminal kickbacks, astro- 
nauts were involved. It turned out they spent better than $2 mil- 
lion investigating and so far only one or two little guys that I know 
of have been prosecuted. 

One I think put the arm on a contractor for a job for some of his 
relatives. So I think we need to look and be accountable for the ex- 
penditure of taxpayer money on some of these audits. 

In fact, the topic of today's hearing, the adequacy of contractor 
cost reporting on the Space Station program, was examined in 
great depth by the Space Subcommittee just last year. One of the 
subcommittee's hearings clearly identified the limitations of the 
Form 533s in tracking and projecting Space Station costs, and 
highlighted the need for some reforms in NASA's contract monitor- 
ing, and also the need for an independent cost analysis capability 
to address the reasonableness of program cost estimates. 

While I would in no way minimize the findings, I don't believe 
there is any major Federal program for which similar problems 
could not be uncovered. 

I guess, Mr. Chairman, what I wanted to say was the sub- 
committee has taken the problems identified in the Space Station 
program seriously and while we don't pretend to be the only ones 
who can make such an investigation, in the intervening months, we 
have been tracking NASA's progress and responding to their con- 
cerns as the Space Station redesign effort has proceeded. I think 
NASA is making progress, but I and other members of the sub- 
committee will continue to push NASA to implement all the needed 

At a later time, I may go into the fact that we have introduced 
and passed legislation out of the House for independent cost assess- 
ments and I was informed of H.R. 2200 and I think H.R. 4800, 
which was marked up last week. 

I appreciate the chairman allowing me to make this opening 

Mr. DiNGELL. The Chair thanks the gentleman. 

The Chair announces that the first panel of witnesses is Mr. Mi- 
chael J. Thibault, Assistant Director, Policy and Plans, DCAA, 
Cameron Station, Alexandria, Virginia; accompanied by Michael S. 
McConnell, Branch Manager of the Houston Branch Office. 


Mr. Thibault, I am sure you and Mr. McConnell are aware of the 
fact that this committee receives testimony of all witnesses under 

Do you have objection to testifying under oath? 

Mr. Thibault. No, sir. 

Mr. DiNGELL. It is the right of each of you to be advised by coun- 

Do you so desire? 

Mr. Thibault. No, sir. 

Mr. DiNGELL. Copies of the rules of the subcommittee and the 
committee and the House are at the witness table to advise you of 
your rights during your appearance here and limitations on the 
powers of the subcommittee. 

Gentleman, please each raise your right hand. 

[Witnesses sworn.] 

Mr. DiNGELL. You may each consider yourself under oath. 

Gentlemen, please be seated. The Chair will be delighted to re- 
ceive such statement as you choose to give. 

Mr. Thibault, you have been before the subcommittee before and 
have been of considerable assistance to us and we appreciate the 
assistance that you are affording us today. I would note that you 
have assisted us on the inquiries that the subcommittee made in 
contractor performances at Stanford and also on the 
superconductor, which was a rather interesting and perhaps enter- 
taining matter. 

We are delighted to have you before us today and welcome you 
with our thanks for your past performance. 

Mr. Thibault. Thank you, Mr. Chairman. 

If it is acceptable, I would request that my entire statement be 
entered into the record and I would like to simply highlight several 
aspects of that statement. 

Mr. DiNGELL. That would be appropriate and, without objection, 
so ordered. 


Mr. Thibault. Mr. Chairman and members of the subcommittee, 
you have requested that I testify today on the Defense Contract 
Audit Agency's budgeting and financial control audits of 10 major 
contractors of the NASA Johnson Space Center. I will discuss the 
background of the audits, the common system deficiencies found 
among the 10 contractors working at Johnson Space Center, their 
audit recommendations for improvement, and contractor comments. 

The NASA Johnson Space Center, already the mission control 
center for the space shuttle flights, has recently been named the 
host NASA center for the International Space Station Alpha. In ad- 
dition to this effort, the Johnson Space Center awards research and 
development-type contracts, engineering design and maintenance 
and support contracts, logistics support contracts for other NASA 
programs, and contracts for the Johnson Space Center operations 
and functions which support NASA's mission and programs such as 
security and quality assurance. 

Other than the Space Station contracts, most contracts are level- 
of-effort contracts, which call for providing a certain number of 
hours of effort in a particular task area. 

To provide NASA management with an effective evaluation of 
contractor cost performance, NASA designed and implemented the 
NASA contractor Financial Management Reporting System, com- 
monly called the NASA 533 report. Procedures for completing the 
NASA Form 533 are contained in the NASA Handbook. 

Improperly completed Form 533 reports may result in an erro- 
neous measure of contract performance progress and a failure to 
appropriately estimate the full cost needed for contract completion. 
Hence, it is vital that contractors' budgetary systems are adequate 
within their own organizations and that these systems operate effi- 
ciently and effectively. 

The Houston Branch Office of the DCAA has cognizance of the 
contract audit activities for contractors performing at NASA John- 
son Space Center, Houston, Texas. As a part of the branch office's 
comprehensive audit of these contractors, auditors reviewed the 
budgeting and financial control systems of the 10 largest contrac- 

Two of the contractors, IBM and McDonnell Douglas, had major 
contracts on the Space Station program valued at a total of over 
$5 billion and the other contractors have had significant engineer- 
ing services contracts at the Space Center. 

The audits were performed to evaluate the effectiveness of over- 
all budgeting and financial controls of government contract costs. 
These budgetary audits necessarily utilized the NASA Form 533 
reports that the 10 contractors had submitted to NASA as part of 
their contract performance reporting requirements. The audits cov- 
ered contractor operations for the fiscal year ended 31 December 

In summary, the audits of the 10 major Johnson Space Center 
contractors found that the contractors' budgetary and financial con- 
trol systems and the required NASA Form 533 reports do not effec- 
tively identify or prevent cost growth. The causes for contractors' 
failure to identify or prevent cost growth are: One, contractors do 
not perform a bottoms-up estimate-to-complete, or what is referred 
to as ETC. 

Two, contractors do not analyze or explain cost overruns through 
techniques such as detailed variance analysis. 

Three, contractors do not accurately report contract values or 
baselines. Contractors are commingling authorized, negotiated con- 
tract baselines with undefmitized cost estimates which are not ade- 
quately supported or are not authorized in some instances. 

Four, contractors do not obtain written authorization from the 
contracting officer for significant portions of costs prior to incurring 
the costs. 

Five, contractors do not have internal controls to effectively mon- 
itor and prevent inefficiencies at contract worktask levels or to re- 
duce or prevent unnecessary or unreasonable costs from being in- 
curred. Contractors also do not perform adequate reviews of staff- 
ing or utilization of equipment and facilities. 

We believe that there is significant financial risk to NASA John- 
son Space Center programs, if contractors' budget and financial 


control systems, and the related contractor reporting on NASA 
Form 533, are left unchanged. 

Audit recommendations to correct the system deficiencies found 

One, all contractors should establish detailed budgets and con- 
tract baselines from which to monitor and control costs. 

Two, contract baselines, which are first established upon award 
of a contract, should only be changed if the specific contract scope 
of work is changed and contractually modified. 

Three, cost growth should be estimated by the contractor and au- 
thorized under the contract prior to incurrence. Cost growth pro- 
posals should be based on detailed budget analyses by contractors 
which adequately support the need for additional funds. 

All contractors should perform an accurate percentage of comple- 
tion and estimate to complete for each major worktask in process 
and provide such information to NASA on the Form 533 reports. 

The lead or prime contractors for the Space Station Program and 
the Space Shuttle Operations should be held accountable for the ac- 
curacy of subcontractors' NASA Form 533 reports. 

Finally, contractors should become more proactive in the man- 
agement of contract costs. Contractors should be involved in cost 
reduction efforts and ensure that the government is not being 
billed for any unnecessary or unreasonable costs. 

In general, the 10 contractors' reactions to the reported system 
deficiencies ranged from concurrence to outright dismissal. 

Most contractors attributed the audit findings to compliance with 
contracting officer direction. Several contractors expressed a will- 
ingness to implement strengthened budgetary and financial control 
systems, if the customer, NASA Johnson Space Center, believed 
there would be a benefit. 

It is our opinion that all contractors should have policies and pro- 
cedures which would ensure that NASA Form 533 reports are 
being consistently and accurately prepared. While most of the con- 
tractors concurred in general with this objective, the new Space 
Station contract provides an opportunity to strengthen the contrac- 
tors' budgetary systems and establish work order baselines from 
which to monitor, review, and report costs. 

DCAA will continue to test and report on the contractors' sys- 
tems and the accuracy of the contractors NASA 533 performance 
measurement reports. If the contractors fail to make acceptable 
progress in resolving the reported system deficiencies, contractual 
remedies should be considered, such as withholdings on public 
vouchers or disallowance of cost. 

Mr. Chairman, this concludes my statement. I am happy to an- 
swer any questions that you or members of this subcommittee may 

[The prepared statement of Mr. Thibault follows:] 

Prepared Statement of Michael J. Thibault, Assistant Director, Policy and 
Plans, Defense Contract Audit Agency 

Mr. Chairman and members of the Subcommittee. You have requested that I tes- 
tify today on the Defense Contract Audit Agency's (DCAA) budgeting and financial 
control audits of ten major contractors of the National Aeronautics and Space Ad- 
ministration (NASA) Johnson Space Center. I will discuss the background of the au- 
dits, the common system deficiencies found among the ten contractors working at 


Johnson Space Center, audit recommendations for improvements, and contractor 

The NASA Johnson Space Center, already the Mission Control Center for the 
Space Shuttle flights, has recently been named the host NASA center for the Inter- 
national Space Station Alpha. In addition to this effort, the Johnson Space Center 
awards research and development type contracts, engineering design and mainte- 
nance and support contracts, logistic support contracts for other NASA programs, 
and contracts for the Johnson Space Center operations and functions which support 
NASA's mission and programs such as security and quality assurance. Other tnan 
the Space Station contracts, most contracts at Johnson Space Center are level-of- 
effort contracts, which call for providing a certain number of hours of effort in a par- 
ticular task area. 

To provide NASA management with an effective evaluation of contractor cost per- 
formance, NASA designed and implemented the NASA contractor Financial Man- 
agement Reporting System, commonly called the NASA 533 report. Procedures for 
completing the NASA Form 533 are contained in the NASA Handbook. The Hand- 
book, published in 1985, is provided to all NASA project managers and contractors 
for the administration of the Contractor Financial Management Reporting System. 
Contract cost data is submitted in a standard format for most contracts on a month- 
ly or quarterly basis, and is used by NASA to plan, monitor, and control the re- 
sources available through its awarded contracts. 

The Form 533 NASA reports, along with the other required technical and sched- 
ule reports, are to provide NASA Project Managers the data necessary for evaluat- 
ing contractor cost performance. In addition, >fASA uses the data for establishing 
the basis for its accrued revenue and expenditure accounting system. Improperly 
completed Form 533 reports may result in an erroneous measure of contract per- 
formance progress and a failure to appropriately estimate the full costs needed for 
contract completion. Hence, it is vital that contractors' budgetary systems are ade- 
quate within their own organizations and that these systems operate efficiently and 
effectively. Without adequate budgetary systems, contractor cost performance can- 
not be accurately determined or reported, nor can contract cost growth be identified 
soon enough to allow for timely implementation of corrective measures. Accordingly, 
NASA's missions may not be accomplished in the most efficient and cost effective 

The Houston Branch Office of the Defense Contract Audit Agency has cognizance 
of the contract audit activities for contractors performing at the NASA Johnson 
Space Center, Houston, Texas. As a part of the Branch Officers comprehensive audit 
of these contractors, auditors reviewed the budgeting and financial control systems 
of the 10 largest contractors. These were IBM Corporation, Unisys Systems Corpora- 
tion, McDonnell Douglas Aerospace Space Station Division, Allied-Signal Technical 
Services Corporation, Lockheed Engineering & Science Company, Barrios Tech- 
nology Incorporated, Loral Aerospace Corporation, Rockwell Space Operations Com- 
pany, CAE-Link Corporation, and Boeing Aerospace Operations Company. Two of 
the contractors, IBM and McDonnell Douglas had major contracts on the Space Sta- 
tion program valued at a total of over $5 billion and the other contractors have had 
significant engineering services contracts at the Space Center. 

The audits were performed to evaluate the effectiveness of overall budgeting and 
financial controls of Government contract costs. These budgetary audits necessarily 
utilized the NASA Form 533 reports that the ten contractors had submitted to 
NASA as part of their contract performance reporting requirements. The audits cov- 
ered contractor operations for the fiscal year ended 31 December 1993. 

In summary, the audits of the ten major Johnson Space Center contractors found 
that the contractors' budgetary and financial control systems and the required 
NASA Form 533 reports do not effectively identify or prevent cost growth. The 
causes for contractors' failure to identify or prevent cost growth are: 

(1) Contractors do not perform a bottoms up estimate-to-complete (ETC). A de- 
tailed E'TC based on documented percentage of completion analysis on major 
worktasks in contractually required under the old and new Space Station contracts. 
Nevertheless, McDonnell Douglas, the prime contractor for the old Space Station 
Freedom contract, did not perform this contractual requirement but instead often 
used the available funding as an ETC rather than making a true projection of the 

Most level-of-effort contractors, such as Lockheed, merely report summary level 
data that computes an ETC by subtracting the incurred contract costs to date from 
the award target costs. There is no detailed estimate of the true costs to complete 
the contract tasks. 

(2) Contractors do not analyze or explain cost overruns through techniques such 
as detailed variance analysis. McDonnell Douglas for instance indicated that its per- 


formance measurement system was only operational for 39 of the 73 months of the 
period of performance. Contractors provide only summary explanations in NASA re- 
ports which do not provide sufficient information to determine the causes of the 
overruns and allow for corrective action. 

(3) Contractors do not accurately report contract values or baselines. Contractors 
are commingling authorized, negotiated contract baseline with undefinitized cost es- 
timates which are not adequately supported or are not authorized in some in- 
stances. These inflated contract baselines tend to equal their estimates at comple- 
tion, thus masking any overrun on portions of the contract that have been nego- 
tiated. For example, there was $2 billion in undefinitized value on the McDonnell 
Douglas Space Station contract which was reported to NASA in the contract base- 
line while the contract was active. The contract was terminated as of 19 November 
1993. The subcontract termination settlement proposal from IBM included approxi- 
mately $84 million of the undefinitized costs plus additional fee of $7.7 million. The 
amounts for the prime contractor, McDonnell Douglas, will not be known until 
McDonnell Douglas submits its termination proposal. That is not expected until 
after the IBM audit and negotiations are completed. 

(4) Contractors do not obtain written authorization from the contracting officer for 
some costs prior to incurring the costs. 

(5) Contractors do not have internal controls to effectively monitor and prevent 
inefficiencies at contract worktask levels or to reduce or prevent unnecessary or un- 
reasonable costs from being incurred. Contractors also do not perform adequate re- 
views of staffing or utilization of equipment and facilities. 

We believe that there is significant financial risk to NASA Johnson Space Center 
programs, if contractors' budget and financial control systems, and the related con- 
tractor reporting on NASA Form 533, are left unchanged. 

Audit recommendations to correct the system deficiencies found include: 

(1) All contractors should establish detailed budgets and contract baselines from 
which to monitor and control cost. 

(2) Contract baselines, which are first established upon award of a contract, 
should only be changed if the specific contract scope of work is changed and contrac- 
tually moaified. 

(3) Cost growth should be estimated by the contractor and authorized under the 
contract prior to incurrence. Cost growth proposals should be based on detailed 
budget analyses by contractors which adequately support the need for additional 

(4) All contractors should perform an accurate percentage of completion and esti- 
mate to complete for each major worktask in process and provide such information 
to NASA on the Form 533 reports. 

(5) The lead or primary contractors for the Space Station Program and the Space 
Shuttle Operations should be held accountable for the accuracy of subcontractors' 
NASA Form 533 reports. 

(6) Contractors should become more pro-active in the management of contract 
costs. Contractors should be involved in cost reduction efforts and ensure that the 
Government in not being billed for any unnecessary or unreasonable costs. 

In general, the ten contractors' reactions to the reported system deficiencies 
ranged from concurrence to outright dismissal. 

Most contractors attributed the audit findings to compliance with contracting offi- 
cer direction. Several contractors expressed a willingness to implement strengthened 
budgetai"y and financial control systems, if the customer, NASA Johnson Space Cen- 
ter, oelieved that there would be a benefit. 

The prime contract for the newly revamped Space Station Program was recently 
awarded to a now contractor, Boeing Aerospace Operations Company. The contrac- 
tor was asked to respond to the summary audit findings and recommendations. 
Boeing's comments were: 

(1) Boeing agreed that they will in the future provide a detailed budget and base- 
line established to monitor and control costs. 

(2) Boeing agreed that the baseline should not change unless a specific contract 
scope of work is changed and contractually modified. 

(3) Boeing agreed that cost efficiencies and the correction of inefficiencies should 
be put in place prior to incurrence of costs. However, costs associated with preparing 
documentation in a budgetary analysis process may offset any benefit received and 
therefore must be considered. 

(4) If NASA believes that performing a percentage of completion estimate for each 
major worktask performed would be beneficial, Boeing will comply. 

It is our opinion that all contractors should have policies and procedures which 
would ensure that NASA Form 533 reports are being consistently and accurately 
prepared. While most of the contractors concurred in general with this objective, the 


new Space Station contract provides an opportunity to strengthen the contractors' 
budgetary systems and estabUsh work order baseUnes from which to monitor, re- 
view, and report costs. 

DCAA will continue to test and report on the contractors, systems and the accu- 
racy of the contractors' NASA 533 performance measurement reports. If the contrac- 
tors fail to make acceptable progress in resolving the reported system deficiencies, 
contractual remedies should be considered, such as withholdings on public vouchers 
or disallowance of cost. 

Mr. Chairman, this concludes my statement. I am happy to answer any questions 
that you or the members of the Subcommittee may have. 

Mr. DiNGELL. Mr. McConnell do you have any comments you 
would like to make at this time? 

Mr. McConnell. No, sir. 

Mr. DiNGELL. The Chair recognizes members for questions begin- 
ning first with the gentleman from Colorado, Mr. Schaefer. 

Mr. Schaefer. Thank you, Mr. Chairman. 

Mr. Thibault, your audit has identified a number of deficiencies 
in the business system used by NASA's 10 largest contractors. A 
skeptic might say "So what? DCAA didn't identify anything illegal 
going on. What difference does it make whether NASA contractor 
business systems are adequate or not as long as the hardware 

Explain to us in layman's terms why these business management 
system deficiencies should matter to NASA, to Congress, and to the 
American taxpayers. 

Mr. Thibault. The absence of effective management and finan- 
cial control systems greatly increases the risk of either unidentified 
or disguised contractor cost growth or overruns occurring without 
appropriate government oversight in that situation. And the ab- 
sence of these controls which are critical to that government over- 
sight and the government visibility of cost growth simply makes 
the government's oversight job extremely difficult if not impossible. 

Mr. Schaefer. The American taxpayer should care because these 
systems are part of the effort to ensure that the tax dollars are 
spent wisely and that one contractor is not duplicating the work of 
another; is that correct? 

Mr. Thibault. Yes, sir. 

Mr. Schaefer. I understand that DCAA informed the 10 NASA 
contractors that they were the subject of the audit, and about 
DCAA's audit plans in the fall of 1992. Did the contractors make 
any request that DCAA found unusual? 

Mr. Thibault. When we first made the request, probably the 
only thing that was unusual was that the contractors asked for an 
extended period of time to prepare for the audit. 

Mr. Schaefer. All of them? All 10 or some of the 10 or what? 

Mr. Thibault. Virtually all, sir. Typically, there is no specific 
norm, but usually within 30 days from the time we hold an en- 
trance conference contractors provide requested information nec- 
essary to establish the procedures and practices in place. In this 
particular case, these contractors generally asked for 4 or 5 months 
delay in order to gather this data in order to sufficiently prepare 
for the audit, expressing that it was an important audit and there- 
fore they needed the time. 

Mr. Schaefer. Did DCAA ask the contractors for any data or 
documents that they weren't required to keep? In other words, did 


DCAA ask the contractors to generate otherwise unrequired con- 
tracts or data? 

Mr. Thibault. No, sir, that was not our intent. That is why it 
was unusual in the sense that we were asking for the support and 
the procedures and documentation surrounding the NASA 533 re- 
ports, cost performance measurement and management reports, in- 
formation that typically we would anticipate to receive in a very 
short turnaround. 

Mr. SCHAEFER. If I am getting this right, the time lag was ex- 

Mr. Thibault. Yes, sir. From an audit risk viewpoint, it raises 
questions as to why it would take so long when it is a simple re- 
quest for the supporting documentation to support the periodic re- 
ports, typically monthly or quarterly, that the NASA Form 533's 
that are submitted to the customer or to the prime contractors. 

Mr. SCHAEFER. Does the difficulty that the contractors experi- 
enced in meeting the DCAA request for documents, even with 4 
months notice, suggest certain deficiencies in their business man- 
agement systems? 

Mr. Thibault. Yes, sir. It suggests certain deficiencies. It raises 
a question, if you ask a contractor to provide support for its budget- 
ing and financial forecasting systems and they can't generate that 
support for a substantial period of time. Then if you also find out 
there is minimal support for it, it certainly does raise those ques- 
tions, yes, sir. 

Mr. SCHAEFER. Did IBM flat out refuse to provide DCAA with 
the information requested about the management expenses, bo- 
nuses and work fees? 

Mr. Thibault. Yes, sir. One of the information requests that we 
asked all 10 contractors for was information supporting the award- 
ing of executive or management bonuses as well as background in- 
formation on fees. Nine of the 10 contractors provided it. One of the 
10 contractors, IBM, denied that request. 

Mr. DiNGELL. Would the gentleman yield? Denied you or did it 
deny NASA? 

Mr. Thibault. They denied us, sir, and we worked with NASA 
to obtain the data. Obviously denial of information that is nec- 
essary to establish fair and reasonable costs that are being claimed, 
paid, vouched, billed, is a very significant event. 

Mr. DiNGELL. So they refused to deliver the information to you. 

Mr. Thibault. Yes, sir. 

Mr. DiNGELL. Did they refuse to deliver the information to NASA 

Mr. Thibault. That is our understanding. We asked NASA for 
assistance and it was our understanding that NASA was also de- 
nied by IBM. I would prefer that question be directed to NASA offi- 

Mr. DiNGELL. I wonder if IBM would be more cooperative with 
the committee. 

Mr. Thibault. I don't know, sir. We have taken our run at it and 
will continue to take our run at it, trying to work with NASA to 
obtain the information. 


Mr. DiNGELL. If you don't receive the information quickly, would 
you please inform us so we can provide the necessary compulsory 
process to ensure the cooperation? 

Mr. Thibault. We will do that. We will document that request 
one more time and if we are unsuccessful, we will notify the com- 

Mr. DiNGELL. Don't request it too many times and don't request 
it too nicely. 

Mr. SCHAEFER. To follow up, Mr. Chairman, in short then, IBM 
refused to provide the government auditors with information about 
what our government was paying to do? 

Mr. Thibault. Yes, sir, information necessary in our opinion to 
verify that the costs were proper and allowable. 

Mr. SCHAEFER. Did IBM offer DCAA justification for its refusal? 

Mr. Thibault. Mike McConnell, who is our branch manager will 
answer that question? 

Mr. ScHAEFER. Was there a reason? 

Mr. McConnell. It was indicated that this was proprietary in- 
formation that they chose not to give out. 

Mr. Schaefer. Why would it be proprietary? 

Mr. Thibault. We would not believe it at all to be proprietary 
and that is calling it like it is, a bit of a weak reason. 

Mr. Schaefer. This is very interesting, Mr. Chairman. Is this 
the only one that refused? 

Mr. Thibault. Yes as far as providing the information. Nine out 
of the 10 did not think it was proprietary and in a reasonably time- 
ly manner, provided that support. 

Mr. Schaefer. Based on that and your audit, is NASA getting 
full value for the money it pays its contractors to maintain the 
business systems? 

Mr. Thibault. Certainly in terms of the costs that are being paid 
for the performance management systems, I think the answer 
would have to be no, because the systems aren't working as in- 
tended or as prescribed by NASA policy guidelines. 

Mr. Schaefer. We are talking about millions of dollars here. 

Mr. Thibault. Yes, sir. In fact in the area of performance and 
award fees alone, we are talking of approximately — I have that 

Mr. Schaefer. I have been told it is approximately $60 million 
or thereabouts. 

Mr. Thibault. Yes, sir. Actually, the total for management costs, 
bonuses and fees for all of NASA on these 10 contractors we re- 
viewed at Johnson Space Center is $127 million for that portion of 
it. The IBM portion is smaller, but that is not included in that 
total. We don't have access to all of the supporting data. 

Mr. Schaefer. Is there any chance that NASA could recover 
some of this money to pay for maintenance of these defective sys- 

Mr. Thibault. One of the issues that I addressed in my state- 
ment, is there are substantial portions of the work at virtually 
most of these large contractors that is for unauthorized or 
undefmitized work. In other words, there haven't been specific con- 
tracts awarded or identified or modifications identified. 


We are in the process of an audit at IBM in order to establish 
from an audit perspective the amount of that related to IBM's ter- 
mination. That includes all costs and not just management fee. 

Mr. SCHAEFER. Since NASA recognized the deficiencies of its con- 
tractors' management systems, what effect did these deficiencies 
have on the award fees that NASA then gave its contractors? 

Mr. Thibault. Well, the award fees in our opinion should be 
based on performance. As far as the actual award fees being made 
and the criteria for them, I am not in a position to specifically iden- 
tify what criteria we used to establish that award fee, sir. 

Mr. SCHAEFER. Do you think that NASA should consider revising 
its award fee system to weigh the business management systems 
more heavily? 

Mr. Thibault. Yes, sir. We would agree. It is our understanding 
the portion of the award fee that relates to financial management 
is very small presently. We would be in support of any action on 
the part of NASA to put a more substantial weight on that due to 
the importance of identifying cost growth or cost overruns in a 
timely manner in order to be able to take appropriate actions. 

Mr. ScHAEFER. I understand that DCAA reviewed its draft audit 
findings with NASA and with the individual contractors. How did 
the contractors respond? 

Mr. Thibault. The contractors ran the complete range from in 
one case, one of the worst responses I have seen in my career, to 
fairly proactive and positive responses. 

Mr. ScHAEFER. What was the worst response? 

Mr. Thibault. We had a response from Unisys and again you 
have to understand that many of these same findings were found 
at each of the 10 locations, so you would anticipate some consist- 

However, in the case of Unisys, to highlight a portion of the re- 
sponse, the individual that responded, a Unisys executive, said, 
"This is the single most negative and flawed report that I have en- 
countered in my career. It is inaccurate, unfair, incomplete, mis- 
leading, unsupported, overexaggerated, unbalanced," and it goes 
on. So it is not the kind of a response that typically engenders a 
positive working relationship. 

Mr. SCHAEFER. I understand. 

One final question. What about IBM? 

Mr. Thibault. IBM acknowledged in their response agreement 
with certain of the areas. They were typical of many of the contrac- 
tors I believe, and that is they indicated that if the customer, 
NASA, believed it was necessary to make the recommended im- 
provements that they would make them. 

Mr. SCHAEFER. Thank you. 

Mr. DiNGELL. Mr. Brown. 

Mr. Brown. Thank you, Mr. Chairman. 

Mr. Thibault, did your review include contractors such as IBM 
and Bendix and Unisys and Boeing and McDonnell Douglas? 

Mr. Thibault. Yes, sir. 

Mr. Brown. What is a NASA Form 533? 

Mr. Thibault. The Form 533 is the primary part of the financial 
management system which is used to assess contractor perform- 
ance and report on performance, and it includes progressing on the 


particular contract and it is used to manage cost performance 
growth and reporting, sir. It really is the central document that is 
used for financial management purposes. 

Mr. DiNGELL. Would the gentleman yield? 

Is any of that proprietary information? 

Mr. Thibault. Not in terms of anjrthing that we have encoun- 
tered. I would think an organization may look at it internally as 
somewhat proprietary, but not in terms of access to government 
oversight officials. 

Mr. DiNGELL. You referred to one contractor that refused to 
make available information either to you or to NASA. I wonder; did 
they claim that any of that information was proprietary? 

Mr. Thibault. Michael made the point that that was one of the 
reasons they gave, that it was proprietary. They among the 10, 
were the only ones who made the point. 

Mr. DiNGELL. Should any of that information be in the 533 re- 

Mr. Thibault. In terms of the bonuses, it would have been in- 
cluded within the costs because these were reimbursed costs that 
are part of the overall contract costs; so certainly it would be. 

Mr. DiNGELL. How would this be proprietary in character? 

Mr. Thibault. We don't believe it could be proprietary. 

Mr. DiNGELL. Let's stretch our imagination and try to under- 
stand how it would have been proprietary. 

Mr. Thibault. If an individual was paid an employee bonus for 
contract performance, an individual by name was provided — let's 
state a figure, $5,000 for timely delivery or early delivery of a prod- 
uct under budget 

Mr. DiNGELL. Is that proprietary? 

Mr. Thibault. We certainly wouldn't believe that it would be 
proprietary in terms of not providing access to the government, no. 
We would take the view that the normal access provisions, in fact, 
cover information necessary to perform our audit responsibility. 

Mr. DiNGELL. Thank you. 

Mr. Brown. Were the contractors you mentioned complying 
with — all those that you said you had reviewed — were they comply- 
ing with NASA's cost performance reports? 

Mr. Thibault. No, sir. 

Mr. Brown. None of them. 

Mr. Thibault. No, sir. At various levels, there were significant 
deficiencies recurring for all of them, such as all 10 contractors had 
not properly completed the NASA Form 533. For all 10 contractors, 
the estimates to complete that I referenced earlier had improper 
estimates to complete. All 10 contractors, in our opinion, were per- 
forming inadequate or nonexistent analysis of direct and indirect 

Nine out of 10 contractors, or all 10 contractors we believe had 
inadequate controls over bonuses and awards. Inadequate controls 
over downtime and idle time existed at 9 out of 10. We have a se- 
ries, we could furnish you a summary, that range from only 5 or 
6 organizations versus all 10 for a rather long list of deficiencies. 

Mr. DiNGELL. If the gentleman would permit, would you submit 
that for the record? 

Mr. Thibault. Yes, sir. 


[The following information was received.] 

NASA Johnson Space Center Major Contractors 

[Budget System Deficiencies Summary] . 

^^^--^ cS:/s 

NASA Form 533 not properly completed 10 

Inadequate formal written policies/procedures on completion of NASA 533's/budgets 8 

Noncompliance with formal written procedures 5 

Improper estimate-to-completed 10 

Inadequate audit trail from NASA Form 533 to a specific work break structure 5 

Unauthorized/unnegotiated cost included in reported incurred cost and/or projected estimate-to-complete cost 4 

Delays in recording actual costs 1 

Prime contractor directs subs to improperly complete estimates-to-complete on NASA Form 533s 5 

Subcontractors' data are not incorporated into the prime contractors' NASA Form 533s 2 

Financial budgets differ from operational budgets & NASA Forms 533s 5 

Budgets move with actuals, i.e. adjusted each month/quarter 4 

Actual hours are moved from an overrun work breakdown structure to another 1 

Uncompensated hours not included in estimate-to-complete hours 4 

Untimely update of budgets 1 

Either inadequate or non-existent indirect/ direct analysis 10 

Either inadequate or nonexistent utilization of equipment analysis 8 

Either inadequate or nonexistent utilization of facility analysis 4 

Inadequate controls over bonuses and awards 10 

Inadequate controls over idle time and down time 9 

Mr. Brown. NASA spent more than $11 billion on the Space Sta- 
tion and billions more on other Johnson Space Center projects. 
How do you explain, given the litany you just mentioned of inad- 
equate controls over bonuses and awards, inadequate controls over 
idle and downtime, one after another after another — how do you 
explain, given the level of public funds being expended, that these 
basic problems exist? 

Mr. Thibault. I think it does go back to our position in the audit 
report, that when you have an absence of effective financial man- 
agement and budgetary controls, it gets extremely difficult, if not 
impossible, to manage cost growth effectively. It goes back to the 
principal finding in each of these 10 reports, that is the absence of 
effective financial and budgetary controls by these 10 contractors. 

Mr. Brown. Let me examine a handful of specific contractors. 
IBM was a major subcontractor on the Space Station; correct? 

Mr. Thibault. Yes, sir. 

Mr. Brown. They billed the government for approximately half 
a billion dollars in costs incurred prior to termination of their con- 
tract; is that correct? 

Mr. Thibault. The number is $492 million, but that is essen- 
tially correct, yes, sir. 

Mr. Brown. You conducted an audit of those costs and of the 
$492 million that IBM had incurred, you didn't question more than 
$100 million of that. Could you explain that? 

Mr. Thibault. Yes, sir. We have completed the field work on 
that assignment. We have held the exit conference. IBM is a sub- 
contractor to McDonnell Douglas. There is a total exception that we 
have taken which is $107 million out of the $492 million. 

I might say that we have been informed by the prime contractor, 
McDonnell Douglas, that they intend to ask IBM to resubmit that 
termination because we have also taken the position that IBM sub- 


mitted inadequate cost and pricing data to support the claimed 
costs as well as that the proposal is unacceptable presently for ne- 
gotiating a fair and reasonable price because of the significant defi- 
ciencies associated with that submission. But we found a bottom 
line of $107 million of exceptions that we have briefed to the con- 

Mr. Brown. You said IBM was a subcontractor with McDonnell 
Douglas; correct? 

Mr. Thibault. Yes, sir. That is correct. 

Mr. Brown. There seems to be some employee bonuses that 
might have been excessive. I understand that McDonnell Douglas, 
and in the subcontract with IBM — how did McDonnell Douglas de- 
termine its bonuses? 

Mr. Thibault. Each organization was a little different. McDon- 
nell Douglas, in their case, averaged per employee for each em- 
ployee, that was eligible for a bonus, 3V2 to 4 percent of their base 
salary regardless of performance, individual performance in sup- 
port of contract objectives. 

Mr. Brown. So there was no incentive. Those employees that did 
exceptionally well got the same bonus as those that performed 
much more poorly? 

Mr. Thibault. Yes, sir. What we found was that in virtually 
most cases, the bonuses were not tied to performance on the con- 
tracts for McDonnell Douglas. 

Mr. Brown. Was that the same for Lockheed? 

Mr. Thibault. Yes, sir. Lockheed was a little different in the 
sense that their bonuses were tied to spending on the operating 

Mr. Brown. The more they spent the higher bonus you got? 

Mr. Thibault. That was our concern. 

Mr. Brown. There is no incentive to keep government spending 

Mr. Thibault. That was our concern. 

Mr. Brown. What about Bendix? 

Mr. Thibault. Allied Bendix — theirs was a case where the award 
bonus was based on spending. They are a level-of-effort contractor, 
heavily labor intensive, and their award bonus was based on 
spending at least 92 percent of the level-of-effort funding. If they 
spent at least 92 percent of the level-of-effort funding, they quali- 
fied for a bonus. 

Mr. Brown. Another real incentive to keep government spending 

Mr. Thibault. We were extremely concerned they are not being 
tied to performance on the contract; yes, sir. 

Mr. Brown. What do the Federal Acquisition Regulations allow 
for bonuses? If you would explain that and contrast that with how 
these bonuses were, in fact, decided and liberally handed out by 
those companies. 

Mr. Thibault. Yes, sir. The FAR under that cost principle on 
compensation identifies incentive compensation. I won't read the 
whole thing, but it highlights "incentive compensation should be 
based on production, cost reduction or efficient performance," which 
we are in agreement with. Our concern with the bonuses, as we 


have just now outlined, is that they were not based on production, 
cost reduction or efficient performance in many, if not most cases. 

Mr. Brown. You have completed the Space Station determina- 
tion, the audit for IBM? 

Mr. Thibault. Yes, sir. 

Mr. Brown. You have not completed an audit on McDonnell 
Douglas and others — when will that be? 

Mr. Thibault. We have been informed by McDonnell Douglas 
that once the very large subcontract termination for IBM is com- 
pleted and negotiated, then they will be submitting their termi- 
nation claim. We have not received any of the other termination 
claims. However, I am discussing mainly the Houston Branch of- 
fice's and audit cognizance. Other claims could be received maybe 
at other DCAA locations. 

As far as the Houston Branch, we have no other work load nor 
at this time do we have a specific schedule. 

Mr. Brown. Why does McDonnell Douglas appear to be waiting 
until IBM is finished up, if you will? 

Mr. Thibault. That is a good question. I wouldn't want to specu- 
late for them, but I wouldn't think if they inserted IBM's claim, it 
would matter, even though it has been found inadequate. We have 
been told we may get another submission. If they just put a line 
item in for $492 million to explain the portion that was IBM, it 
would seem to us perfectly appropriate for them to provide that 
submission to NASA for review, but there may be underlying rea- 
sons that possibly NASA could shed light on later. 

Mr. Brown. Apparently there is a preliminary report of 2 weeks 
ago, even though you haven't completed the termination audit for 
McDonnell Douglas, the preliminary report of July 18, identifying 
some significant problems of McDonnell Douglas. You had stated 
the program is experiencing about a $1.5 billion cost variance over- 
run. That is in addition to the problems with the subcontractor 
IBM; correct? 

Mr. Thibault. Yes, sir. 

Mr. Brown. What could you tell us about that? 

Mr. Thibault. The preponderance of that cost is for substantial 
undefinitized work, work which has not been supported by McDon- 
nell Douglas as either definitized or authorized. It hasn't yet been 
audited by DCAA because the work hasn't been identified for audit, 
nor has it been negotiated as part of the definitization of that work. 

Mr. Brown. Thank you, Mr. Chairman. 

Mr. DiNGELL. The gentleman from Texas, Mr. Barton. 

Mr. Barton. Thank you, Mr. Chairman. 

I am a new member of this Oversight and Investigation Sub- 
committee and quite frankly, I haven't participated as fully as I 
should have in some of the other hearings. Having said that, I 
think I bring some expertise to this hearing. 

I am a registered professional engineer. I worked as a cost con- 
trol engineer for a major Fortune 500 company. I helped develop 
and implement a cost estimating system for a multi-billion dollar 
project, and prior to that was a plant manager that had total prof- 
it-and-loss accountability for a printing plant. So I know a little bit 
about cost estimating and tracking and performance review. 


I am also a strong supporter of the Space Station. I come from 
Texas. I have been to Houston a number of times. At one time I 
was on the Science Committee and the Space Subcommittee, but I 
am no longer. So when I come to this hearing, I have mixed feel- 

As a taxpayer, I am absolutely infuriated to read the chairman's 
report and some of your opening statements. On the other hand, 
I strongly believe in the vision of the Space Station and the need 
for the United States to maintain its role in scientific advancement. 

So I really kind of looked at this material. It says here that this 
Form 533 that we keep referring to was designed by NASA and im- 
plemented in 1985 and it is called the Financial Management Re- 
porting System. It says that the procedures for completing this 
form are in the NASA Handbook. 

It also says that the handbook is provided to all NASA project 
managers and contractors for administration of the financial man- 
agement reporting system. If this has been on the books since 
1985, is it just a piece of trash or would it actually work if it were 

Mr. Thibault. I understand that it is used quite effectively in 
NASA and has been for an extended period. You raise an interest- 
ing point about its particular use, a question as far as its applica- 
bility, because there was a question initially in our discussion with 
on-site NASA officials about its applicability, and we were informed 
by them that this handbook was incorrect. They subsequently re- 
tracted that statement and informed us that the handbook, sir, was 

Mr. Barton. I want to be clear on this. The NASA Form 533 
with all the accompanying paraphernalia on how to use it is pri- 
marily a process for use by NASA personnel themselves or is it to 
be given to the contractors for them to use to provide data for 
NASA then to evaluate? 

Mr. Thibault. No, sir. It is cost performance management. It is 
intended to be used by the organization, by the contractors. It is 
subsequently used by NASA. The responsibility for preparing it 
and for maintaining its integrity as a document or as a system is 
the organization, the contractor's. 

Mr. Barton. It was designed to be used by the contractors. This 
was NASA's effort to give them a performance management cost es- 
timating and evaluation tool; is that correct? 

Mr. Thibault. Yes, sir, consistently so that when NASA inter- 
prets the results for multiple locations, they would have consistent 

Mr. Barton. Now, I am a new contractor. I am so excited. I have 
won my first contract with NASA. I really want to get to work. 
How am I educated on how to use this great instrument of per- 
formance reporting? Do I go to a training session here in Washing- 
ton or in Houston or am I sent the manual and some forms and 
say, "Go to it. I hope you have enough sense to figure out how to 
fill them out?" 

Mr. Thibault. A couple of observations and then I am going to 
ask Mike for any perspectives from his actual review. Virtually 
every major contractor has cost performance management systems 


in place. All of these contractors that we evaluated, the 10 largest, 
are sophisticated organizations with the capability established. 

Now as far as specific training on the NASA 533 system, I do not 
know whether or how that is communicated other than procedural 
policy and probably coordination with NASA officials, but I would 
ask Mike if he can provide additional perspective on that. 

Mr. McCONNELL. The information on the 533 is supposed to be 
a reflection of the contractor's specific performance measurement 
system, which is his budgetary system. 

Mr. Barton. I understand what it is supposed to be, but is there 
any real effort to train the contractors in how to provide the infor- 
mation and fill out the forms and use the system? Apparently the 
answer is no. 

Mr. Thibault. As far as the actual training, I can't answer that. 
There is a handbook. 

Mr. Barton. Do they have to pass a test that they have read the 

Mr. Thibault. I can't answer that, sir. 

Mr. Baton. I think that is our first problem. This thing has been 
on the books since 1985. It is 9 years later. This audit of the 10 
prime contractors — was this self-initiated by DCAA? Was it re- 
quested by NASA or did Chairman Dingell or Chairman Brown or 
somebody request that DCAA do this? 

Mr. Thibault. No. We do annualized audit planning based on 
risk. We are aware that significant issues have been addressed and 
raised, not only in our audits, but other reviews. Our reviews are 
founded on an evaluation of internal control systems as established 
by organizations and this was a self-initiated audit by DCAA, by 
Mr. McConnell in his annual audit planning at Houston Branch. 

Mr. Barton. Is that something Mr. MeConnell self-initiates 
every 9 years, or why this year? 

Mr. Thibault. We typically look at internal control systems on 
a cyclical base every 3, 4, or 5 years depending on our knowledge 
of the system. 

Mr. Barton. This is the first time in 9 years or the second time 
in 9 years or the third time in 9 years 

Mr. McConnell. In terms of budgetary and financial systems — 
I came to Houston Branch as the branch manager in 1992, March 
of 1992. Part of my job managing the audits at that location was 
to look for high-risk areas which I felt we should put our available 
audit manpower towards. 

Mr. Barton. So this was a decision that you made as a new 
project manager in this area. You weren't told to make it, you 
didn't have a flow chart saying, "It is 1992. I have to do this." 

You used your initiative saying, "Looks like there is a problem 
here. It hasn't been done in a while. We need to do this." 

You had the authority to do that? 

Mr. McConnell. Yes, sir. 

Mr. Thibault. I might also add, going back to a point you raised 
about the effectiveness of the handbook, NASA itself reevaluated 
the applicability of the 533 about a year ago and as a formal state- 
ment, they reinforced the importance of the 533's and the effective- 
ness and value to NASA that these contractors use this process and 


did that in both an explanatory as well as a directive format about 
a year ago. 

Mr. Baton. We have done these audits. I have read the summary 
of your statement and there is nothing earth shattering in the find- 
ings except for the fact that we know NASA and the Space Station 
have been plagued for years with mission statement, what is the 
size of it going to be, and apparently if you have been doing your 
job, which I have no reason to think you haven't been, you are find- 
ing the same things over and over again. 

Is that fair for me to observe or unfair? 

Mr. Thibault. I think it is fair to observe that the findings in 
this audit, while not specifically scoped the same as prior oversight 
reviews by other oversight organizations, are consistent with those 

Mr. Barton. We know there are obviously some procedural re- 
porting problems. I want to get to the $64 question. Let's assume 
that this committee passed legislation and it was passed in the 
other body and signed by the President that gave Mr. McConnell 
the authority to implement his recommendations as long as they 
are consistent with law, not something totally off the wall. 

What would you do? How do we once and for all solve this prob- 
lem? Is it an attitude problem? Is it a systemic problem or is it 
something different? 

Mr. Thibault. In terms of the importance of establishing ac- 
countably, essentially the recommendation is to establish financial 
management systems that will effectively enable those contractors 
to track and report on financial growth. 

Mr. Barton. It is not a lack of financial management systems. 
Is it just flat that they don't care because it is taxpayer dollars or 
NASA is incompetent or it is 

Mr. Thibault. The recurring theme and the more positive re- 
sponses by these organizations was that they acknowledged the 
benefits of the recommendations and if the customer felt it was ap- 
propriate they would take those actions. 

Mr. Barton. That is just bureaucratic garbage. 

Mr. Thibault. Some of the contractors, without foundation or 
support, said maybe the cost of the system is greater than the ben- 

Mr. Barton. What if we, keying off Mr. Brown's questions about 
incentive contracts, bonuses, actually put some incentives in to 
save money, paid bonuses based on the ability to save money? 

Mr. Thibault. We would agree with that statement absolutely. 

Mr. Barton. I thank the chairman. 

Mr. DiNGELL. The time of the gentleman has expired. 

Now, gentlemen, the forms that we are referring to are NASA 
forms, are they not? 

Mr. Thibault. Yes, sir. NASA-prescribed forms and system; yes, 

Mr. DiNGELL. Is it your view that these forms are of value in 
holding down costs and informing the government of the status of 
the contract, the billing, the costs, the overruns and whether the 
contracts are going to be performed on time and according to cost 
estimates that went into the contract? 


Mr. Thibault. It is our opinion that these forms and the systems 
that they support are essential in proper cost management and in 
controlling costs and in holding costs down, yes, sir. 

Mr. DiNGELL. You have informed NASA of the findings of your 
audits on a continuing basis, have you not? 

Mr. Thibault. Yes, sir. 

Mr. DiNGELL. Now, you are kind of in the position that some of 
these terminations, as they are being reviewed by NASA, are, in 
fact going to impact on the completion and the rules under which 
other terminations are going to be completed, isn't that so? 

Mr. Thibault. Certainly in terms of authorized expenditures and 
whether, in fact, NASA authorized certain expenditures and wheth- 
er the work was properl}' definitized or is allowable, that is correct. 

Mr. DiNGELL. Everybody will know what the rules are and will 
proceed to take advantage of any benefits that may lay within 
those rules? Isn't that right? 

Mr. Thibault. Yes, sir. We would think it would be advan- 
tageous to get all these claims in a closely controlled time span in 
terms of understanding and dealing with it in a current time 

Mr. DiNGELL. So if we don't do the job of dealing with the first 
of the contractor's termination, the overruns and other things that 
will be sanctioned in the first would be an example of the kinds of 
things that would approved later, is that right? 

Mr. Thibault. I think precedent could be possibly established or 
would be established. Yes, sir. 

Mr. DiNGELL. You stated that the contractor's estimates to com- 
plete inappropriately includes at least $689 million of claims that 
could not have been approved, authorized or definitized. Could you 
explain this with regard to McDonnell Douglas? 

Mr. Thibault. Yes, sir. Out of the $1.5 billion of substantial 
undefinitized work is $689 million where that work has been iden- 
tified in the 533. But subsequent to audit evaluation, it is not au- 
thorized under any modification that has been submitted to NASA 
for approval. And it raises a significant possibility that costs that 
have been incurred and claimed and paid may subsequently be 
found unallowable; substantial portions. 

Mr. DiNGELL. Was McDonnell Douglas providing assessments of 
cost overruns to NASA? 

Mr. Thibault. No, sir. It is our understanding that they did not. 
There were no detailed reports outlining this because this 
undefinitized work was not identified and not available and they 
were not providing reports laying that out. Is that a fair represen- 

Mr. DiNGELL. They were not providing reports or they were pro- 
viding reports which did not include that information? 

Mr. Thibault. It is my understanding there weren't detailed re- 
ports providing the variance analysis. 

Mr. McCONNELL. The 533 that we looked at showed no cost vari- 
ance. The contract value for the McDonnell Douglas contract 
equaled the estimate to complete. So, therefore, there was no cost 


However, the details of the contract value and the estimate to 
complete were broken out in the backup to the Form 533. It was 

Mr. DiNGELL. Was that 533 Form being properly handled by the 

Mr. McCoNNELL. No, sir. 

Mr. DiNGELL. It was not? 

Mr. McCONNELL. The contract value based on the requirements 
of the handbook indicated that the contract value should only rep- 
resent the authorized and negotiated cost on the contract, not to in- 
clude all the undefmitized potentially unauthorized cost as well. 

Mr. DiNGELL. So it did not comply with the regulations of NASA 
and was not properly filled out. Did you bring this to the attention 
of NASA? 

Mr. McCoNNELL. Yes, we did. 

Mr. DiNGELL. Now, was McDonnell Douglas providing assess- 
ments then of cost overruns to NASA? 

Mr. McCONNELL. Well, again, the 533 as such did not show an 
overrun. However 

Mr. DiNGELL. They were filing the form, but they were not giving 
the information that would enable the form to inform NASA about 
cost overruns, isn't that right? 

Mr. McCONNELL. That is correct. 

Mr. DiNGELL. Your audit also found that McDonnell Douglas 
stated that they were authorized by NASA to report contract value 
differently than that authorized in the NASA Handbook. Is that so? 

Mr. Thibault. Yes, sir. 

Mr. DiNGELL. Can you then explain how this took place and who 
in NASA authorized this alternative method? 

Mr. Thibault. As part of our coordination with NASA, one of the 
comments furnished by NASA management, talking about Mr. Mc- 
Connell's draft report, said the draft in nearly all cases indicates 
that contractors are not complying with the NASA Handbook. 
While this is true, NASA has directed each of the contractors on 
required reporting, the handbook as written is incorrect and in the 
process of being rewritten. 

That was furnished to us and then after our briefing of NASA 
headquarters, that on-site official subsequently revised his cor- 
respondence to Mr. McConnell and stated that it has come to his 
attention he used a bad choice of words and said the handbook is 
in fact correct and is the official document. 

Mr. DiNGELL. They told you that the handbook was correct and 
it is an official document and that indicated it was to be complied 
with; is that right? 

Mr. Thibault. No. They initially said the handbook was incor- 
rect and it was being revised. They subsequently said it was cor- 
rect. They said, however, in a number of cases the contract sched- 
ule had supplemented the handbook requirements. 

Mr. DiNGELL. In other words, in the contract schedule, they told 
the contractors to disregard the handbook? 

Mr. Thibault. Essentially that is the meaning. 

Mr. DiNGELL. Did they cite an authority for so doing, for advising 
the contractor that they need not comply with the NASA Hand- 


Mr. Thibault. I think they became the authority. 

Michael, did they cite an authority other than NASA head- 
quarters which they were following; NASA headquarters is cer- 
tainly not the case because they have identified NASA policy as 

Mr. DiNGELL. Has the handbook been corrected? 

Mr. Thibault. No. In fact, they have withdrawn the statement 
that the NASA policy was incorrect. 

Mr. DiNGELL. It has now been withdrawn? 

Mr. Thibault. Two weeks ago, they withdrew the statement that 
they had said that the handbook was incorrect stating that it was 
a bad choice of words. I understand that NASA does not believe a 
new handbook is necessary and about a year ago they reaffirmed 
the importance and the continuing value of their cost performance 
system as it presently exists. 

Mr. DiNGELL. Where is the cost performance system made public 
or outlined for the benefit of contractors and NASA employees? 

Mr. Thibault. Through policies and procedures that are incor- 
porated, I believe, into contractual requirements. 

Mr. DiNGELL. Is that a publication or is that something that ex- 
ists in the ether? 

Mr. Thibault. That is readily available to any organization that 
wants to bid on work with NASA. 

Mr. DiNGELL. Does that define how contracts are supposed to be 
carried out? 

Mr. Thibault. I believe from a cost performance management 
and reporting, I think that policy does define how those systems 
are to be carried out and administered. 

Mr. DiNGELL. Would you look at that and give us an answer to 
that question. 

Mr. Thibault. Yes, sir. 

[The document referred to is retained in the subcommittee files.] 

Mr. DiNGELL. While contracts at IBM and McDonnell Douglas 
and other contractors have been terminated, hasn't NASA chosen 
Boeing to be the prime contractor at the Space Station Alpha un- 

Mr. Thibault. Yes, sir. 

Mr. DiNGELL. We will start the next round for the members — the 
gentlewoman from Pennsylvania is here. The Chair recognizes the 
gentlewoman from Pennsylvania. 

Ms. Margolies-Mezvinsky. Mr. Thibault, one of the primary 
reasons NASA abandoned the Space Station Freedom and these 
other contractors was the enormous cost growth associated with 
the program; is that correct? 

Mr. Thibault. That is my understanding. Yes, ma'am. 

Ms. Margolies-Mezvinsky. Were you aware that during the 
past four rating periods dating back to October of 1991 that Boeing 
has been given either a poor or an unsatisfactory rating by NASA 
for cost control? 

Mr. Thibault. We were unaware of that until that was brought 
up by subcommittee staff. 

Ms. Margolies-Mezvinsky. Is there any reason why you were 
unaware of it? 


Mr. Thibault. We are not part of the award process, certainly 
it is pertinent information to us, but as far as the process to award 
fee or the process to evaluate contractor performance as part of se- 
lection criteria, we provided an independent advisory report ahead 
of time. 

We are not included because we were advisory and we are not 
part of the actual acquisition selection process. We are independent 
of that process; so while that is information that I think would 
have been useful in our evaluation, we were unaware of it until it 
was brought up by committee staff. 

Ms. Margolies-Mezvinsky. It seems to me that this may be in- 
formation that you would want to store someplace. 

Mr. Thibault. Absolutely. 

Ms. Margolies-Mezvinsky. Does it concern you that Boeing has 
taken the lead in Space Station Alpha, given this track record? 

Mr. Thibault. Again, we were not part of the criteria for the se- 
lection of Boeing. It does concern us, because if, for 4 years in a 
row, contract financial management and related reporting is 
deemed by NASA as unsatisfactory or not at a par with what they 
would like, that raises a significant concern about a very signifi- 
cant program in terms of financial management. 

So yes, it is pertinent and it is an area that we believe is sen- 
sitive and warrants increased attention. 

Ms. Margolies-Mezvinsky. Are you aware of the recent Boeing 
settlement with the government for mischarging on Defense and 
NASA contracts? 

Mr. Thibault. Yes, ma'am. 

Ms. Margolies-Mezvinsky. Can you give us some details about 
that settlement? 

Mr. Thibault. Yes, ma'am. That settlement came in the latter 
stages of April of 1994. In fact, the information that I will summa- 
rize is from a press release by the United States Attorney out of 
the Western District of Washington. 

For the record, I could furnish the entire statement or the entire 
press release. 

Mr. DiNGELL. Would you submit that for the record, please, sir. 

Mr. Thibault. Yes, sir. 

[The press release referred to is retained in subcommittee files.] 

It essentially included three major areas of costs that were recov- 
ered by the government totaling about $75 million, the largest of 
which involved Boeing Research and Development costs which Boe- 
ing falsely characterized as manufacturing and production engi- 
neering. In that case, $55 million was recovered in the settlement 
at the end of April of 1994. 

The second of three items is Boeing charged the government sev- 
eral million dollars in foreign direct selling costs that were unal- 
lowable and the government recovered $12.4 million as part of that 

In the third case, Boeing charged several millions in hazardous 
waste disposal costs, contrary to its disclosed accounting practices 
consistent with cost accounting standards legislation and regula- 
tion, and in that case, $8.8 million was recovered by the govern- 
ment. So there was a total of $75 million out of that. 


Ms. Margolies-Mezvinsky. Didn't settlement specifically men- 
tion Boeing charges, Boeing's charges regarding space robots as 
well as the Space Station? 

Mr. Thibault. Yes, ma'am. There was specific mention within 
the settlement that part of the Boeing mischarging related, a sub- 
stantial portion — in fact, they cite it as one of the more egregious 
examples, related to the Boeing division responsible for the applica- 
tion of artificial intelligence to computers, and examples they high- 
lighted were on space robots. Space Station environmental systems 
and other computer applications were specifically highlighted as 
areas where cost recovery as substantial. 

Ms. Margolies-Mezvinsky. Does it strike you as singularly odd 
that at a time Boeing was repaying the government some $75 mil- 
lion in mischarging, that they would be selected by NASA to lead 
the cost control effort on the Space Station? 

Mr. Thibault. The short answer is yes, but I have to qualify that 
I was not part of that process, so what the level of knowledge was, 
I am unaware of. 

Ms. Margolies-Mezvinsky. Your agency also conducts overhead 
audits of major contractors. Your audit work at Stanford University 
apparently identified major areas of mischarging involved in gov- 
ernment support research. I am curious as to what is the most re- 
cent year that DCAA has conducted an actual incurred cost over- 
head review of Boeing? 

Mr. Thibault. During the time of the audit, it was 1986. Be- 
cause of the settlement and the ongoing investigation that we pre- 
viously have been talking about and that the chairman mentioned 
in his opening statement, we were asked because of the Boeing 
problems by the U.S. Attorney's Office of the Department of Justice 
to defer our audits for some 7 or 8 years and Boeing did in fact 
not make submissions since 1986. 

Ms. Margolies-Mezvinsky. That was the last year Boeing sub- 
mitted its actual overhead claim? 

Mr. Thibault. Yes, ma'am. 

Ms. Margolies-Mezvinsky. Thank you, Mr. Chairman. 

Mr. DiNGELL. The time of the gentlelady has expired. 

The Chair advises that the subcommittee will recess while we go 
to the Floor to vote on the Calvert amendment to the Desert Pro- 
tection Act. We will have a recess of 15 minutes. We will return 
at 45 minutes after the hour to continue the proceedings. 

[Brief recess.] 

Mr. DiNGELL. The subcommittee will come to order. 

The Chair is going to recognize the gentleman from Texas, Mr. 
Hall, for questions. 

Mr. Hall. Thank you, Mr. Chairman. 

Of course, we are all against waste, Mr. Thibault, of the tax- 
payers' dollar and I might suggest to you that goes for frivolous au- 
dits by other government agencies as well. What I am trying to de- 
termine is whether or not there is really anything new turned up 
here today or anything that NASA is not already trying to come to 
grips with? Do you understand that? 

Mr. Thibault. Yes, sir. 

Mr. Hall. I want to go back to the Form 533 Mr. Barton asked 
you about. Of course, you say it is a report on performance and 


used for financial management. Actually, it is a form simply to 
show how much the project is going to cost in the future, isn't it? 

Mr. Thibault. That is a key part of that reporting process; yes, 
sir. The estimate to complete and the projected cost. Yes, sir. 

Mr. Hall. It doesn't deal that much with what has already been 
spent, but it deals basically with the future; is that an accurate 

Mr. Thibault. Sir, it deals with both the actual cost incurred as 
a baseline and then to project future costs. So it deals with both, 

Mr. Hall. Have you pointed up any limitations in this form, was 
that your testimony? 

Mr. Thibault. No, sir. We have not pointed limitations in the 
form. We believe that the form and the current process is a viable 
and effective method for cost performance reporting. Now, as far as 
improvement to the form, if there could be enhancement, we would 
be in favor of it. We haven't seen the need based on our evaluation 
to recommend any. 

Mr. Hall. I think Mr. McConnell said or you that the 533 that 
we looked at showed no cost variance. 

Mr. Thibault. That was Mr. McConnell. 

Mr. Hall. Does that imply that you didn't look at all the 533's? 
Are they so voluminous that you can't look at all them in your 

Mr. McConnell. We just looked at 10 specific 533's. 

Mr. Thibault. That is 10 on 10 contractors? 

Mr. McConnell. That is correct. 

Mr. Hall. Actually, it is very complicated and it is not simply 
a matter of adding and subtracting when you look at the Space 
Station, is it? 

Mr. McConnell. That is correct. 

Mr. Hall. It is very complicated in building a Space Station and 
analyzing the building and the cost and to project the future. That 
is also true, isn't it? 

Mr. McConnell. That is very correct. 

Mr. Hall. Change in budgets, change in designs, building air 
locks, modules or writing software; you are not familiar with how 
that is done, are you? 

Mr. Thibault. In terms of the technical aspects, if there are 
technical requirements, we are not the engineering support of 
NASA. NASA has engineering support and provides that to us 
where there are technical questions. So we do not have technical 
responsibility or oversight; yes, sir. 

Mr. Hall. I am not complaining about your adding and subtract- 
ing and your reporting. I presume you report the facts the best you 
can on a very complicated situation. 

Mr. Thibault. We have a responsibility to report and base our 
audits on factual data. Yes, sir. 

Mr. Hall. The real problem is projecting costs in a technology 
that is totally new, because the Space Station is new and totally 
different; is that true? 

Mr. Thibault. I think it is a complex program with a changing 
baseline. I think that is one of the recurring situations that we 
highlighted, the importance of establishing just what that baseline 

86-145 0-95 


is and definitizing and authorizing that work so that we can make 
the forecasts for projected costs. Yes, sir. 

Mr. Hall. You seem to be critical of the selection of Boeing. Do 
you have an opinion as to whether or not they probably had the 
most information on building a Space Station? 

Mr. Thibault. Sir, as I tried to say a couple of times, I was not 
intending to be critical — I did not say that — I do not intend to criti- 
cize Boeing for either the selection which we were not involved in, 
I simply tried to respond to questions about risk situations or cost 
recovery situations that were expressed, some of which we were fa- 
miliar with, such as the settlement that we described, and other 
items, such as NASA's cost performance ratings we had not been 
familiar with nor been provided that data. I think it is important 
to note, we were not part of the selection process 

Mr. Hall. I understand. 

Mr. Thibault. We were not involved with the award of Boeing. 
So I am not familiar with exactly why Boeing was considered and 
selected as the most qualified organization. 

Mr. Hall. So when I ask whether you have an opinion as to 
whether or not they have the most information on building of a 
Space Station, your answer is no? 

Mr. Thibault. Yes, sir. It is no. 

Mr. Hall. Or that they have done the best job to date — you 
wouldn't have any way of having an opinion on that, would you? 

Mr. Thibault. I do not have an opinion. 

Mr. Hall. Go back to the Form 533. Are you aware of any moves 
toward identifying the limitations on Form 533? 

Mr. McCONNELL. I am not. 

Mr. Thibault. I am not. 

Mr. Hall. So you are not aware of the fact that the Science, 
Space and Technology, in particular the Space Committee, has 
highlighted the need for reforms in a NASA contract monitoring 
and the need for independent cost analysis? 

You are not aware of that and you weren't aware of that when 
you testified, were you? 

Mr. Thibault. I was not familiar with your committee's work or 
its prior recommendations. That is correct. 

Mr. Hall. Were you also not aware of the fact that we had im- 
plemented the Chief Financial Officer Act of 1990? 

Mr. Thibault. I am familiar with the Chief Financial Officer Act. 
Yes, sir. 

Mr. Hall. Are you aware of the fact that we have established an 
independent cost analysis function? 

Mr. Thibault. Within NASA? 

Mr. Hall. Yes. 

Mr. Thibault. No, sir. I am not familiar with the independent 
cost analysis function. I have been to meetings with NASA's Chief 
Financial Officer and I am aware of the importance they place on 
that responsibility. 

Mr. Hall. And that we have appointed an independent cost anal- 
ysis person; are you aware of that? 

Mr. Thibault. I do not know who the person is nor have I been 
briefed by NASA or am I aware that they have a person who does 
independent cost analysis for NASA. 


Mr. Hall. Have you met with Mr. Pinetta? 

Mr. Thibault. On the independent cost analysis, no, sir. 

Mr. Hall. So you are not aware that they have been appointed 
and they are awaiting Senate confirmation? 

Mr. Thibault. No, sir. 

Mr. Hall. You are really not aware that reforms are underway 
through Science, Space and Technology and the Space Committee 
particularly, are you? 

Mr. Thibault. I think the important point to be made here is 
that this audit was not established because of the work that was 
done by a particular organization. These audits were established 
because of known risks by these 10 contractors at Johnson Space 

Two significant contracts relate to Space Station. Eight of the 
contracts relate to other work at Johnson Space Center and they 
were established to evaluate and either provide assurance or make 
recommendations related to these contractors' policies and proce- 
dures for budgetary and financial controls on their contracts. 

Mr. Hall. Let me ask you and give you an example of one of the 
DCAA recommendations: "All contractors should establish detailed 
budgets and contract baselines from which to monitor and control 

Do you consider that earth shaking? 

Mr. Thibault. No. That is an appropriate and necessary budg- 
etary and financing component. 

Mr. Hall. Is there an3^hing new in that or do you think NASA 
or this committee would disagree with that? 

Mr. Thibault. No. In fact, the reason we made that rec- 
ommendation is because in our review of these 10 contractors, they 
did not have effective budgetary systems. The fact that anybody on 
this committee would feel that is an integral part of that would not 
be surprising. 

Mr. Hall. I am trying to find some value that is added by your 
audit and to find out how much your audit has cost us to date. 

Would you put that information in the record? 

Mr. Thibault. Yes, sir. 

[The following information was received.] 

The cost of the DCAA budget and financial control systems audits of ten major 
NASA Johnson Space Center contractors: approximately $233,000. 

Mr. Hall. How far back does the DCAA audit function go with 
respect to Johnson Space Center? 

Mr. Thibault. We have been NASA's principal auditors for a 
long period of time. Other than the DOD, NASA is our most signifi- 
cant customer and Johnson Space Center, for as long as I have 
been involved with headquarters since 1980, policy and operational 
matters, it is my understanding we have been supporting NASA's 
Space Exploration programs. 

For the record, I will provide you a baseline of our audit presence 
at Johnson Space Center, sir. 

[The following information was received.] 

The span of time for which DCAA has been performing audits for NASA at the 
Johnson Space Center: since the Agency's inception in 1965. 

Mr. Hall. Among the other things 


Mr. DiNGELL. The Chair observes that there is a vote on the 
Floor. The time of the gentleman has expired. 

For that reason, the subcommittee will adjourn for 5 minutes 
and we will return for further questions. 

The Chair thanks the gentleman from Texas for his assistance. 

Mr. Hall. I thank the Chair. 

Mr. DiNGELL. We also thank you Mr. Thibault. I have a couple 
of little questions that I regretfully will have to ask you to wait to 
respond to when we come back. 

We will return in 5 minutes. 

[Brief recess.] 

Mr. DiNGELL. The subcommittee will come to order. 

Mr. Thibault, while we are on this overall subject, how big of a 
backlog does your agency have in receiving and auditing actual 
overhead expenses? 

Mr. Thibault. At the start of 1994, this fiscal year, last October, 
it was about $156 billion of unaudited incurred costs. By the end 
of this year, it will be about $129 billion of incurred costs. In terms 
of audit count, the number is just over 14,000 audits, the majority 
of which are the smaller contractors, under $10 million. 

Mr. DiNGELL. Now, I note that recently the Appropriations Com- 
mittee cut your agency's budget by almost Vb. What will be the im- 
pact of this on DCAA if the cut is sustained? 

Mr. Thibault. It will have a very adverse impact on our ability 
to bring our backlog down. It would seriously expose DOD's con- 
tract audit capability, and in our opinion, it would be an unaccept- 
able financial risk for the Department in contract audit oversight. 

Mr. DiNGELL. What will the practical effect of this kind of cut be 
in terms of losses to the taxpayers, in terms of lack of audit, lack 
of recovery of funds that are due the government because of inap- 
propriate expenditures, improper billings, waste fraud and abuse? 

Mr. Thibault. We evaluated the impact of the hundred million 
dollars reduction by probable audit area and in terms of reduction 
in force and the immediate impact would be a reduction in force, 
we probably couldn't put it in place by 1 October, by 1 January of 
1995 of about 2,400 auditors. 

Mr. DiNGELL. You mean you would lose 2,400 auditors? 

Mr. Thibault. Out of 5500, yes, sir. 

Mr. DiNGELL. So you will lose almost 50 percent of your work 

Mr. Thibault. Yes, sir, because we are labor intensive and that 
is where the reduction would be. The impact on our audits would 
be significant work that we presently do with substantial risk to 
the government, such as defective pricing, incurred cost audits and 
forward pricing; we would not be able to perform. 

We have gone through with our best estimate of what the impact 
of that would be and the first year of lost savings based on sus- 
tained savings from that reduction would be $832 million. 
Mr. DiNGELL. The cost to the taxpayer is $830 million? 
Mr. Thibault. Yes, sir. 

Mr. DiNGELL. Now, what will that do in terms of the number of 
audits? It will about halve the number of audits you can do, won't 


Mr. Thibault. It will be a substantial reduction. Said another 
way, in terms of the backlog the majority of those 14,000 audits are 
for contractors under $70 million. We would not be able to perform 
most of those audits, so the small contractors, where significant is- 
sues have been raised by this committee and by other committees 
and other oversight organizations, simply we would not have the 
resources to address those issues, to do those audits; and whereas 
the good news for the backlog is it is coming down now under a 
very challenging environment, it would in the near term turn 
around and go up substantially. 

Mr. DiNGELL. The practical result of this would be to leave, you 
said, about $830 million in the hands of people who are not entitled 
to that money? Is that right? 

Mr. Thibault. It would be unallowable costs that are sustained 
in the past that would be vouched and paid and remain with these 

Mr. DiNGELL. So to save $100 million, we are going to spend 
$830 million and leave money in hands of people they are not enti- 
tled to. 

Mr. Thibault. Yes, sir. 

Mr. DiNGELL. A lot of these audits that are in your backlog that 
you won't be able to do will be abandoned forever. You will not ever 
be able to get back to them because of other work that you will 
have to do, because of statutes of limitations, because of expiration 
of regulations and things of that sort. 

Mr. Thibault. I think that is right. We would build a backlog 
of unaudited work, but as you accurately represent, the statute of 
limitations, for example, defective pricing 3 years after final pay- 
ment would start kicking in and we would be removing that from 
the auditable backlog. 

In the area of forward pricing, our customers, be it NASA trying 
to definitize contracts in this case, for a significant amount of that 
work we would not be able to provide independent advisory reports 
to those customers, and that would undermine their ability to nego- 
tiate a fair and reasonable price. 

Mr. DiNGELL. Mr. Thibault, you have been before this committee 
on a number of occasions. We always find your assistance to be in- 
valuable to us. Thank you for your valuable assistance. 

Mr. McConnell, we appreciate what you have done to help us 
over the years and we appreciate your appearance today. 

The gentleman from Colorado. 

Mr. SCHAEFER. I have a couple of questions, if you don't mind. 

Mr. Thibault, the DCAA has characterized the now-terminated 
NASA contract with McDonnell Douglas for Space Station Freedom 
as a de facto level of effort contract. Why is it characterized this 
way and what is the harm of a de facto level of effort contract 
where the deliverable is a piece of hardware? 

Mr. Thibault. Mike, do you want to take a run at that. 

Mr. McConnell. This is long — ^^you could go into a long story on 
the Space Station. Basically that is what it became. You are right, 
a de facto level-of-effort contract due to the fact that the contrac- 
tor's performance measurement systems were not operational for a 
good period of contract performance and basically money was not 


being controlled in the manner that the contract contractually 
called out for it to be. 

Mr. SCHAEFER. Is it true that McDonnell Douglas simply gave up 
using its cost and scheduling control system at some point even 
though NASA paid McDonnell Douglas to maintain this system? 

Mr. McCONNELL. McDonnell Douglas indicated to us that their 
performance measurement system was inoperable for at least the 
first 2V2 years of the Space Station contract. 

Mr. SCHAEFER. Did they say why they gave up using this cost 
and control schedule? 

Mr. McCONNELL. Rebaselining. They indicated that the contract 
was being rebaselined and they were not able to keep up with this 
and therefore they didn't use their performance measurement sys- 

Mr. SCHAEFER. Well, in its failure to maintain a functioning cost 
and schedule and control system when it was most needed, is it an 
indication that the McDonnell Douglas portion of the Space Station 
contract was somewhat out of control? 

Mr. McCONNELL. Well, the McDonnell Douglas response indi- 
cated that. Yes. 

Mr. Thibault. From a financial management viewpoint, that 
was our opinion, that there were not proper controls to monitor and 
provide sufficient visibility on cost growth. 

Mr. SCHAEFER. In 1993, NASA restructured radically the Space 
Station contract and selected Boeing to be the new prime contrac- 
tor. What type of contract has Boeing been working under since it 
was selected? 

Mr. Thibault. A letter contract. 

Mr. SCHAEFER. How does this letter contract under which Boeing 
is working differ with unpriced orders or the level of effort con- 
tracts or undefinitized? 

Mr. Thibault. Do you want to take a run at that? 

Mr. McCONNELL. We have a follow-up audit going on right now 
as to the undefinitized costs, how they are being handled on the 
letter contract to date. We have just initiated this and I don't have 
anything really to give you as far as audit results. 

Mr. SCHAEFER. Is a letter contract similar to undefinitized work? 

Mr. Thibault. In terms of risk, it obviously is not as desirable 
as a final awarded definitized contract based on cost and pricing 
data that has been audited, evaluated and negotiated. 

Again, I would appreciate or I would suggest that NASA can 
probably provide a better understanding or insight into why this 
span of time and what their plans are to make final award of the 
contract and to implement the normal contractual award process. 

Mr. SCHAEFER. I appreciate that and we will be asking that. 

One final question. Do you know how much money NASA has 
given Boeing under the terms of the letter contract? 

Mr. Thibault. We will provide that for the record. 

[The following information was received.] 

The total amount of costs and fees Boeing has invoiced to NASA Johnson Space 
Center on letter contract NASIS-1000: $319,971,898.96 as of 18 July 1994. 

Mr. SCHAEFER. I thank the chairman. 

Mr. DiNGELL. The Chair thanks the gentleman for his assistance 
this morning. 


Gentlemen, the committee thanks you again. You have been of 
great assistance to us. 

The Chair announces that the next panel is a panel composed of 
General John R. Dailey, Retired, U.S. Marine Corps, Acting Deputy 
Administrator, NASA; accompanied by Mr. Arnold Holz, Chief Fi- 
nancial Officer; Mr. George Abbey, Deputy Director at Johnson 
Space Center; Ms. Deidre A. Lee, Associate Administrator for Pro- 
curement; and Mr. Robert Easley, Director of Procurement at John- 
son Space Center. 

Ladies and gentlemen, thank you for being with us today. The 
Chair advises that it is the practice that all witnesses who appear 
before this committee testify under oath. Do any of you have objec- 
tion to so doing? 

Do any of you desire to be advised by counsel during your ap- 
pearance here? 

For your information, there are copies of the rules of the sub- 
committee, rules of the committee, and rules of the House to inform 
you of your rights and the limitations on the powers of the commit- 
tee as you appear before us. 

If you will each raise your right hand. 

[Witnesses sworn.] 

Mr. DiNGELL. You may each consider yourself to be under oath. 

General, we will recognize you at this time for such statement 
as you choose to give. 

General Dailey. Thank you, Mr. Chairman and members of the 
subcommittee. With your permission, I will submit a formal state- 
ment for the record. 

Mr. DiNGELL. Without objection, your entire statement will ap- 
pear in the record and we will recognize you for such summary as 
you choose to give. 


General Dailey. Thank you, sir. 

The situation that has been described in the first part of this 
hearing was recognized by our Administrator, Mr. Dan Goldin, 
when he arrived from industry over 2 years ago. He recognized 
that we needed to make significant management reforms and 
changes in the way that we do business. 

He directed the development of a series of management reforms 
that fixed responsibility and streamlined our ability to manage pro- 
grams and to operate the agency. Of particular importance was the 
Space Station Freedom program, the difficulties of which have been 


discussed at some length here this morning and were all evident 
to our Administrator at that time. 

He took specific action in that case and created a team to rede- 
sign the station and to restructure the management system for the 
Space Station and, as has been mentioned earlier, this consolidated 
from multiple prime contractors and centers to a single prime con- 
tractor, which is Boeing, and a host center, which is the Johnson 
Space Center, with the oversight being provided by the program di- 
rector's office at our headquarters in Washington and the Associate 
Administrator for Space Flight. 

There is also a series of requirements that was identified to en- 
able the individuals associated with these programs and in man- 
agement positions to better perform their duties and in response to 
Mr. Barton's question earlier today about the 533 Forms and how 
do we employ those and do we just deliver a handbook and some 
instructions and expect people to know how to do it, that is what 
we were doing. 

In our review, it became evident to us that we needed to provide 
instruction for not only the civil servants who oversee the process, 
but for the contractors who complete them. Johnson Center created 
a course in February of this year. We have trained over 200 people 
at this point, 90 of which are contractors, in the proper execution 
of this document. That is one of the near-term or immediate action 
training requirements that we have met, but in addition to that, 
we have near-term courses that are being set up to provide instruc- 
tion for specific disciplines in the management area. 

But in the long term and perhaps most important is we have cre- 
ated and are ready to implement a program manager course which 
will develop individuals in NASA as they develop through their ca- 
reer and provide them with the necessary preparation prior to as- 
suming a position of increased responsibility. 

This is one of the things that we found in our review of the Space 
Station program and other programs within NASA that we have 
been deficient in properly preparing our people for the responsibil- 
ities that we have levied upon them. So training has an increased 
importance in the agency and is being stressed at the highest levels 
and will be institutionalized so that we don't solve the problem 
today only to have it return in the future, but it will be a continu- 
ing process by which we prepare people to do their jobs. 

As part of this Awareness Training program, we have with us 
today specific individuals from the Johnson Space Center who are 
charged with the implementation and oversight of these controls 
that we have for the Space Station program and the other major 
contracts at Johnson. We thought that it would be valuable experi- 
ence for them to see firsthand the level of concern that exists here 
in Washington and at our headquarters over the duties that they 
are about to perform. 

Audits are an important part of our management structure and 
DCAA provides this service to us. In fact, we are on the same team. 
We hire them to do audits and to provide us with the insights that 
are necessary for us to focus on deficiencies and problems that need 
to be solved, so we consider this to be a valuable, essential service 
that we must have. We are in agreement with the recommenda- 


tions that have been provided to us by the DCAA audit and are in 
the process of implementing these recommendations. 

One thing that became clear to us, however, in the process of 
preparing for this hearing and the dealings we have had as a result 
of the audit is that we need to have a closer relationship with 
DCAA. We need to talk on a more frequent basis. While not com- 
promising their independent status, we n§ed to keep each other in- 
formed to a greater extent. 

I was concerned this morning when the question was asked 
about our training program and they were not aware that we have 
had one in effect and in fact have trained 200 people. That is an 
example of what I am talking about. 

The IBM question about providing information and the fact that 
we were not aware that they were having difficulty acquiring that 
information are examples of the type of improved communications 
that we need to establish with DCAA and the Inspector General 
and GAO. These are important functions that we have to con- 
centrate on. 

We believe that NASA is on the move. We recognize our respon- 
sibility to the American people and we are clearly cognizant of the 
fact that we must ensure that our Nation gets the maximum bene- 
fit from every dollar that we spend. We don't have all the answers, 
nor do we believe that we have everything in place that we need 
to make sure that we are successful in achieving our goal of achiev- 
ing maximum benefit from the dollars, but we do believe that we 
have a system in place and that we have a management team in 
place that is ready to respond to these developing requirements 
and are willing to make change and to provide us with the best 
possible oversight and enabling us to carry out our responsibilities. 

With that, sir, I would like to introduce my colleagues at the 
table. On my far right is Gene Easley, the director of procurement 
at the Johnson Space Center; Mr. George Abbey, the deputy direc- 
tor at the Johnson Space Center; Deidre Lee, associate adminis- 
trator for procurement at headquarters; and Arnold Holz, our 
newly appointed chief financial officer. 

Mr. DiNGELL. Thank you for being with us. 

[The prepared statement of General Dailey follows:] 

Prepared Statement of General John R. Dailey (Ret.), Acting Deputy 
Administrator, National Aeronautics and Space Administration 

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity 
to come before you today to discuss NASA's commitment to improving its procure- 
ment, financial, and program management practices. 

In this era of fiscal austerity and the attendant emphasis on maximizing the re- 
turn on investment of each federal dollar, NASA is making a concerted effort to 
streamline and improve the Agency's management practices. NASA has initiated a 
number of management and procurement reforms, and ipy associates and I have 
come today to discuss these reforms and the strides NASA is making in improving 
the Agency's performance. 

The recent Defense Contract Audit Agency review of Johnson Space Center con- 
tracts points out a number of areas in which NASA could improve its financial, pro- 
curement, and program management practices. We concur with the majority of the 
audit. Furthermore, NASA had already begun implementation of reforms at the 
Agency, Center, and Program level. 

My testimony addresses NASA's efforts to improve the Agency's management. I 
shall begin by describing the Agency-level reforms that Administrator Goldin has 
instituted during his tenure and then touch on the actions that the Johnson Space 


Center and international Space Station Program are taking to address the specific 
recommendations from the DCAA report. 

Accurate financial management systems are critical to NASA's successful program 
management and cost control. We have instituted a number of reforms in the areas 
of financial management, program management and contract management in re- 
sponse to the Administration's National Performance Review. Significant examples 
01 these reforms include: 

Contractor Financial Management Reporting: Revision of the NASA Federal Ac- 
quisition Regulations (FAR) Supplement to clarify financial management reporting 
requirements for both NASA and its cont»'actors. Changes address the timeliness 
and accuracy of reporting, NASA manager roles and responsibilities, and inclusion 
of subcontractor costs in prime contractors financial management reports. 

Contractor Training: NASA has developed a course and is training its contractors 
in NASA financial management (NASA Form 533) reporting requirements. NASA 
business professionals also participate in the training. NASA plans to train all con- 
tractors within the next 24 months. 

Management of Major Systems and Programs: The NASA Chief Financial Officer/ 
Comptroller and an independent panel of experts annually review and validates pro- 
gram plans and estimates. 

Program Management Council (PMC): NASA's senior management reviews all 
NASA programs with development estimates of at least $200 million on a quarterly 
basis and at selected milestones to ensure diligent program management. Any pro- 
gram experiencing a 15% cost overrun is subject to a special review and considered 
for cancellation. 

Contractor metrics: Major NASA programs are reviewed for cost, schedule, tech- 
nical and other significant performance areas on a quarterly basis and issues semi- 
annual "report cards" to contractor CEOS. 

Award Fee: NASA has issued regulations to improve cost control performance on 
Agency contracts. This new policy requires that a contractor's profit be repaid to 
NASA if a project does not meet performance specifications. 

Change Order Policy: The NASA FAR Supplement has been modified to ensure 
more effective management of contract changes and control of cost growth. Most 
change orders over $1 million must be negotiated prior to issuance. Exceptions must 
be approved by Center Directors. 

Contractor Rates Forum: NASA's Space Flight program reviews their top thirty 
projects annually for direct and indirect contractor rate performance. 

Cost Control: NASA's Office of Procurement is implementing an initiative which 
emphasizes cost control with NASA's contractors and within the Agency. The Ad- 
ministrator will meet with Chief Executive Officers of contractors doing business 
with NASA in August to discuss the issue. 

Incentive Arrangements on Contracts: NASA is applying incentive arrangements 
to contracts to achieve greater cost control. 

Performance Based Service Contracting: NASA is participating in the Office of 
Federal Procurement Policy's (OFPP) pilot project to implement performance based 
service contracting Government-wide. NASA is identifying candidate acquisitions 
and establishing an Agency-wide task force for this initiative. 

Johnson Space Center is taking the DCAA recommendations very seriously. Dr. 
Carolyn Huntoon, Director of Johnson Space Center, will ensure that all of the rec- 
ommendations in the report are given immediate attention. To that end, the John- 
son Space Center has developed a plan of action which addresses each of the DCAA 
recommendations. Specifically, the following actions are already underway or will be 
undertaken over the course of the next year: 

Contractors will be held accountable for developing appropriate procedures for es- 
tablishing detailed budgets and baselines. JSC will proactively determine that con- 
tractors have complied with contract reporting requirements. Contractors will at- 
tend the course: Financial Management Reporting for Contractors. 

Change orders over $1 million will be aefinitized before issuance unless critical 
need is approved by the Center Director. 

JSC has increased its emphasis on cost control in Award Fee con- 
tracts. Contractors instructed in Estimate at Completion (EAC) reporting require- 

Contractors will perform reviews of indirect rate on major contracts as part of the 
budget process, specifically looking at: indirect/direct staffing functions and proc- 
esses; utilization of equipment; and utilization of facilities. 

The very survival of the Space Station program depends on how successful NASA 
and its contractors control and reduce costs, proactively. A key objective of the pro- 
gram redesign effort in 1993 was to streamline and consolidate the NASA and con- 
tractor program management structure to allow for the accurate, current and com- 


plete collection, reporting, and evaluation of budgetary data. The establishment of 
a single Space Station program office hosted at a single center with one prime con- 
tractor, along with the implementation of the integrated product team (IPT) ap- 
proach, has greatly enhanced the efficiency and effectiveness of the program budget- 
ing and financial control process. This new management structure and team ap- 
proach continues to yield dividends as we improve communications and shorten 
cycle time. As the Defense Contract Audit Agency (DCAA) plays an essential role 
in assisting NASA in improving its overall financial processes, the Space Station 
program office, along with the Space Station contractors, has plans that address the 
following reforms and improvements relative to the DCAA audit report. 

Recommendation #1: All contractors should establish detailed budgets and base- 
lines from which to monitor and control costs. 

Response Ul: Baselines will be established for the Boeing Prime Space Station ef- 
fort along with the lower-tier contractors effort (McDonnell Douglas, Rocketdyne, 
and Boeing Huntsville) immediately following contract definitization. This effort will 
result in detailed plans for the negotiated scope of work. This baseline process will 
be accomplished using the Department of Defense validated performance measure- 
ment systems currently in place at each of the contractor's plants. 

Recommendation #2: These baselines should not be constantly changed to reflect 
actual costs. The baseline costs should only be changed if the specific contract scope 
of work is changed and contractually modified. 

Response U2: Once the performance management baseline is established for the 
Space Station contracts, it will be used throughout the program to conduct evalua- 
tion and analysis compared to actual cost including cost analysis, variance analysis, 
and corrective action plans. The baseline will be changed only by formal modifica- 
tions to the contract that reflect scope of work changes (see response #3). Any 
changes of this type will be subject to review by the Program Management Council. 

Recommendation #3: Cost growth should be proposed by the contractor and au- 
thorized under the contract prior to the incurrence by the contractor. Cost growth 
proposals should be based on the detailed budget analysis by contractors which ade- 
quately supports the need for additional funds. Cost proposals should be submitted 
before the incurrence of significant cost. 

Response it3: We concur. 

Recommendation #4: The contractor needs to become more involved in the effi- 
cient management of its work tasks and in efforts to reduce or prevent costs and 
correct inefficiencies before costs are incurred. These efforts should be documented 
in the contractor's budgetary analysis process. 

Response M: The Space Station program is in the process of finalizing cost nego- 
tiation and contract definitization with the prime contractor, the Boeing Company, 
who in turn is completing negotiation and definitization with its lower-tier contrac- 
tors. We have had two comprehensive concurrent fact-finding reviews and evalua- 
tions of the contractors' proposal that involved NASA, DPRO, and DCAA personnel. 
The integrated Crovernment/contractor team has understood and evaluated the basis 
of estimates for the work scope and contractor approach. We have rearranged work 
flow, assembly, test and verification processes to optimize program efficiencies. The 
budget will be allocated and agreed to prior to contract definitization. In addition 
to having a significant portion of the contractor award fee based on budget manage- 
ment, the definitized contract between NASA and Boeing will include an incentive 
fee feature to encourage and motivate contractor cost performance. Such incentive 
fee will be paid only after realized contractor cost savings. Furthermore, proactive 
cost control will be a standing topic for the Program Management Council review 
processes as stated in NASA Handbook 7120.5, Management of Major System Pro- 
grams and Projects. 

Recommendation #5: All contracts should perform an accurate percentage of com- 
pletion and estimate to complete for each major work task performed. The estimate 
to complete is not the difference between incurred costs and contract target costs. 

Response #5: Using the validated performance measurement system. Estimate at 
Complete (EAC) will be evaluated on a monthly basis through the contractor lateral 
monthly variance analysis meeting. At the time of these evaluations. Space Station 
management will review the current month's accomplishments against the frozen 
baseline and any changes to the EAC will be reflected in the current months report- 
ing. Also, a comprehensive program-wide EAC will be prepared on a yearly, semi- 
annually or a periodic basis as stated in the contractors approved systems. Gen- 
erally accepted methods for generating EACs will be used, including grass-roots en- 
gineering, as well as parametric estimating. NASA monitors the contractor's EAC 
and its calculation. Space Station management is also provided with periodic inde- 
pendent government EAC, including comparisons with the contractor's data. 


Recommendation #6: Contractors should provide NASA with specific schedules as 
to what it plans to review internally in regards to: (a) indirect and direct staffing 
functions and processes; (b) utilization of equipment; and (c) utilization of facilities. 
The specific results of these reviews should be provided as well as corrective action 
plans and cost avoidance details. 

Response U6: We concur. The Space Station program office will work with the cog- 
nizant DPRO or DCAA personnel to review the contractors' operating plans and for- 
ward pricing rate proposals to understand the rationale used in the development of 
all rates and factors. The review will include the evaluation and analysis of the con- 
tractors' business forecast, staffing plan, equipment and facilities utilization as- 
sumptions, as well as contingency plan that allow the needed flexibility and agility 
for rapid response in case of unexpected changes in the business climate and envi- 

Recommendation #7: The lead contractors for the Space Station Program (Boeing 
Corporation) and for the Space Shuttle Operations (Rockwell) should be made ac- 
countable for the accuracy of the 533 data. These contractor should be tasked by 
NASA to ensure that the contractors working under them are reporting accurate 
cost data and are actively involved in monitoring their contract performance and in 
controlling cost growth on these major NASA programs. 

Response #7.- NASA concurs. This recommendation is totally consistent with 
NASA's policy. Improved adherence to these policies is being emphasized by NASA 
management, for example: 

(a) NASA will insure that calculation of business management award fees reflect 
the accuracy and completeness of Boeing's 533 data. 

(b) NASA has developed a new training course on proper 533 preparation proce- 
dures and has initiated training for the prime and lower-tier contractors. 

Recommendation #8: Contractors should establish specific goals each year as to 
contract performance and cost reduction objectives. Bonuses should reflect the ac- 
complishment of these specific goals. Bonuses should not be based on predetermined 
percentages based on employees just "showing up" for work. 

Response #8: We concur. 

Recommendation #9: Each contractor should establish an account to accumulate 
idle or free time. A specific definition as to what constitutes idle or free time should 
be established by NASA and given to each contractor. Idle or free time can then 
be measured penodically to determine if it is reasonable or excessive. 

Response #9; NASA will work with the DCAA to ensure that appropriate defini- 
tions of "non-productive," "idle," or "free time" are included within the disclosure 
statements of the prime and lower-tier contractors. NASA will emphasize with 
DCAA the need to maintain constant vigilance on the amount of such time and the 
rationale for its inclusion in NASA contracts. 

NASA has been reforming its financial management, contract management, and 
program management systems for the past two years. While we have had a number 
of successes, we are seeking further improvement as we reinvent NASA. DCAA 
plays an essential role in assisting us in improving NASA's overall financial proc- 
esses and NASA is aware of the significance of the issues raised in this audit. I hope 
that we have adequately answered your concerns. 

Mr. DiNGELL. The Chair is going to recognize the gentleman from 
Colorado for questions. 

Mr. SCHAEFER. Thank you, Mr. Chairman. 

General, or anyone else who would care to respond to any of the 
questions, the DCAA audit, as you know, has disclosed significant 
deficiencies in the ability of NASA contractors to generate accurate 
cost performance reports to NASA. Without accurate reliable cost 
performance reports, how can NASA make intelligent estimates to 
Congress about what programs, especially large and expensive pro- 
grams, like the Space Station is actually going to cost us? 

General Dailey. We can't. That is the reason we have imple- 
mented these management reforms. I have outlined those in the 
submission for the record. 

We would be glad to discuss any of them in detail that you would 
like. One that is important though in terms of accomplishing this 
goal of getting accurate data is to have the people properly trained 
and then to have an oversight group that understands what we are 


trying to accomplish with the forms and the people completing 
them knowing what we are trying to have displayed. 

We don't want to alibi as to our performance in the past, but 
there are significant activities at the time that some of the audit 
was taking place and some of the things that were happening in 
terms of the redesign and restructuring of the program. It is clear 
that we were not providing the proper guidance and oversight nor 
were the contractors complying properly, although they were re- 
sponding in many cases to our own direction, which was not com- 
pletely accurate. 

We think we have the figures in place on this and our training 
courses are going to be a major portion of achieving that. 

Mr. SCHAEFER. I have this audit report in front of me. Looking 
at the deficiencies that were outlined in two particular pages of 
contractors not complying with certain requests, part of the prob- 
lem comes down to this. This is why the Space Station is kind of 
up and down in Congress because we keep getting different facts 
and figures as to what it is going to cost. It keeps changing all the 

This is one of the reasons I think that we have a problem getting 
this authorization through. 

General Dailey. We agree and we are very concerned about that. 
That is why we are working as hard as we are to get this under 
control. I believe that we do have the structure in place now to cor- 
rect this and to provide the proper information. 

Mr. ScHAEFER. In a meeting with subcommittee staff that was 
held on 21 July, Malcolm Peterson, NASA Comptroller, said that 
NASA was aware of the overruns even if the contractor's cost per- 
formance reports weren't reporting them. 

Was NASA truly aware of these overruns independently of the 
data supplied by the contractors and if so, how? 

General Dailey. Yes, sir. The 533 is one document in the over- 
sight process. We do independent analysis on our own and the pro- 
gram management personnel are also involved on a first-hand 
basis in daily contact with the efforts of the contractors. 

So even though the documents don't reflect the exact status as 
presented by the contractors, we have a parallel independent anal- 
ysis that we run at the same time which gives us indications that 
we can then pursue with the contractors to confirm. But that was 
one of the major reasons why Mr. Goldin inaugurated these man- 
agement reforms over iy2 years ago, because we recognized at that 
time we were having significant problems in controlling costs and 
the reporting and management system to do that were unwieldy 
because of the structure that we had. 

Mr, Schaefer. If NASA knew it, how much was the overrun be- 
fore this was cancelled? 

General Dailey. I can't put a number on that other than we 
knew that we had problems and we knew we were in an overrun 
situation, but part of the difficulty was fixing the exact amount. It 
depends what time frame you are talking about, too, sir. 

Mr. Schaefer. I understood you were aware of the overruns 
independently of the data supplied by the contractors, and if you 
were aware of them, are you saying that you didn't know how 
much they were? 


General Dailey. We didn't know the magnitude in detail. Maybe 
Mr. Abbey can shed light on that. 

Mr. Abbey. I think that was one reason Mr. Goldin was very 
anxious to initiate a redesign, which led us to the new Space Sta- 
tion, because we were concerned about that overrun. I think we 
could submit to the record what we estimate that to be, of what 
that was at that time. 

Mr. SCHAEFER. In other words you don't know? 

Mr. Abbey. I don't know the exact number. I can get that for 

[The following information was received.] 

The projected cost growth was the manifestation of several causes and addressed 
the aggregate costs for three years (FYs 93, 94, and 95) across all the projects in 
the program. The widely reported growth of $1.08 billion was an initial projection 
and was never fully accepted by the program. Through months of hard work, the 
Space Station Freedom program managed to reduce the problem for the three year 
period to approximately $500 million. 

Mr. Abbey. That was part of the fact of why we initiated the re- 
design to go to Space Station Alpha because of our concern with 
the configuration as it was with Space Station Freedom. 

Mr. ScHAEFER. Isn't this the value of 533's? 

Mr. Abbey. Yes, the 533's would have been a major factor in 
quantifying that number. 

Mr. DiNGELL. Would the gentleman yield? 

Were you aware of the cost overruns or not aware of the cost 

General Dailey. We were aware there was a cost overrun. Yes, 

Mr. DiNGELL. What was done about those cost overruns prior to 
the time of the audit? 

General Dailey. That was when we initiated the redesign and 
the restructuring of the Program OfTice to provide better oversight 
capability on the part of the government and also to provide a more 
affordable design for the Space Station. 

Mr. DiNGELL. When did that happen — before or after the audit? 

General Dailey. That has been underway for the last 18 months. 

Mr. DiNGELL. The last 18 months. 

General Dailey. Yes, sir, and is now complete and in place. 

Mr. DiNGELL. Have you done anything to retrieve the over- 
charges and the cost overruns or to bring the contract under con- 

General Dailey. The contracts are being novated at the present 
time and we are in the final stages of definitization with Boeing 
as the prime contractor. 

Mr. DiNGELL. The Chair thanks the gentleman. 

Mr. ScHAEFER. If the Chair would, I would like to ask NASA to 
submit for the record how long NASA knew and how much the 
overrun grew during the time that NASA did know this. 

Mr. DiNGELL. Without objection, the answer to that will be in- 
serted in the record. 

[The following information was received.] 

After the FY 1993 budget for the Space Station Freedom was approved, NASA 
began formulating the FY 1994 budget. The preliminary resource requirements sub- 
mitted by the work packages in December were not dramatically out of line with 
our September estimates. However, when these requirements were completely ana- 


lyzed in January, they turned out to be significantly higher, especially for Work 
Package 2 at the Johnson Space Center in Houston. 

The first actions we took upon learning of the cost growth was to inform Congress 
and the Office of Management and Budget and initiate an intensive review of the 
content of the growth and the potential options to mitigate these costs and to deter- 
mine the cause. These preliminary reviews culminated in a meeting at McDonnell 
Douglas facilities in Huntington Beach, California, during the last week of January. 
At this review, we were successful in defining a number of options to reduce costs, 
but we still did not fully understand the causes of the projected increase. 

Although, we began with Work Package 2, we recognized that it would be nec- 
essary to review the entire program to find where we could cut, reduce, or reorga- 
nize in order to gain efficiencies and realize cost savings. It was for this purpose 
that we began a series of reviews at our program office in Reston, Virginia, in early 
February. All work packages, prime contractors, and international partners partici- 
pated in these reviews. In this way, we could ensure that the reviews would be both 
comprehensive and coordinated, as well as ensure that we understood any potential 
cost growth threats from other parts of the program. After examining many options 
we came up with a number of cost mitigation measures. 

The Space Station Freedom program worked very hard to reduce the projected 
cost increase and had achieved a measure of success, reducing it by 50 percent. Soon 
thereafter, the Administration directed that NASA redesign the Space Station, with 
one of the stated goals being a less expensive vehicle. 

Mr. SCHAEFER. If NASA did know about the overruns and if 
NASA knew that the programs would actually cost more than the 
contractors were telling NASA, what was NASA telling Congress? 

Mr. Abbey. I think again when we were looking at the need to 
redesign the Space Station and go to Space Station Alpha, that was 
a major factor in why we went to the new configuration and we 
projected costs that we felt the Space Station Freedom was going 
to cost when we presented the design to Dr. Vest's committee and 
to the Congress and that was last summer. 

Mr. SCHAEFER. Did you tell Congress before the redesign? 

Mr. Abbey. We reviewed the redesign with the Vest committee 
and last summer also with the Congress. 

General Dailey. It is important to point out, sir, that it was not 
an overrun of incurred cost. It was a projection of what the overrun 
would turn out to be, and that is why we reorganized the program 
to keep it from happening. 

Mr. SCHAEFER. How big was that? 

General Dailey. That is the number we will give you for the 

Mr. Dingell. Are you telling us then that there were no cost 
overruns, but you were anticipating them. Is that right? 

General Dailey. That is right. 

Mr. Dingell. So there were no cost overruns at all up to the 
point we are discussing? 

General Dailey. There was not an overrun of incurred costs. 

Mr. Dingell. What is incurred costs? 

General Dailey. I will get somebody up here to explain that, if 
I may, sir. 

Mr. Dingell. All right. 

Let me try and simplify this. What you are telling us was that 
the budget was not overspent. Is that right? 

General Dailey. That is right. 

Mr. Dingell. But that you knew that because of costs, which ei- 
ther had been developed up to this point or costs which were going 
to be developed in the future, that the budget would be overspent? 

Mr. Dailey. If we didn't take action. 


Mr. DiNGELL. Now those are cost overruns which are going to ac- 
crue, and the result of that is that what we are seeing here is only 
a situation where they had not yet shown up on the books, but not 
where they were not a reality; is that right? 

These overruns were a reality. They didn't show on the books be- 
cause you had not paid for them, but these overruns, in fact, rep- 
resented costs which had already been incurred by the contractor 
and which were going to be billed to the government. Isn't that the 

General Dailey. It may be the case. I can't answer that. 

Mr. DiNGELL. It may be the case or it is the case? 

General Dailey. I don't know. When we provide this information 
for the record, we will clarify that. 

Mr. DiNGELL. But it is also a fact that under these cost overruns, 
work would be shifted to the future, wouldn't it? 

General Dailey. That is one way of accommodating it, yes; or 
eliminate it. 

Mr. DiNGELL. It is not unfair to assume that that was going to 

General Dailey. Another way and, in fact, the way that we did 
accommodate the cost in the redesign was to reduce the scope. 

Mr. DiNGELL. I thank the gentleman. I am not taking his time 
away from him, but I wanted to make sure we got this answer on 
the record. 

Mr. SCHAEFER. I am not sure we do, Mr. Chairman, yet. 

I am looking at a 1993 Inspector General report that states on 
page 14, and I quote, "In fact, in most cases, NASA officials use the 
term 'cost overrun' to mean costs exceeding available funding for 
a given period, whereas the general understanding of the term is 
costs exceeding those estimated or contracted for a certain product 
or level of accomplishment." 

Is that correct? 

Mr. Easley. I think that would be an acceptable definition of 
what a pure contract overrun would be, what you read. 

Mr. SCHAEFER. Didn't NASA use somewhat of a funny definition 
of overrun that was tied to the Anti-Deficiency Act which NASA 
recognized as overrun only when the money ran out? 

General Dailey. I don't think that is exactly right, sir. This was 
a very serious issue that was addressed and we never reached reso- 
lution with the Inspector General on this particular 

Mr. SCHAEFER. All right. 

Is there any potential advantage to NASA and a contractor un- 
derestimating the cost of a contract? That is, is the contractor's fee 
somewhat based upon the original bid, meaning that overruns are 
ineligible for award fees? 

General Dailey. You mean a buy-in? Is that what you are refer- 
ring to; underbidding in order to get the contract? 
Mr. SCHAEFER. Lowballing, I guess you could call it. 
General Dailey. That is a technique that is used. One of the 
management reforms that we have in place is designed to counter 
that and should a contractor underbid a contract knowingly, we 
have controls in place through what we call the Program Manage- 
ment Council which is an agency-level review council that reviews 
all programs over $200 million on a quarterly basis or as required 


based upon changing phases of development, that once a program 
enters this process and is baseUned, if it approaches or achieves a 
15 percent overrun in cost or schedule or fails to achieve its tech- 
nical requirements, it is subjected to review for termination. 

That clause was put in specifically to guard against people un- 
derbidding intentionally and then having a situation where we 
have to add additional funding to complete the program. We think 
we have a fix in place. We have met with the CEO's of all of our 
companies and made clear what our intention is and we are charg- 
ing the contractors to bid on performance, not on cost. We are look- 
ing for people who can do the job 

Mr. SCHAEFER. So a contractor bids, is given the bid, and it may 
or may not have been lowballed, but then they are able to go to 
15 percent above that bid and still be in compliance; is that cor- 

General Dailey. Yes. 

Mr. SCHAEFER. Why do we have a 15 percent leeway here? Why 
do we have any? 

General Dailey. We believe it is necessary. When you work in 
a research and development area, you don't know exactly what you 
are going to get when you start a project. You know what you want 
and you know what you think technology will enable you to 
achieve, but you are not sure. 

So management reserve is a necessary part of a development pro- 
gram. What we give the contractor is a fixed number. What we 
carry in reserve over that, they are not aware of, but we are, and 
that is where we then decide whether we have our own estimate 
as to what it is going to take to complete the project. 

Sometimes it is more than the contractor tells us. We also have 
the funding based upon what we think it is going to take to do it. 
That is the flexibility that we give the program manager to operate 
within his or her program, and when it appears that achieving the 
goal is going to be possible, but it is costing more than was origi- 
nally estimated by the contractor, we give them some leeway. 

Fifteen percent we feel is a stringent requirement in a research 
and development environment. 

Mr. SCHAEFER. Is there any penalty to the contractor? 

General Dailey. The ultimate penalty would be that they would 
lose their contract. Another reform that we have in place is called 
the award fee reform which penalizes them for failure to make 
their costs or schedule or technical performance and their award is 
based upon how well they do. 

There is greater emphasis now being placed on financial manage- 
ment as part of this. It has been incorporated as part of the award 
fee criteria, which was an answer to a previous question that came 
up with the auditors. 

Mr. ScHAEFER. Mr. Chairman, I am very concerned about this 
because if you had 10 percent rather than 15 percent, we probably 
would have everybody running up to 9.y2 or 9% as we go along. 
How many times has this occurred? How many times in your expe- 
rience or anyone else at the table have we had these cost overruns 
approach the 15 percent level? Is this commonplace? 

General Dailey. It is commonplace. 


Mr. SCHAEFER. I would imagine it would be commonplace that 
they will go up to 15. 

General Dailey. We can review for termination at any time. 
They could be on schedule and on cost, but not making their tech- 
nical goals and we could cancel for that reason. 

What I am saying is there is an automatic review that goes into 
effect once they reach the 15 percent level. 

Mr. SCHAEFER. Have you cancelled any for default? If so, why 

General Dailey. We have tried. 

Mr. Schaefer. Wait a minute. You have tried. What is the prob- 

General Dailey. There are constituencies associated with every 
program we have and we have been encouraged to continue some 
that we have tried to 

Mr. Schaefer. I don't understand constituencies. We understand 
constituencies from our standpoint. Is it the same thing? 

General Dailey. It is exactly the same thing, sir. 

Mr. Schaefer. Is it Members of Congress? 

General Dailey. Members of Congress have lent it support in 
cases where we have tried to cancel programs. 

Mr. Schaefer. Even though you have tried to cancel them. Mem- 
bers of Congress have stepped in and this has been apparently 
tried because of default? 

General Dailey. Yes, sir. 

Mr. Schaefer. I yield back, Mr. Chairman, for now. 

Mr. DiNGELL. The time of the gentleman has expired. The Chair 
thanks the gentleman. 

The Chair would inquire, you say in your statement, "The very 
survival of the Space Station program depends on how successful 
NASA and its contractors control and reduce costs proactively." 

How important is cost control, then, to the survival of the Space 

Mr. Abbey. We believe it is absolutely critical, sir, that we must 
maintain this program on cost, on schedule, and achieve our tech- 
nical goals. 

We are committed to doing that. That was what I was trying to 
cover in my opening statement, is that we believe we have both the 
structure and the people, employees, to make sure that this hap- 

Mr. DiNGELL. General Dailey, NASA's own performance review 
for Boeing for the last four rating periods indicate the performance 
has been unsatisfactory twice and poor the other two times in cost 

Now, if cost control and cost reduction are imperative to the sur- 
vival of the Space Station, how could NASA now be dependent 
upon a contractor who has consistently demonstrated unsatisfac- 
tory or poor cost control abilities on previous Space Station con- 

General Dailey. That was a major factor for the task force selec- 
tion of Boeing as the prime contractor for the International Space 
Station. We have had extensive discussions with them. They are 
completely aware of the reforms and the requirements that we 
have implemented as a part of this transition, and they are step- 


ping up the requirements to meet their responsibilities in financial 
management and in the program development area. 

They are a very strong company, with a very sophisticated busi- 
ness management system. They are capable of doing it. We know 
they are and they know they are. 

As I mentioned, NASA was at fault to a certain degree in the 
previous activities with our failure to provide proper oversight and 
to require compliance. 

Mr. DiNGELL. Now, why didn't they have to meet these standards 
and procedures and requirements of NASA prior to the time that 
they got to be selected to be the prime contractor? You had four 
rating periods in which they rated poor or unsatisfactory. 

General Dailey. I think it would have been impractical in the 
time frame. One of the things we are most concerned about at the 
moment is this transition we are going through where we don't 
have a definitized contract, and we are trying to get the program 
established and on course so that we can start making valid assess- 
ments as to where we are. 

So I believe that the answer to that would be timing. And the 
need to 

Mr. DiNGELL. At this time I will yield to Mr. Barton for the pur- 
poses of asking questions. 

Mr. Barton. Thank you, Mr. Chairman. I have a 1:00 o'clock ap- 
pointment and I appreciate it. I just want to ask one question. 

First, it is comforting to know you are beginning to do something 
about the Trust Form 533 and the manual. I appreciate that. 

I want to go to incentive arrangements on your contracts. Under 
current law, is it really possible to provide true financial incentives 
to save money, i.e., if money is saved can you develop an incentive 
system if they get cash so that they know that if they save money 
and perform on time that they get benefits? 

Let me give you an example. When I was plant manager of a 
printing plant, we had an incentive program where each month we 
took our billable dollars and we added up all our costs and in the 
difference we split half with corporate and we kept half at the com- 
pany, plant level, and of that half, we distributed that immediately 
in terms of cash bonuses within 2 weeks from the end of the 
month. So an average factory worker making $7 an hour might get 
a $150 or $200 bonus. So they knew if they performed and saved 
money that they would get an immediate incentive and that at the 
end of the year we had a big bonus pool and they might get several 
thousand dollars. 

Is it possible under current law and current regulations within 
NASA to develop some incentive arrangement where everybody 
who actually saved money and was doing a good job got an imme- 
diate cash benefit and at the end of the year a large benefit and 
in your case as the Deputy Administrator you might get a million 

General Dailey. Sounds like a great plan to me, sir. 

Mr. Barton. Well, I mean, I don't want to belabor it, and I am 
using the Chairman's time, but when you know your costs — I knew 
what paper cost, I knew what ink cost, I knew what natural gas 
cost, I knew what printing plates cost, I knew what the labor costs 
were, and I could go to the workers and say, this is what our over- 


head is, these are the variable costs and if you will work, you are 
going to make more money. So it was their money; it wasn't the 
company's money, you know. 

At NASA, if it is their money, and I don't know what NASA's 
budget is, $15 billion or somewhere in that range, you start divid- 
ing up incentives and the top people make a lot of money, but the 
lower factory worker could get a bonus of several thousand dollars 
a year. 

Now, can you do something like that in the current system or is 
it going to take legislation to make that possible? 

General Dailey. I am going to ask Deidre Lee to answer that 
question, but let me comment generally. In the R&D, it is not quite 
that straightforward because we don't know what things cost and 
we don't know exactly how to make them. So there are some risks 
involved there. 

Mr. Barton. I understand that. 

General Dailey. We believe our new procurement reforms have 
provided that incentive, and we have met extensively with our con- 
tractor leadership and they believe we have got a system in place 
that will incentivize them, but I will let Dee expand on that, if I 

Ms. Lee. Under the current process what happens is the contrac- 
tor earns an award fee based on performance and they can elect 
to distribute those funds. In fact, we have some contractors who ac- 
tually do distribute the award fee score and benefit with their di- 
rect employees. Different contractors do it differently and we don't 
direct them specifically how to do that. 

Another method we are emphasizing more is an incentive fee 
with a cost incentive where there is a sharing in the cost savings 
so for every dollar the contractor saves, the government retains 80 
percent, the contractor retains 20 percent. We have a cost share 
line. We are moving more to those types of contracts. 

Mr. Barton. So you have current authority if you can implement 
a system that works? 

Ms. Lee. Yes. 

Mr. Barton. I thank the Chair. I will pursue this because that 
is the only way, admittedly, in a R&D system where costs are more 
indefinite. It is difficult to put an incentive system in place. But 
you know your overhead, you know your labor costs, and in some 
parts of your programs you actually build a configuration, you are 
trying to build something. 

General Dailey. Right. 

Mr. Barton. NASA at one time was the most innovative and ad- 
mired agency of the government. So you got some goodwill out 
there that we certainly don't have here in the Congress, and if you 
use that with the good graces of this committee and the Science, 
Space, and Technology Committee you could be a role model in how 
to do things right. I want to see a man on Mars and a woman on 
Mars in my lifetime and the only way we are going to do that is 
if we get our act together here, and this is an example of tough 

Don't get mad at John Dingell because he is calling you up here. 
He is trying to save the taxpayer dollars, and if we do that we will 
be able to do some of the visionary things we all want to do. 


I thank the chairman for graciously yielding some of his time. 

Mr. DiNGELL. The gentleman from Texas is most welcome. He 
has made, I think, some valuable points. 

General, could you submit for the record the analysis that NASA 
conducted of this matter of the Boeing selection particularly with 
regard to why you selected Boeing despite the poor record on cost 

General Dailey. Yes, sir, we will. 

[The following information was received.] 

In March 1993, the CUnton Administration announced its continued support for 
the Space Program, but directed NASA to redesign the Space Station to significantly 
reduce development, operations, and utilization costs wnile achieving many of the 
current goals for long duration scientific research. 

To carry out the President's decision, NASA established a Station Redesign Team 
to develop three new technical design options, a streamlined management structure, 
and a more efficient and accountable acquisition approach. On this latter point, the 
Team recommended that NASA designate one of the existing Space Station contrac- 
tors as the single prime contractor, responsible for managing and integrating the 
Space Station as a vehicle and coordinating the design and development of all nec- 
essary hardware. Subsequently, the Advisory Committee on the Redesign of the 
Space Station, appointed by the Vice President, endorsed the Team's recommenda- 
tions, particularly the need to designate a single contractor to manage and integrate 
the Space Station. 

In June of 1993, the President accepted the advice of the Advisory Committee and 
announced his decision to support a restructured Space Station Program. As a sig- 
nificant element of this decision, the Administration urged NASA to make full use 
of the legal authority and administrative discretion available to designate a single 
prime contractor for the program. This direction was made more specific in a July 
13, 1993, letter from the Office of Management and Budget to NASA. 

NASA could have terminated all the existing Space Station contracts and per- 
formed a full and open competition for a single prime contractor which would de- 
velop its own cadre of subcontractors needed to produce the redesigned Space Sta- 
tion. However, this course of action would have wasted much of the taxpayers' in- 
vestment to date, delayed the program by one to two years, dissipated the program's 
talent and expertise, and embroiled the parties in potentially wasteful and time con- 
suming settlement negotiations involved in terminating work, much of which would 
have to be restarted by the new contractor's team. 

As a more efficient and expeditious alternative, NASA elected to select a single 
prime from among the group of contractors with the knowledge and experience nec- 
essary to minimize the time and waste that could occur during program transition. 
Then, with the consent of all parties concerned, NASA novated the remaining prime 
contracts to become subcontracts to the single prime. 

As expected, novation capitalized on the completed work, eliminated the need to 
pay a new group of contractors to duplicate progress already made, kept the core 
of technical talent and expertise intact, and minimized the delay in transitioning 
to the redesigned Space Station. Moreover, because the establishment of a single 
prime contractor, and novation of the remaining prime contracts occurred in a short 
timeframe, NASA quickly and efficiently refocused the program's substantial daily 
expenditures to the redesigned Space Station. 

To implement the direction to select a single prime contractor, NASA established 
a panel of senior officials in July of 1993. After formulating evaluation criteria for 
a common frame of reference, the panel gathered information on each prime contrac- 
tor's responsibilities and historical performance. The panel then applied the pre- 
viously established criteria to the available information and arrived at a compara- 
tive assessment of each contractor's capability to perform the additional and critical 
functions of management and integration. 

The panel's assessment clearly pointed to Boeing as the strongest existing Space 
Station contractor in relation to the established criteria. Specifically, Boeing is re- 
sponsible for the truly essential core hardware, that is, the pressurized modules for 
human habitation; Boeing's integration effort is the most complex required by the 
Space Station Program, principally because the modules must deal with the human 
environment; Boeing had successfully demonstrated capability in the key program 
elements identified in the evaluation criteria; and, Boeing has done the predominant 
amount of work with the international partners integrating their pressurized mod- 
ules with those of the U.S. 


On August 20, 1993 the NASA Administrator submitted formal notification pursu- 
ant to Title 10 U.S.C. 2304(c)(7), to the Speaker of the House, the President of the 
Senate, and all appropriate House and Senate Space Committees, of a determina- 
tion to use procedures other than full and open competition to select Boeing as a 
single prime contractor for the redesigned Space Station program. Pursuant to stat- 
utory authority, NASA proceeded to implement the selection after the prescribed no- 
tification period, having received no objection from Congress. 

In summary, NASA responded to the President's direction to redesign the Space 
Station and restructure program management by selecting a single prime contrac- 
tor. It was, therefore, in the public interest fo/ NASA now to move swiftly and effec- 
tively to make Boeing the single prime contractor responsible for managing and in- 
tegrating the Space Station. 

Mr. DiNGELL. General, the subcommittee has been repeatedly 
told by the staff at NASA that past performance will be an impor- 
tant factor in the selection of contractors for new work. Do you 
agree with that? 

General Dailey. Yes, sir. 

Mr. DiNGELL. Now, let's look at the Department of Defense In- 
spector General and his comments. He has eight ongoing criminal 
investigations into practices by Boeing at the Department of De- 
fense. Did NASA know about any of these? 

General Dailey. We are informed by the Inspector General of on- 
going investigations when they feel it is appropriate. I don't know 
whether we know of all the things that they are doing or not. 

Mr. DiNGELL. Don't you think you ought to know those in that 
area because it relates to the integrity and the ability and com- 
petence of your contractors? 

General Dailey. Those are important things, yes, sir, we don't 
control the IGs; they are independent agencies and they inform us 
as they feel it is necessary. 

Mr. DiNGELL. Sitting there, do you know about any of these 
eight? Do you know any of the eight? 

General Dailey. I don't know which eight you are referring to, 
sir, so I don't know whether I know. 

Mr. DiNGELL. These are ongoing IG investigations of Boeing. To 
the best of my knowledge, it is all that is going with regard to Boe- 
ing at the IG. 

General Dailey. I would have to say I don't, no, I don't know. 

Mr. DiNGELL. You don't know about it. Are you aware that the 
Air Force Office of Special Investigations has 13 criminal cases 
going into the conduct of Boeing? 

General Dailey. No, I was not aware. 

Mr. DiNGELL. Now, your staff has told the subcommittee staff 
that when they examine past performance of NASA contracts they 
only look at previous performance on NASA contracts. 

Shouldn't NASA take into account when it is considering a com- 
pany like Boeing the overall past performance of the company with 
other Federal agencies such as the Department of Defense? In 
other words, if they will diddle the Department of Defense, why 
won't they do the same thing to NASA? 

Ms. Lee. The way we do past performance 

Mr. DiNGELL. Beg your pardon? 

Ms. Lee. On the source selection in past performance evaluation, 
and this is also part of a new initiative from the administration. 
Office of Federal Procurement Policy, greater emphasis is on past 
performance evaluation. We look at the contractor, we tell them in 


the RFP, the request for proposal, they must provide us data on 
their past performance. That includes relevant experience plus like 
work. We do look at both commercial work. Department of Defense 
work, and any other NASA work. 

In looking at the NASA work, we would look at existing reports, 
the existing contracts, and we like to survey for ongoing work as 
well as work that has been completed, and we try to do likewise 
for other activities, both commercial and at other government agen- 

Mr. DiNGELL. Are you telling me that Boeing was requested to 
make submissions with regard to their behavior in prior Federal 
contracts and apparently did not inform NASA about the problems 
that they had with the Defense Department with regard to the De- 
fense Contract Audit Agency and other agencies that are inquiring 
into their performance? 

Ms. Lee. On this particular evaluation, there wasn't a formal 
RFP out. The selection was made among the existing station prime 
contractors so it was based on a determination and finding which 
is a specific method that was notified so we didn't have a formal 
RFP out. 

Mr. DiNGELL. Are you telling me that you didn't inquire into the 
behavior of Boeing with regard to these matters or that you did? 
Or that you didn't do so very carefully? I am trying to understand 
what you are telling me because apparently Boeing didn't tell you 
because poor General Dailey is sitting down there and he doesn't 
know anything about these events. 

Did you ask Boeing to tell you about these things or did you not? 
You appear to have a wonderful, trusting relationship with Boeing. 
I am impressed they must have done something to bring this kind 
of confidence on the part of NASA in Boeing into being because ap- 
parently you didn't inquire of Boeing when you put them in charge 
of this whole contract about their poor behavior in connection with 
other contracts. 

What kind of an inquiry did you make with regard to Boeing 
when you put them in charge of these contracts? 

Ms. Lee. This particular selection, which I believe we are going 
to go ahead and submit the analysis for the record, the prime em- 
phasis was on the technical expertise, and, again, we were dealing 
with a small group of contractors, the prime contractors, so what 
we basically did was a comparative analysis. 

Mr. DiNGELL. What are you telling me, that you made the best 
pick of a sorry lot? You had four or five contractors and you obvi- 
ously picked the best of the contractors. Did you pick Boeing be- 
cause they were the best, or because you thought they were the 
best, or because you didn't bother to inquire? Why did you pick 
Boeing as the best? 

General Dailey. We will submit 

Ms. Lee. I believe we picked Boeing because we felt they had the 
most expertise on the Space Station. 

Mr. DiNGELL. You felt? 

Ms. Lee. Had that expertise. That was a judgment and it was 
done by 

Mr. DiNGELL. You are telling me you believed that? 

Ms. Lee. Yes. 


Mr. DiNGELL. Did you have a reason for believing that? 

General Dailey. If you would like to pursue that we can bring 
Ms. Pam Mclnerney up to answer that; she is ready to lead us 
through the process. 

Mr. DiNGELL. I am content to let you do that if you want, Gen- 
eral. Ms. Lee said she believed they were the best. I would just ask 
you on what basis did you believe they were the best? You know, 
I believe in the Holy Trinity, I never talked to any of them, never 
met the Holy Ghost, but I believe he is there. I don't know it but 
I believe it. I have great faith. 

Apparently, you had great faith in Boeing. I get my great faith 
out of the scriptures. Where do you get your great faith in Boeing? 

You say you had great faith in Boeing. You proceeded to put Boe- 
ing in as the prime contractor. They have demonstrated I think 
rather conclusively on the basis of the record here that they did not 
have a good cost containment record. 

Other agencies, the Defense Department has eight ongoing crimi- 
nal investigations, the Air Force has 13 criminal cases into the con- 
duct of Boeing. 

I am trying to fmd out what was the good information you got 
on Boeing that told you that Boeing people were the people that 
should handle the Space Station? 

General Dailey. That decision was based on the fact that Boeing 
had the responsibility for development of the core hardware for the 

Mr. DiNGELL. The responsibility for the element of core hard- 

General Dailey. Yes. 

Mr. DiNGELL. That is wonderful. But what did they say about 
cost containment? 

General Dailey. The amount and complexities of integration nec- 
essary to provide the core hardware, past performance and dem- 
onstrated capability to produce or support the following Space Sta- 
tion program elements, pressurized elements, unpressurized ele- 
ments, subsystems for human presence and others, logistics ele- 
ments and analysis, and physical integration of experiments, capa- 
bility to coordinate and integrate U.S. elements with those pro- 
vided by international partners. 

Mr. DiNGELL. To give this to Boeing, you took it from another 

General Dailey. We took it away from several others, yes. 

Mr. DiNGELL. Four contractors. Now, Boeing in addition even 
pled guilty and had been suspended in the 1990's for contract irreg- 
ularities. Were you aware of that? 

General Dailey. Yes, we were. 

Mr. DiNGELL. Well, what was it that caused Ms. Lee to have a 
belief that Boeing would do a good job here and that Boeing could 
control costs? Did you inquire into whether Boeing could control 

General Dailey. The confidence that we had in Boeing was based 
upon their 

Mr. DiNGELL. Pardon? 


General Dailey. The confidence we had in Boeing was based on 
their demonstrated performance in developing the elements that I 
mentioned before. 

Mr. DiNGELL. We have established that their demonstrated per- 
formance was — let me just quote. They had been rated unsatisfac- 
tory twice and poor the other two times on cost control. 

Now, you said here, this, you said the very survival of the Space 
Station depends on how successful NASA and its contractors con- 
trol and reduce costs proactively. 

General Dailey. And I 

Mr. DiNGELL. Here you have yourself a contractor who has had 
all manner of difficulty with other agencies, including pleading 
guilty to criminal charges; unsatisfactory and poor two times each 
on cost control. What I am trying to find out is what is it that gives 
Ms. Lee and you. General Dailey, confidence that Boeing is going 
to be able to do these things for you in terms of containing costs 
which you tell us is so important that the entire survival of the 
Space Station depends on it. 

What caused this confidence? What did you have in your files 
that says that Boeing has undergone a transformation which indi- 
cates they will deal honestly with the government and which indi- 
cates that Boeing is going to contain costs after a record of two re- 
views which say poor and two which say unsatisfactory? 

What was it? There must have been something in your records 
that tells you that. Now please tell me what it was. 

General Dailey. It was the very fact that cost control is critical 
to the future of the Space Station. That is the 

Mr. DiNGELL. And we are in cordial agreement. You are speaking 
to somebody who voted for this. 

General Dailey. I know. 

Mr. DiNGELL. I am beginning to wonder whether I should have 
voted for it; in fact, I am beginning to wonder if I ought to be at- 
tacking it. 

I want to know what led you to believe that Boeing was the per- 
son or the corporation that should deal with this question. What 
of 5^our records establishes that? 

General Dailey. Technical competence in their ability to build 
this system, their previous experience, and their realization that 
cost control is absolutely critical to the future of the station. 

Mr. DiNGELL. Aren't you saying you are taking this on faith, 
General, that they are going to 

General Dailey. I think that is the case any time you let a con- 

Mr. DiNGELL. Pardon? 

General Dailey. I think that is the case any time you let a con- 
tract, sir. You have to take it on faith that they can do what they 

Mr. DiNGELL. I am asking you what it was in the records of your 
agency that justified the belief that Boeing was the best and that 
Boeing could meet the requirements? 

Ms. Lee tells me you believe and I am a great believer, in belief. 
I think it is something we ought to believe. But belief requires faith 
and we should run the government on hard facts and I am trying 
to find out what hard facts did you have that justified this? 


General Dailey. Boeing is a very large corporation with a large 
commercial aircraft capability that is very successful and they have 
corporate capabilities that they can bring to bear to run programs. 
This is part of our discussion with them. 

Mr. DiNGELL. Their corporate ability they brought to bear had 
motivated NASA to find them poor and unsatisfactory in two in- 
stances each on four reviews. 

Let me go on. Boeing just recently settled a mischarging case 
with the government for $75 million involving other programs and 
the Space Station; and the press release says — this comes out of 
the U.S. Attorney's office— "Boeing Pays $75 Million For 
Mischarging On Defense Contracts . . . the largest single monetary 
recovery in the history of the United States Attorney's Office for 
the Western District of Washington. 

Such cost mischarging was particularly egregious in Boeing divi- 
sions that were exploring the application of Artificial Intelligence 
(AI) to computers. In the 1980's, Boeing aggressively pursued AI 
research and potential applications to space robots of the future, 
space station environmental systems, military aircraft command 
and control systems, and other computer applications." 

Were you aware of this? 

General Dailey. We are now, yes, sir. 

Mr. Dingell. You are now? Were you at the time you awarded 
it to Boeing? 

General Dailey. I can't answer. I don't know whether we were 
or not. We received that information recently when it was released 
by Justice. 

Mr. Dingell. Did you have any personal awareness of it? 

General Dailey. I have no personal awareness of it. 

Mr. Dingell. You did not. Did anybody at the table have any 
awareness of this? 

Ms. Lee. I was aware of several activities ongoing, just generally 
what was being discussed; I knew Justice Department was dealing 
with some activities. 

Mr. Dingell. Did you make any inquiry into it? 

Ms. Lee. As far as this particular case, no; I just kept myself in- 
formed on that. 

Mr. Dingell. But you believed Boeing was the right contractor 
to do this work? 

Ms. Lee. I personally did yes. 

Mr. Dingell. You personally believed it. 

General, do you personally believe? 

General Dailey. Yes, sir, we as an agency 

Mr. Dingell. I have asked you, Ms. Lee and you. General, to tell 
us about anything you had which would be of a factual character 
that would justify it. And here we have the regrettable situation 
where you and Ms. Lee both believe, but you have not got any hard 
data, and you keep having all these warnings coming in about Boe- 

Can you tell us on what basis the committee can make, come to 
this belief? There may be something out there that would justify 
me in having the same belief, or Mr. Schaefer. 


Now, Mr. Schaefer is a much more charitable fellow than I so he 
will probably be easier to convince than I. But can you tell us any- 

General Dailey. Sir, I think you have to have confidence in us 
that we can make this come in and bring the program in with the 
capabilities and with the money that is available to do it. We are 
committed to doing that and that is what we are here to tell you. 

Mr. DiNGELL. Well, now. General, the Defense Contract Audit 
Agency has questioned over $100 million of the $490 million that 
IBM submitted as a cost on the Space Station program. Are you 
aware of that? 

General Dailey. Yes, sir, we are. 

Mr. DiNGELL. What are you doing to collect that money? 

General Dailey. You want to go ahead and answer that, or Gene. 

Mr. DiNGELL. That is approximately 20 percent; 100 million out 
of 490 comes out to a shade more than 20 percent. What are you 
doing to collect that money? 

Mr. Easley. I would like to answer that, Mr. Chairman. 

When I became aware of it, there was, through the DCAA audit 
report where there was potential unallowable costs that a letter 
was sent from NASA to McDonnell Douglas, our prime contractor, 
IBM is a subcontractor, informing them that they are to make no 
more payments to that, to IBM, until it has all been resolved. 

Mr. DiNGELL. Have you withheld that money, then? When was 
the first money withheld? 

Mr. Easley. To my knowledge no money has been withheld on 
the billable costs to date. 

Mr. DiNGELL. You say no money has been withheld. But you are 
paying them. You are not withholding. But if you are paying them 
you are not withholding, is that right? 

Mr. Easley. That contract was terminated and there is a very 
low level of that activity going on at IBM, very few costs currently 
being incurred. There are some costs that have not been nego- 
tiated. It is undefmitized costs and there will be quite a bit of costs 
that IBM believes that McDonnell owes them and 

Mr. DiNGELL. How much money are you withholding from IBM? 

Mr. Easley. I don't have the specific number that IBM has not 
been reimbursed by McDonnell. 

Mr. Dingell. Well, will you look into it and inform the commit- 
tee for inclusion in the record how much you are withholding from 

Mr. Easley. Absolutely. 

[The following information was received.] 

As of June 26, 1994 NASA is withholding $3.4 milhon from IBM. NASA is with- 
holding an additional $14.8 million from McDonnell Douglas. 

Both companies also have pending fee claims which NASA has not yet analyzed. 
IBM is claiming $6.3 million and McDonnell Douglas has claims totalling $46.7 mil- 

Mr. Dingell. I get the feeling you are not withholding much be- 
cause you are telling us you have a low level of activity. 

The sequence is you are paying McDonnell which is paying IBM, 
is that right? 

Mr. Easley. We are not making any payments to McDonnell that 
relates to the IBM activity whatsoever. 


Mr. DiNGELL. Well, now, as I gather, McDonnell is in this portion 
of the contract the prime contractor, is that right? 

Mr. Easley. That is correct. 

Mr. DiNGELL. IBM is a subsidiary contractor. Does the prime 
contractor have any responsibility or not? Is he able to say we got 
lots of money, fellows, have a good time? Or is he supposed to actu- 
ally supervise expenditures as the agent of NASA? 

Mr. Easley. Your latter point is correct. It is his subcontract and 
he is the responsible party to make sure it is all correct before the 
costs are billed to us. 

General Dailey. As you are aware, we are undergoing a termi- 
nation. We have not received the final settlement proposal from 
McDonnell Douglas. We are making no further payments on this 
matter until it gets resolved. 

Mr. DiNGELL. Well, IBM has submitted their termination, is that 

Mr. Easley. Their termination proposal. 

Mr. DiNGELL. Okay. McDonnell Douglas has not, is that correct? 

Mr. Easley. That is correct. 

Mr. DiNGELL. Why not? 

Mr. Easley. McDonnell was waiting until they get the, all the 
termination activities from their subcontractors so they will be able 
to give us a better proposal. 

Mr. DiNGELL. Well 

Mr. Easley. All inclusive. 

Mr. DiNGELL. You are still paying McDonnell, is that correct? 

Mr. Easley. No, sir. We have ceased payments to McDonnell on 
all activities. 

Mr. DiNGELL. You have ceased payments to McDonnell. 

Mr. Easley. As relates to the Space Station Freedom contract. 

Mr. DiNGELL. How much is outstanding there? 

Mr. Easley. I cannot give you a precise number. There are 
claims from some subcontractors that have not been paid that 
could come in. 

Mr. DiNGELL. So they are not paying their subcontractors? 

Mr. Easley. There are some additional claims as a result of the 
termination that they — McDonnell in turn terminated a number of 

Mr. DiNGELL. Terminated a number of subcontractors? 

Mr. Easley. They have terminated several subcontractors. 
McDonnell Douglas had a number under the Space Station Free- 
dom program that had to be terminated. 

Mr. DiNGELL. I am trying to understand. McDonnell Douglas has 
been prime contractor. McDonnell Douglas has been making pay- 
ments to IBM. McDonnell Douglas has made payments to other 
subcontractors. You are getting complaints about McDonnell Doug- 
las terminating some subcontractors. 

I am trying to understand, do you know what McDonnell Douglas 
is paying to whom for different portions of the contract that we are 

Mr. Easley. I can certainly get you that information. 

Mr. DiNGELL. But you don't know it now? 


Mr. Easley. We have incurred in total close to $3 billion on that 
contract with McDonnell Douglas and somewhere on the order of 
half would be for subcontractors. 

Mr. DiNGELL. Can you tell us or can you, General, tell us today 
that McDonnell Douglas is making pa3rments to the subcontractors 
according to the contract or that they are simply paying money? 

Mr. Easley. Let me answer that, to my knowledge they are mak- 
ing payments in accordance with the terms of their subcontracts. 

Mr. DiNGELL. Do you know that? Have you had an audit that 
tells you they are doing that? 

Mr. Easley. All our vouchers — we do not 

Mr. DiNGELL. No, vouchers are nice, but when I submit a vouch- 
er I say I have done this and I sign my name. That is a voucher, 

Mr. Easley. Yes. 

Mr. DiNGELL. So if people, for example, like Boeing have falsely 
billed, they submitted false vouchers, haven't they? 

Mr. Easley. Correct. 

Mr. DiNGELL. DCAA caught them. You guys did not, did you? 

Mr. Easley. Let me point out every voucher I have paid McDon- 
nell Douglas has been provisionally approved by DCAA. 

Mr. DiNGELL. But they were paid before audit. What I am trying 
to say is there is a difference between an audit and a voucher. 

Mr. Easley. That is correct. 

Mr. DiNGELL. An audit is where you validate, you certify the 
work has been correctly done and the amount is proper, is that cor- 

Mr. Easley. Correct. 

Mr. DiNGELL. A voucher is somebody saying I did this and you 
pay them money, right? 

Mr. Easley. Not unless it has been approved by DCAA. Every 
one of these to 

Mr. DiNGELL. All of these were approved by DCAA? 

Mr. Easley. To my knowledge all the money we paid McDonnell 
Douglas, the cost vouchers have been provisionally approved by the 
Defense Contract Audit Agency. 

Mr. DiNGELL. Have been provisionally approved? 

Mr. Easley. Right. 

Mr. DiNGELL. There is an approval and provisionally approved 
approval? What is the difference? 

Mr. Easley. The difference is that this — the provisional approval 
is what you need to make disbursements from the Federal Treas- 
ury. The final approval is after the contract work is complete or 
some segment in the process where DCAA has a final incurred cost 
audit to finally verify the costs previously provisionally approved 
were in fact correct or should be adjusted, 

Mr. DiNGELL. That has all been done? 

Mr. Easley. The final incurred cost audit has not been done. 

Mr. DiNGELL. But the money has been paid? 

Mr. Easley. The money has been paid up through a certain pe- 
riod of time. 

Mr. DiNGELL. It has been done at IBM, has it not? You paid IBM 
all except a few small items that have to be cleaned up according 
to what the General tells me. 


Mr. Easley. There are quite a number of costs that IBM beUeves 
that is due them that has not been paid to them by McDonnell 

Mr. DiNGELL. Would you want to debate that with the General 
because he told us there were only a few small items that have not 
been paid at IBM? 

Mr. Easley. If you permit, Mr. Chairman, let me say there is a 
significant fee claim from McDonnell Douglas, and I am using the 
total cost in terms of cost and fee that is questionable whether or 
not the money will be fee bearing or not. 

Mr. Dingell. The basis of the audit, though, DCAA questioned 
$107 of $492 million. And what I am trying to figure out is how 
you are dealing with this matter. 

Let's take a look at this. You are still paying McDonnell now 
through the new contract with Boeing and you paid them $156 mil- 
lion to date. 

Mr. Easley. Mr. Chairman, the Boeing contract is not the re- 
sponsibility of the Johnson Space Center so 

Mr. Dingell. General, can you tell us that? What I am trying 
to understand is you are still paying McDonnell Douglas. But you 
are paying them through Boeing now. You paid them $156 million 
to date. What I am trying to understand is for what was that $156 
million paid? 

Ms. Mclnerney, I guess I will have to swear you if you are going 
to testify. Do you have any objection to testifying under oath? 

Ms. McInerney. No, I don't. 

Mr. Dingell. Do you desire to be advised by counsel? 

Ms. McInerney. No. 

Mr. Dingell. I will inform you that copies of the rules of the 
House and the rules of the subcommittee are there on the table for 
your use. 

[Witness Sworn.] 

Mr. Dingell. Would you give your name to the Reporter, please. 

Ms. McInerney. Pamela McInerney. 

Mr. Dingell. Mr. Reporter, would you read back the last ques- 
tion because this charming young lady is going to give us an an- 

[The Reporter read the record as requested.] 

Ms. McInerney. The dollar amount 

Mr. Dingell. I am having a hard time hearing you. 

Ms. McInerney. Under the new Boeing contract, the letter con- 
tract was issued November 15, 1993, and at that time Boeing is- 
sued subcontracts to the other work package contractors. Initially, 
they supported transition activities down at the Space Station pro- 
gram office in Houston in order to transition from the old work 
package arrangements into the new single prime arrangement with 
the subcontractors. 

On February 1, 1994, the letter contract was significantly modi- 
fied to incorporate the hardware content associated with the formal 
work package contract. That is the hardware content that would be 
part of the forward going program. 

So that $150 million represents transition costs through Feb- 
ruary 1, and from February 1 to the current period it would rep- 


resent the activities associated with the McDonnell Douglas portion 
of the forward going work under the Space Station program. 

Mr. DiNGELL. So I guess we can say simply that NASA is cur- 
rently paying McDonnell Douglas, right? 

Ms. McInerney. That is correct. Through Boeing. 

Mr. DiNGELL. General Dailey, there is a criminal investigation 
regarding some $20 to $40 million that IBM has charged to the 
Space Station. Isn't that right? That is some of the $107 million 
whose expenditure is questioned by DCAA. Isn't that right? 

General Dailey. I don't know what the amount is. I know there 
is an investigation under way but I don't have the details. 

Mr. DiNGELL. Well 

General Dailey. I believe that is an ongoing investigation. 

Mr. DiNGELL. Beg your pardon? I know it is. 

General Dailey. We don't get that information when they are 
under way other than to be notified that 

Mr. DiNGELL. Don't you think it would be useful if you did? 

General Dailey. Yes, sir but 

Mr. DiNGELL. Then you wouldn't have to appear before some con- 
gressional subcommittee and say, we don't know anything about it. 
But it would be useful in your administration of the contract 

General Dailey. It would. 

Mr. DiNGELL. [continuing] to know whether somebody is stealing 
from the till. Then poor Ms. Lee wouldn't have to come before us, 
Ms. Lee, and tell us what great people they are. We don't want 
that happening to her. 

Now, is NASA currently negotiating a major contract with Boe- 
ing for Space Station Alpha? 

General Dailey. Yes, we are. 

Mr. DiNGELL. Now, we have got here a whole array of abuses 
found by the Department of Justice and by other Federal regu- 
latory agencies and investigative agencies, including the Depart- 
ment of Defense. 

Wouldn't it seem useful that NASA were to have some full and 
complete audits of Boeing's actual overhead submissions? Don't you 
need those so you can make a judgment? Here you have a company 
that ranks poor twice, unsatisfactory twice, is involved in a number 
of criminal prosecutions for serious misbehavior, and you don't 
have the vaguest idea of what is going on with regard to their over- 
head submissions because you haven't had any audits of the mat- 
ter. Shouldn't you have some audits here. General? 

General Dailey. Yes, sir, but 

Mr. DiNGELL. Pardon? 

General Dailey. But Boeing was prevented from providing that 
information at the request of the U.S. Government. 

Mr. DiNGELL. They were precluded from doing so because of pre- 
vious bad conduct by Boeing. 

General Dailey. That is right. 

Mr. DiNGELL. But those criminal matters are now closed. 

General Dailey. Yes. They have provided some information. We 
have the 1993 overhead and the 1987, I believe, overhead costs. 

Mr. DiNGELL. Don't you think you ought to review the audit be- 
fore you come in here and tell us they should be the people who 
should have this contract as the prime contractor? Poor Ms. Lee be- 


lieves they are the best but she does so without any audits on these 

General Dailey. DCAA is currently auditing that information. 

Mr. DiNGELL. Well, why is it that the negotiations won't wait 
until after the audit is completed? 

General Dailey. I am not sure that it won't, but I don't know 
what the time frame is for the completion of the audit. We can get 
that information. 

[The following information was received.] 

The following represents the schedule agreed to by the government's Corporate 
Administrative Contracting Officer (CACO) and the Boeing Corporation for submis- 
sion of Overhead Rate Packages to the government: FY 1986, Boeing submission 
September 1993, audit complete February 1994; FY 1987, Boeing submission Janu- 
ary 1994, audit complete June 1994; FY 1988, Boeing submission September 1994, 
audit complete February 1995; FY 1989, Boeing submission January 1995, audit 
complete June 1995; FY 1990, Boeing submission September 1995, audit complete 
February 1996; FY 1991, Boeing submission January 1996, audit complete June 
1996; FY 1992, Boeing submission September 1996, audit complete February 1997; 
and FY 1993, Boeing submission May 1994, audit complete October 1994. 

Mr. DiNGELL. Somebody else want to comment on that? Mr. 
Holz? Ms. Lee? 

Here is where you are. You negotiate the contract and then you 
audit them. You might be saying, my word, how could we have ever 
done this — or maybe I should say, my word, how could you have 
ever done that. How could you ever have done this? 

What I am saying is here you negotiate a contract but Ms. Lee 
tells us she believes they are the best people to do the work but 
they have not even been audited and you can't tell us anything in 
your record that would indicate to me that they have been behav- 
ing properly on these matters. 

Ms. Lee. We are 

Mr. DiNGELL. How are you telling us these are the best possible 
people? They are unaudited; your record of their behavior is bad. 

Ms. Lee. We are negotiating cost reimbursement contracts so 
after the audit appropriate adjustments will be made and we will 
pay the right amount — so it is an estimating procedure as is for- 
ward pricing. We are using forward pricing rates to estimate the 
future rates that will be used to calculate the basis of that contract 
and those two after they are accumulated and become actuals and 
audited we make appropriate adjustments and pay only those al- 
lowable and applicable. 

Mr. DiNGELL. Here is where you are going to be, you are going 
to give them a contract you will audit in 4 or 5 years, you tell us, 
of the work done by the company, you are telling me that you be- 
lieve this is the best company to do the work, then all of a sudden 
whenever the audits are completed you are going to find out — I 
won't say you are going to find out but I will say you might find 
out there are a whole mess of fresh new irregularities. Are you 
going to come back here under oath and tell me you still think they 
were the best choice? 

Ms. Lee. I can't tell you at this time. 

Mr. DiNGELL. Well, can you tell us at this time? We have gone 
through this. You tell me you believed earlier, do you still believe 
they are the best people to get this work? 

Ms. Lee. Yes, sir, I do. 


Mr. DiNGELL. You do. Do you have any sound basis on which you 
can tell the committee these are the best people to do the work? 

Ms. Lee. My basis is mainly the discussions of their technical 
competence, knowledge of the Space Station. In order to be able to 
control costs and approach the business aspect, they have to have 
the technical competencies and those excellents — so I feel we have 
to have a contractor able to perform excellent in the technical 
arena and also bring in business management and cost controlling. 
They have to be coupled together and I think we have the best 
combination given the circumstances on this. 

Mr. DiNGELL. Am I in error in coming to the rather curious as- 
sumption that when one is going to select somebody they ought to 
audit first and negotiate second, rather than negotiate first and 
audit later? 

Is there something wrong with my reasoning on that matter? 
You are negotiating with Boeing, you are going to audit them later. 
I am suggesting wouldn't it be a nice thing to try something inno-» 
vative and audit first and negotiate later? Am I illogical in my ap- 
proach to this thing? 

Ms. Lee. No, sir. 

Mr. DiNGELL. What is wrong with my approach and why is it in- 
ferior to the approach you folks are taking at NASA? 

Ms. Lee. It isn't. The current system that we do use in fact is 
used not only on these contracts but government-wide. You will see 
that as we negotiate, or as any other government agency basically, 
particularly on cost reimbursement contracts, what you negotiate is 
the forward pricing rates which are the best estimates s.nd those 
are reviewed, et cetera, by DCAA. As mentioned to you earlier, 
they will go ahead and audit the forward pricing rates but then 
those rates as recommended by DCAA are what we used in the ne- 
gotiation. But still because it is a cost reimbursement contract 
when DCAA does their second audit of actuals, we make additional 
adjustments. So we do use audited rates but they are forward pric- 
ing rates and then we subsequently use again the audited rates 
based on the actuals incurred based on after the fact data. So we 
use both. 

Mr. DiNGELL. How are you going to do accurate forward pricing 
if you don't know the overhead? 

Ms. Lee. We get the forward pricing rates from DCAA. 

Mr. DiNGELL. Beg your pardon? 

Ms. Lee. DCAA did that review and they recommended forward 

Mr. DiNGELL. DCAA has not audited since 1986. 

Ms. Lee. They will continue and they are now auditing those 
actuals for those periods and they also, the contractor submits to 
them projections including overhead projections in their base, the 
business base, and from that we establish forward pricing rates. 

Mr. DiNGELL. DCAA has not completed the audits. Contractor 
statements of overhead and costs have proven to be egregiously 
bad, and you folks down there at NASA have said that 2 years they 
were poor and 2 years they were unsatisfactory. That is 4 out of 
4. I am trying to understand how you are going to get any intel- 
ligent adjustment as to forward pricing until you know the over- 
head and how are you going to get that until you have done the 


audit to find out how they have compUed with the prior require- 

Ms. Lee. DCAA is currently auditing those rates, both the for- 
ward pricing rates and the overhead rates for those past years. We 
are working with DCAA to get that data. In fact, we work with 
them many times on verbal and information and they give us and 
keep us updated on how it is progressing. So we are working with 
them on both ends, the forward pricing rates and the 
preestablished overhead rates for the past years. 

Mr. DiNGELL. Will the audits be done before the negotiations are 

Ms. Lee. The work will be well under way. I would guess the 
final published audit probably won't be out, but they give us infor- 
mation and say, here is what is going to be and here is what we 
are finding, and they give us recommendations many times as the 
audits are ongoing. But as far as a final published audit in each 
»case, it probably won't be completed by then. 

Mr. DiNGELL. How important are the submissions that the com- 
pany is going to be making to you? Are they going to give you as 
much information, more information, or less information than 
DCAA is going to give you? 

Ms. Lee. They generally will give us and propose the rates they 
have proposed to DCAA and they will tell us they are either ap- 
proved DCAA rates and we are using the approved rates or these 
are the rates submitted to DCAA for audit. They will tell us where 
they are and what the status of the rates are for each of the years 
and then we act accordingly. 

Mr. DiNGELL. Now, will the information that will be submitted 
to NASA by Boeing be sufficient to, all by itself, to negotiate a con- 
tract with Boeing? 

Ms. Lee. I hesitate — not all by itself because we will take that 
information and validate based on DCAA's knowledge and use 
DCAA recommendations in the rate activity. 

Mr. DiNGELL. Against what are you going to validate the infor- 
mation that will be submitted to you by DCAA? 

Ms. Lee. Against their own audit. DCAA is our auditor. When 
they give us a finding, we generally accept their finding and that 
it is, in fact, an audited rate. 

Mr. DiNGELL. You are not going to have complete audits and you 
tell me that you are going to validate those audits against some- 
thing else. I am trying to understand against what else are you 
going to validate the audits that will be performed by DCAA. 

Ms. Lee. We will validate the information the contractor gives us 
with DCAA. So if the contractor comes in and says, my overhead 
rate is 92 percent, and for this year or whatever, we will go to 
DCAA and say, is that the rate you have recommended, and then 
they will tell us, yes or no. And what they have recommended. 
That recommendation, recommended rate from DCAA is based on 
their DCAA's audit of the contractors' information. 

Mr. DiNGELL. How am I to assume you will have enough infor- 
mation to negotiate a good contract? With Boeing on this matter? 
You are getting incomplete audit information, you are getting 
Boeing's submissions, and how are you going to know this before 
you examine, for example, allowables, the question of what is al- 


lowabJe, what is allocable and what is reasonable? You got to do 
those three things. How are you going to do that? 

Ms. Lee. DCAA and NASA work as a partnership and DCAA ac- 
tually does the audit work. In fact, we reimburse them for that 
work. They perform — performed the audit and once they perform 
the audit we accept their recommendations. We, NASA, do not do 
a subsequent audit. That is to try and save government money and 

The contractors' rates are only audited one time by DCAA and 
then we, the remaining government agencies, use that rate and 
that audit as the basis of their actions. So we don't have NASA and 
DCAA and Department of Defense all auditing the same rates. 
DCAA is the auditor. 

Mr. DiNGELL. I want to pursue this in a bit, Ms. Lee. I have to 
go to the Floor. There is another vote. We will reconvene in 15 min- 

[Brief recess.] 

Mr. DiNGELL. The subcommittee will come to order. General 
Dailey, we have talked about a number of matters that have gone 
on in connection with this contract with regard to the Space Sta- 
tion with which you and Ms. Lee and Mr. Easley and the others 
there were unfamiliar. 

Do you think you ought to go forward with this contract with 
Boeing before you have the answers to the questions and have the 
information that you need? 

General Dailey. I believe that the process that we have under 
way will not proceed at a rate faster than we have the necessary 
information to negotiate a contract with Boeing. 

Mr. DiNGELL. So you are saying you should go forward with the 
contract without having the answers to the questions? 

General Dailey. It may be that we go forward without all the an- 
swers. The other factor here is that we are operating off a letter 
contract and are trying to get a definitized signed contract with our 
prime contractor so that we can start fixing those costs and get in- 
creased control over the program and that is a very serious consid- 
eration at this point because of the funds that are involved. 

Mr. DiNGELL. You are telling us that you have come to the con- 
clusion that you have made the best judgment you can? 

General Dailey. Yes, sir. 

Mr. DiNGELL. Do you feel that the other information discussed 
today or that has become available as a result of the DCAA audit 
indicates that it is something you ought not pay any particular 
heed to? 

General Dailey. No, sir, not at all. In my comment, I said that 
not only do we accept the recommendations of the DCAA audit, but 
we are, in fact, incorporating the recommendations, and that is the 
case with the other audits performed by GAO and the IG. 

Mr. DiNGELL. What about the civil and criminal problems that 
Boeing has had with the Justice Department? 

General Dailey. Boeing has not been declared an unqualified 

Mr. DiNGELL. They were suspended once. Am I to assume they 
were suspended for their good character or were they suspended for 
a different reason? 


General Dailey. No, sir. They are not suspended now. They are 
a qualified contractor that we are in negotiations with. 

Mr. DiNGELL. I will not say that they are not qualified to bid. I 
think that we are a long way fi'om establishing that you have any 
information in your files which would justify selection of anybody 
at this time. 

I have asked Ms. Lee that and I have asked you that and neither 
of you have been able to come forward with suggestions to us as 
to what that might be. 

General Dailey. The information that I gave, sir, I believe is 
very important, and that is their technical competence to bring ex- 
pertise to bear in the financial management area. This hearing is 
focusing on the financial management aspect and that is a critical 
aspect of this program, as the chairman has noted. 

But financial management is one factor. Technical competence is 
also a critical factor. We must have a contractor that can do the 
job. Under the previous arrangement, NASA was the integration 
contractor. We didn't have a single prime. 

In this case now, we have Boeing and that is the reason we want 
them as our prime contractor is to provide the integration function 
for the Space Station. This is a critical aspect of the development. 
So financial management is a critical portion of this entire oper- 
ation. It is one that is going to bring us the visibility that could 
be very detrimental to the program if we don't have it under con- 
trol, but it was a careful consideration that we made in the selec- 
tion process of Boeing along with all the other capabilities that 
they have. 

In our discussions with them and with their leadership, we are 
convinced that they are going to bring the necessary controls in 
place to control costs. 

Another important factor in the previous Space Station program 
that led to cost growth was the lack of control of changes and con- 
figuration modifications to the program. The thing that we have in 
place now with our new management structure is a much more rig- 
orous process by which changes will be approved. 

Mr. DiNGELL. Of course, your new management structure is not 
yet in place either. 

General Dailey. It is in place. As a matter of fact, they have 
central responsibility in this case to make sure that we do have the 
financial management controls and they are a critical part of it. 

As I mentioned, we have many of them with us here today par- 
ticipating in this hearing as part of their awareness and training 

Mr. DiNGELL. We will try to assist them in their continued 
awareness of these matters. As a matter of fact, your staff sug- 
gested we should visit with you again in 6 months so you should 
get your calendar set to get together some time early in March next 
year. That will be about as soon as I can get the subcommittee con- 

The Chair's time has expired. The Chair recognizes the gen- 
tleman from Colorado. 

Mr. Schaefer. I want to move off Boeing for a moment and go 
back to IBM. 


Gentlemen and Ms. Lee, the chairman asked you what effort you 
were making to get back $100 million from IBM. You stated you 
were authorized to withhold pa3rments. However, you told us that 
due to the low level of activity, no payments were being made. So 
what efforts are you making to reclaim the $100 million in ques- 

Ms. Lee. Right now, those costs are our questioned costs. There 
will be a final audit. DCAA will determine — if they are determined 
to be unallowable costs, we will disallow them which means that 
IBM will, through their prime, refund the money. So if they are de- 
termined to be unallowable costs, we will recoup the funds. 

Mr. SCHAEFER. You don't anticipate any problems from IBM in 
returning the funds if they are not actual costs? 

Ms. Lee. No, I don't. 

Mr. ScHAEFER. I have a fax that came from you Mr. Easley dated 
July 25, 1994. Without going through the whole thing, it basically 
is saying we are unable to obtain any IBM data. The subcontractor 
was novated to Boeing under SSPO in February 1994 and neither 
the MCDAC officials who were prime to IBM or Loral officials who 
acquired the IBM Division were able to provide the data. 

The question is — and this is rather distressing to me as I know 
it is to other members of the committee — but the fact that IBM re- 
fused to provide DCAA with information about their management 
costs, bonuses, award fees, et cetera — I know that IBM sold that 
division to Loral. 

Do you intend to talk to Loral to ensure that this information is 
going to be provided to the DCAA? 

Mr. Easley. Absolutely. The only piece of information that has 
not been received, to my knowledge, is the executive bonus fees. 
The other types of award fees and costs and things of that nature, 
to my knowledge, they had access to. 

Mr. Schaefer. It says, "Any IBM data here as of July 25." It 
says "any." This was Monday. This is R.E. Easley. 

Mr. Easley. That was the data relating — this was a response 
back to Mr. Dingell's staff that they had asked us last week to get 
the executive bonuses on all attendees' companies. We responded 
this week with nine and Loral, IBM refused to give the information 
regarding the executive bonuses, but we are going to pursue that 
through proper channels to obtain it. 

Mr. Schaefer. What is the proper channel? 

Mr. Easley. Pursuing it through their corporate office. There is 
a government official there who is called the Administrative Con- 
tracting Officer for the Federal Government. There is a person at 
IBM, but Loral has acquired that particular division, so we will 
walk it through the cognizant Administrative Contracting Officer, 
which in this case will now be at the Loral headquarters. 

[The following information was received.] 


Tp#r« Illu m i n ation SyvtSflW 

Mjrint Pli». Suitf 600 Clint H. Ocnny 

24SO South S^Of« Blvd ~ PruUHnt 

PO Box 58487 
Houston, n 77058 

Fax (713)335-5010 MUgusi J, lyy* 

TO: R. E. Easley. NASA 

FROM: C H. Denny, Loral Space Informaiion Systems 

The following additional information is being provided that addresses IBM Federal Systenu 
Division-Houston employees. This data was supplied by the Federal Sysicmi Croup office 
which was responsible for executive compensation under IBM. These payments relleci year- 
end bonuses earned prior to the sale of Federal Systems to Loral. Also, please note that 
IBM used a calendar year performance period. 

If you need further information, please advise. 

CY 1993 

CY 1992 

CY 1991 



Number $S$ 

Nwmtcr 5JJ 



1 50.666 

1 13.440 









TOTAL 175,135 1 50.666 1 13.440 


Mr. SCHAEFER. If there are problems with the bilHng, as Ms. Lee 
indicated, you expect that you are going to get refunds. Would you 
get the refunds from IBM or Loral? 

Mr. Easley. As far as I am concerned, from McDonnell Douglas. 
That is our prime contractor. If they are determined to be unallow- 
able costs, they will have to pursue the recovery with Loral or IBM. 

While the acquisition has taken place, I am not sure all the pa- 
perwork has yet been finalized between Loral and IBM, but I don't 
expect any problem with regard to that nature. 

Mr. SCHAEFER. Is there any problem withholding the money 
going to McDonnell Douglas for bonuses until we get this data? 

Mr. Easley. The bonuses that will be reimbursed to Loral? 

Mr. SCHAEFER. Right. 

Mr. Easley. No, there will be no problem doing that. 

Mr. SCHAEFER. Why don't we do that until we get the proper 

Mr. Easley. We have ceased payments on the McDonnell con- 
tract also. 

Mr. SCHAEFER. That is not the question, sir. 

Mr. Easley. We make payments for Loral through McDonnell 

Mr. SCHAEFER. So why make those until we get the proper data? 

Mr. Easley. We can certainly do that, but I may add, Mr. Schae- 
fer, since that contract with McDonnell Douglas has been termi- 
nated, we are not paying any vouchers to McDonnell Douglas sub- 
sequent to last month. So the issue would be do we pursue a recov- 

Mr. SCHAEFER. You are paying them through Boeing; right? 

Mr. Easley. A separate contract by the Space Station Alpha Pro- 
gram Office which is a separate contractual arrangement with Boe- 
ing, not my responsibility. 

Ms. McInerney. Under the current Boeing contract, the letter 
contract on the Space Station Program Office, McDonnell Douglas 
is a first-tier subcontractor. IBM, through Loral, is not a sub- 
contractor to McDonnell Douglas. That effort was deleted out of the 
work package to contract in October and it was not carried forward 
in the new program. The reason it was deleted, it was based on 
simplification of the DMS architecture. 

Mr. SCHAEFER. I understand that, but we are talking about get- 
ting money back that has already been spent. 

Ms. McInerney. I understand. 

Mr. SCHAEFER. So, therefore, who do we go to and how do we put 
the pressure on to get that money back for the taxpayers? 

Ms. McInerney. In this case, I would assume we would go 
through McDonnell Douglas, because it is under the Work Package 
2 arena. We would not go to Boeing because Boeing does not have 
responsibility for the past liabilities on the Freedom program. 

Mr. SCHAEFER. Have we gone to McDonnell Douglas? 

Ms. McInerney. I can't address that. 

Mr. Easley. As far as recovering the IBM bonuses, the answer 
to that is no. 

Mr. SCHAEFER. Why not? 

Mr. Easley. I just found out — first of all, I just found out re- 
cently where the data from IBM had not been provided to the 


DCAA. I don't know if the costs for the bonuses may or may not 
be appropriate, but I will take action to recover that. 

Mr. SCHAEFER. I think, and would hope that NASA does, too, 
that it is a shocking display of arrogance for a contractor to refuse 
to provide to the government auditors data about what the govern- 
ment's own money has been buying. 


Mr. Easley. I agree. 

Mr. SCHAEFER. Well, we have been talking about this, what pos- 
sibly can be done, and I would hope that NASA does intend to 
move forcefully to recover the monies that we have out there. 

Do you agree? 

Mr. Easley. Absolutely. 

General Dailey. We are going to do it. We found out very re- 
cently that this had not been recovered and we will take the action 
to get it back. 

Mr. SCHAEFER. Why were you the last to know on this? 

General Dailey. My comment that I made about the fact that we 
need to have a closer working relationship with DCAA and our 
other audit agencies, that was one of the examples that I had in 

Mr. DiNGELL. Would the gentleman yield? 

Mr. Easley, the DCAA turned over its report on this matter with 
regard to withholding of the information by IBM in March. You, in 
response to a question from my good friend from Colorado, said you 
had just gotten that information and this is now nearly August. 

March was 4 or 5 months ago. You just became aware of it or 
it was just turned over? 

Mr. Easley. The March report was a draft report. Just a week 
or so ago, the final report was issued. The DCAA came to me dur- 
ing the process of the audit and asked my assistance to get a piece 
of information — I had never been asked to go assist them — related 
to another com^pany. 

Mr. Dingell. Do you read these drafts when you get them? 

Mr. Easley. Yes, sir. 

Mr. Dingell. Well, the original date is 7 March 1994, "Report 
On Audits Of The Budgeting And Financial Control Systems, 
NASA Johnson Space Center Major Contractors, Houston, Texas." 

Without objection, this will be put in the record. 

[The following information was received.] 


CRAFT ^' ^^"^ 

AUDIT REPORT NO. * ' ' Hag efr 1994 


•:HRai NO. 


Urxler the provisions of Title 32, Coda of Federal Re^iiations, Part 
290.26(b)(2), any Freedom of Information Act requests for audit reports 
received by DCAA will be referred to the cx^^nizant contracting agency for 
determination as to reieasaoility and a airect response to the requester. 

Contractor information contained in this audit report may be proprietary. The 
restrictions of 18 USC 1905 should be considered before this infonnation is 
released to the public. 

This report may not be released to any Federal agency outside the Department 
of Defense without the approval of Headquarters, DCAA, except to an agency 
equesting the report in negotiation or j^dninistering its contract. 



86-145 0-95 


SUBJECT: Report on Audits of the 
Budgecing ana Financial 

Control SysteflB 
NASA Johnson Space Center 

Ma^or Contractors 
Houston, Texas 

TO: Dr. Robert Easiey 

Director of Procurement 
NASA, Johnson Space Center 
Mail Code BB 
Houston. Texas 77058 

1. Purpose of Audit 

As part of our cocnarehensive audit of contractors at tt» NASA Johnson 
Space Canter, Houston, Texas, we reviewed the Budgeting and Financial Control 
-ysteiDS of ten ma^or NASA contractors. We performed these reviews to 
.'Vaiuate the policies, procedures, and practices for assuring the 
effectiveness of overall controls of Government contract costs. (Xtr audits 
were conducted from 1 July 1993 through 30 September 1993 and covered 
contractor operations for the fiscal year ended 31 December 1992. 

Our primary objective in reviewing these budgetary systems was to 
establish that scund budgetary systems are operating for each ooopany's 
planning and cost control purposes. AiUitionai objectives were to determine 

a. Costs estimated and/ or incurred for government woric are 
developed, recorded, and coDtrolled on a consiBtent basis with 
management's most recent and probable plans. 

b. Direct and indirect costs for goverment contracts are estimated 
and performed efficiently and econooacally . 

c. Ajiy significant changes in the contractor's plans and 
circumstances are promptly reflected through controlled and 
docunented revisions to budgets and estimates to C08V>iete. 

d. Reports to the Government on performance of cootract effort are 
consistent with the contractor's latest budgetary data. 

We conducted our audit in accordance with generally accepted government 
standards. Those standards require that we plan and perform the audit to 
ootain reasonable assurance about whether the data and records reviewed are 
free of misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the data and records reviewed. An 
audit also includes assessing the acocunting principles used and significant 
estimates made by the contractors , as well as evaluating the overall data and 
records presentation. Ue believe our audit provides a reascneible basis for 
our opinion. 

2. Scope of Audit 

To acco«rplish our objective and provide the maximun coverage of the NASA 
major contractors, we identified ten contracts which represent the moet 
significant Government dollars as a basis for our review o£ these tudgetary 


systems and financieul controls, 
related data are presented below: 

The specific contracts and other pertinent 





Freedom WP-2 

March 1993 

(Prune NAS9-18200) 


(Prune NAS9-18000) 








Preedoa WP-2 




(Prune NAS9-18000) 












(Prune NAS9-18344) 






















CAE Link 












Although the extent and depth of these audits varied depending upon the 
;:ontractor size, anount of govemnent business, and audit risic, in general 
the audit scope included reviewing the accuracy of budget prepeuration . 
testing assunptions used in developing the budget, and assessing the 
reasonableness of explanations in manageinent reports for budget vairiances. 
In essence, are sound budgetary syBtens in existence within these NASA 
contractor organizations. and aure these budgetary systeme operating 
effectively as managerial tools to produce maxunum efficiency and economy of 
operations? Generally, the audit scope was designed to determine the 

a. Do the contractors have functional organizations for prepetf-ing 
realistic budgets with written procedures prescribing the necessary 
mechanics, documentation, and controls? 

b. Are these 
volume and are 

procedures used to forecast the coapany's business 
estimates based on logical assunptions and reliable 

c. Do budgetary systeme provide for a quantitative expression of 
management plans and define what is expected of each memoer of 
management at every level responsible for cost control? 

d. Is there an actual need for each function budgeted and is the 
projected cost level reasonable? 

e. Do the systems provide for advance notice of budget plan changes 
which may affect affect future woridoad and rescurces, such as 
increases /decreases in plant population, asset acquisitions and 
dispositions, and physical moves? 

f. Do budgetary systems include adequate cost monitoring techniques 
such as adequate benchmarics for determining direct and indirect 
staffing levels, guidelines for evaluating indirect cost 
projections, and requirements for performing ade^iate facility 


g. Do the contractors effectiv«iy controi costs by verifying that 
management coopares budgeted to actual costs, significant variances 
are noted, an2LLYzed, and explanations are documented? 

Specifically, our scope of audit attenpted to determine how pro-active 
the contractors are in trying to cootrol and reduce costs en the NASA 
programs. The contractor policies, procedures, and practices were reviewed 
to determine the following: 

a. Whether or not the contractor had detailed budgets established 
for Its specific worlctasKS. 

b. Whether or not these contractors perform detailed cost analysis 
on specific worKtasXs which would indicate whether or not the 
contractors are pro-active and involved in the management of its 

c. Whether or not these contractors reported accurate and conplete 
information on its NASA Form 533 cost proDecticais. Do the 
contractor's internal budgets and cost analysis co<n>are to the 
information as reported to the Govemroent? 

d. Whether these contractors had perfonned any recent internal 
reviews of (i) direct to indirect staffing requireoants , (ii) 
utilization of facilities, and, (iii) utilization of equipoent for 
the specific NASA contracts and programs. Are these contractors 
pro-active in the management of costs? 

3. Background 

The NASA Johnson Space Center (JSC) in Houston, Texas, already the 
Mission Controi Center for the Space Shuttle flights, has recently been named 
the host NASA center for the Space Station Freedom effort with Boeing 
Corporation as the prime contractor. In addition to this effort, NASA JSC 
contracts include research and development type contracts, engineering design 
and/ or maintenance and s^nxsrt coarracts, logistic sv^iport contracts for 
other NASA programs, and contracts for the NASA JSC operations and fiaictions 
which support NASA's nussion and programs such as security tni quality 

To provide NASA management with a more effective evaluation of contractor 
cost performance, NASA designed and mpleraented the use of the NASA 
Contractor Financial Management Reporting System or NASA 533 reports. This 
NASA Form 533 report, a contractu^LL reporting requirement by NASA on a 
monthly and/or quarterly basis is applicable to all NASA cort-type, price 
determination and fix-priced incentive contracts. These r^xjrts, along with 
the other requued technical and schedule reports, are to provide NASA 
Project Managers neceeeary data lor evaluating contractor ooet performance. 
Specifically, the NASA Form 533 provides the following data to management: 

An Estimate Coet/Hours-to-Conplete or a projection of hours and 
costs which realistically supports the schedule of contract effort. 

Cost Incurred/Hours Wortced which reflect the contractor cost and 
technical performance on a monthly basis and cumulative biwis. 

A contractor's Estimated Final Cost/Hours which is to provide 
NASA management data for the estimate of coet/hcurs at contract 

Procedures for corrpletion of the NASA Form 533 are contained in the NASA 
■{andboon, NHB 9501. 2B. This Handbook, published in February 1985, is 
provided to all NASA project managers and contractors for the administration 
of the Contractor Financial Management Reporting System. Ccmtractual data 
is submitted in a standard format, both summarized and detailed by WBS, for 
most contracts and is used by NASA to plan, monitor, and control the 
resources aveuiable through its awarded contracts. 


Therefore, our budgetary review utilized thia docuBient, NASA Form 533 
report, in performing our review of the cOTitractor's buciget. According to 
the policies, procedures, and instructions contained in this HandbooJc, the 
pr unary source of monitoring contractor performance is the NASA Form 533 
report which must be correlated with required technical and schedule 
reports. It is also used by NASA for establishing the basis for the Agency's 
accrued revenue and expenditure accounting systen. This is the fundamental 
reason for assuring that each contractor has an adequate budgetary system 
within Its organization and that it is operating effectively and 
efficiently. Without adequate budgetary systerae, contractor performance 
cannot be accurately determined nor HASA's mission be acooopiished in the 
most efficient, effective, and successful inanner. 

4. Suranary of Audit Results 

a. In our opinion. Contractor Financial Management Reports (Form 533) 
being prepared by the oajor contractors for submission to NASA for cCTitract 
progress do not properly reflect costs needed for contract ooopietion. This 
•problem is a direct result of inadequate contractor involveaent in the 
.nanagement of the costs needed to perform and ccoplete NASA contracts. 

Since the start of our audit significant changes have taken place 
concerning the restructuring of the Space Station and Space Shuttle 
programs. All Space Station work packages are being norvated into one 
contract which will be managed by Boeing as the Prime ccntractor. This new 
contract is to be definitized by 31 August 1994. IBM, a major subcontractor 
to McDonnell Douglas under its (WP02) workpackage, had its subcontract 
terminated in November 1993. Also, IBM announced in Oeceater 1993 that it 
sold Its Federal Systems Division to Loral Corporation. 

Based on this restrxjcturing of the Space Station Program, funding ani 
requirements for McDonnell Douglas , Rocketdyne ( Rockwell ) , Lockheed and other 
subcontractors has been significantly reduced. This condition makes it 
critical that these contractors imnediately review their staffing, equipment 
and facilities utilization in order to prevent excess and unreasonable costs 
from being incurred and billed to the GovemDent due to these ongoing 
changes. It is also critical that these contractors develop systems which 
will enable them to monitor costs incurred, project accurate estimates to 
coiqplete and be more involved in cost avoidance and worktask efficiency 

To further emphasize the necessity for contractor pro-active management 
of contract cost, one must also consider the Government's expense tor paia 
management cost. bonuses, and fees. The Government recognizes chat 
contractors should be adequately corpensated for their management expertise 
and re2LLize a profit. By the same token, there must be a corresponding 
benefit received by the Government ana evidenced by incentives for the 
control of cost within the contractor's organization. For without adequate 
control of contract cost, the incurred management costs, plus awards such as 
bonuses and fees, are not properly rustified. Exhibit B illustrates an 
approximate level of annualized expense paid by the Government for rhic 
management knowledge and associated bonuses and profits. 

On December 1-2, 1993, meaisers of the cost proposal conramity 
representing NASA, DCAA, Rocketdyne (Rockwell) McDonnell Douglas and Boeing 
met to discuss an acceptable approach and plan for developing the Space 
Station Alpha Tier I cost proposal. One of the objectives was to establish a 
program baseline based on a detailed Work Breakdown Strxjcture (WES). Once 
the baseline and WBS's are estahlished and agreed to. each contractor and 
subcontractor involved snould adapt its system to monitor its costs ana 
project accurate estimates to conplete around the specific baseline 
structure. Establishing this obiective is only the first of several 
solutions to correct ma^or system deficiencies noted in our review and 
sijitmarized below. The specific ctaitractor budgetary deficiencies are 
suirmarized below, illustrated in Exhibit A, and detailed in the separately 
issued audit reports included as enclosures to this report: 



(1) Contractors have inadequate detailed budgets and contract 
baselines to enable them to determine an accurate percentage of 
coin)letion and project an accurate estimate to conpiete. 

(2) Contract baseline costs are constantly changed to reflect 
actual costs 

(3) There is little evidence of contractor cost amdysis of 
twdgetary variances and involvement to reduce or control cost 

(4) Certain costs are incurred prior to the work being 
contractually authorized and adequately baselined. 

(5) Contractors expect to be automatically reimbursed for all costs 
it incurs because of the cost type contract environment at NASA. 

b. Within each of ^^e enclosed audit reports, specific contractor 
system deficiencies and recommendations are discussed in detail in the 
"Statement of Condition and Reconinendation" appenaices. However, we aiso 
want to enphasize needed overall system reconroenoations as follows: 


( 1 ) All contractors should establish detailed budgets and baselines 
from which to monitor and control costs. 

(2) These baselines should not be constantly changed to reflect 
actual costs. The baseline costs should only be changed if the 
specific contract scope of work is changed and contr actually 

( 3 ) Cost growth should be proposed by the contractor and authorized 
under the contract p rior to the incurrence by the contractor. Cost 
growth proposals should be based on the detailed budget analysis by 
contractors which adequately supports the need for additional funds. 

(4) The contractor needs to become more involved in the efficient 
management of its worlctasJcs and in efforts to reduce or prevent 
costs and correct inefficiencies before costs are incurred. These 
efforts should be docunented in the contractor's budgetary analysis 

( 5 ) All contractors should perform an accurate percentage of 
completion and estimate to cco^lete for each major woric task 
performed. The estimate to complete is not the difference between 
incurred costs and contract target costs. 

(6) Contractors should provide NASA with specific schedules as to 
what It plans to review internally in regards to : 

(a) indirect and direct staffing functions and processes 

(b) utilization of equipment 

(c) utilization of facilities 

The specific results of these reviews should be provided as well as 
corrective action plans and cost avoidance details. 

(7) The lead contractors for the Space Station Program (Boeing 
Corporation) and for the Space Shuttle Operations (Roctoieil) should 
be made accountable for the accuracy of the 533 data. These 
contractors should be tasked by NASA to ensure that the contractors 
working under them are reporting accurate cost data and are actively 
involved in monitoring their contract performance and in controlling 
cost growth on these major NASA programs. 

(8) Contractors should establish specific goals each year as to 
contract performance and cost redvjction objectives. Bonuses should 


reflect the accomplishment ot these specific goals. Bonuses s^^3uld 
not be based on predetermineci percentages based on enployees ]ust 
"showing up" for worlc. 

( 9 ) Each contractor should establish an account to accurrulate idle 
or free tuns. A specific definition as to what constitutes idle or 
free tune should be established by NASA and given to each 
contractor. Idle or free time can then be measured periodically to 
determine if it is reasonable or excessive. 


Because Boeing Aerospace Corporation was recently awarded the prune 
contract for the newly revanped Space Station, we specifically requested 
Boeing respond to our composite reconnenoations addressed in the body of this 
report. Boeing's response to this request is included below and corresponos 
zo the cuxive numberea recomnendations. The formal written response is 
LTOciuded as Attachment A to Enclosure 10. 

( 1 } BAO agrees and does provide NASA a detailed budget and baseline 
established to monitor and control costs. 

(2) BAO agrees that the baseline budgets should not change unless a 
specific contract scope of worJc is changed and contractually 
modified. Estimates to couple te should change whether a tasK is 
added below the threshold aaount which requires no contract 
modification or over the threshold anount which does require a 
contract modification. 

(3) The contractor agrees that cost growth should be proposed and 
authorized under the contract prior to any cost incurrence by the 
contractor. BAO currently worte under this methodology. 

(4) BAO agrees that cost efficiencies and the correction of 
inefficiencies should be put in place prior to incurrence of costs. 
However, costs associated with preparing documentatxan in our 
budgetary anfilyses process may offset any benefit received: this 
oust be considered. 

1 5) If NASA feels that perfomung a Percentage-Of-Conpletion lor 
each .Taioi worK tasK performed would be beneficial, BAO would 
comply. However, cost associated with preparing a 
Percentage-Of -Completion and estimate to cooplete for eacn ma^or 
uoric tasK may offset any beneiit received; this must be considered. 

(6) If NASA feels that specific schedules as to what it plans to 
review intem2LLly in regards to (a) indirect and direct staffing 
functions and processes, b) utilization of equipment, and (o 
utilization of facilities would be beneficial. BAO would comply. 
Presently, FEPC has no contract requirement to provide reviews. 
Also, the costs associated with preparing these schedules and 
reviews may offset any benefit received: this must be considered. 

(7) This conment is not addressed to the FEPC. 

(8) BAO does establish goals each fiscal year as to contract 
performance and cost reduction objectives. Boeing currently does 
r.ot provide bonuses to enployees on FEPC. 

i9) If NASA feels that accumulating idle time would be beneficial, 
BAO would coaply. Idle time, as BAO understands the definition in 
this audit report, means any down time of a tasK/area that results 
from some inpact to the program. Down time meaning that enployees 
cannot wor< on the task/ area that was uipacted and could not work on 
any other tasic/eurea of the p rogram. The FEPC program does not 
experience down time under this definition. Currently, there is not 
a contract requirement to do so. 


In addition, each contractor was presented the specific conditions and 
reconroendations applicable to their organization and requested to sutmit a 
formal written response. These written responses are included and identified 
as an "Attachment A" to the applicable audit report enclosure. 


It IS the intent of this audit that all contractor's have policies and 
procedures which would ensure that NASA 533 reports are being consistently 
and accurately prepared. While most of the contractors concurred in general 
with the above audit objective, the new space station contract gives 
contractor's the oworturuty to strengthen their respective budgetary systeins 
and establish woric order baselines from which to monitor, review, and report 
costs. In fact, the new International Space Station proposal is being priced 
and put together based on an ejctensive worX breaXdown structure (WBS) from 
which to accumulate, monitor and report costs. This preaward process can 
have a ma^or uipact on future surveillance activities. The WBS established 
during preaward mpacts application of the criteria, baselines management, 
estimates at cocpietion, as well as analysis. A successful preaward process 
can be ensured when solicitation and contract requirements are structured to 
the needs of the program. Each contractor should submit a written sunmary or 
the management procedvires it will establish, maintain and use in the 
performance of the contract. 

Contractors should establish detailed baselines from their participation 
\n each WBS, perform accurate estimates to cooplete based on a documented 
ercentage of coopletion analysis, and report this progress accurately on 
their respective NASA 533's. Hilestcmes mast measure acooaplishmant of work 
necessary for program coopletion and not merely the passage of time. For 
exanple, the ccnpletion of monthly or quarterly program or staff meetings 
would not be considered milestones which demonstrate work acootsplishment . 
Coopletion of critical design reviews or configuration erudits would be 
measures of work accomplished. 

rurthermore, breaking down of a task into smaller milestones whose 
budgets are objectively determined would be an acceptable eeimed value 
technique. The assumption is that percent cociplete methods must be 
objective. For exanple, a sx^servisor ' s monthly best guess of a percent 
conplete would nQ£ be an acceptable earned value technique. However, a 
monthly calculaticn of percent cooplete based upon preset values for 
assessing progress in accooplishing a task is an acceptable earned vzilue 
technique. The key question to ask is, "Do the techniques being used provide 
the best available measurement for determining objective accooplishnients?" 

Most contractors with Level of Effort (LOE) type contracts believe they 
should be excluded from doing an acceptable earned value technique. These 
contractors indicated that estimate to cooplete is merely the difference 
between negotiated budgeted hours and actual tours incurred. The budgeted 
hours are established at the beginning of the fiscal year based on the 
contractor's annual operation plan. These contractors stated that NASA 
controlled the hours after the establishment of the annual operating plan and 
ihey merely did what they are told to do. Certain contractors alao felt that 
It is cost prohibitive to do acceptable earned value techniques, and the 
budget baseline is the object of misunderstanding between teaa members and 
therefore, variances are reported and analyzed at a top contract level. 

It IS the opinion or DCAA that the LOE contract method merely accunulates 
oudgeted cost of work performed based on the passage of time. It is the 
least effective and desired of all earned value techniques. LOE worK 
packages show no schedule vauriances and true program variances are masked as 
data is sumnarized to higher levels of the work breakdown structure. The LOE 
method should be used only for certain fixed levels of program support such 
as a program manager, contract manager, or technical manager. Other 
activities should be either discretely measured or apportioned to the effort 
they support. If the contractor and NASA technical taOce the time to 
negotiate hours for specific work tasks under LOB contracts, why shouldn't 
the contractor be held actxuntable for the baseline and do an accurate 


estimate to conpiete and e2u-ned value analysis on the progress of that worK 
task? The value of carefully scheduling, then motutoring the status of all 
necessary activities in eacn project is universally recognized. 

It IS also the objective of this audit that each contractor become more 
pro-active in the management or its contrzKirt costs. We were shown little 
evidence of contractor involvement in reviews of its functioneU. areas or ^ob 
processes. Performing a imre accurate earned vsU.ue analysis of 30b and 
project worJctasJcs could give the contractors better visability as to 
potential high cost and high risJt jobs. The contractor may need to review 
this analysis in more detail in an effort to reduce cost growth and correct 
futiire schedule slippages. Contractor reviews of its operations should be 
scheduled each year in an effort to be as efficient as possible and prevent 
excessive costs froo being incurred. Policies and procedures should be 
developed which establish periodic reviews of staffing, equipment a«l 
acility utilization. The objective should not be how much money has been 
appropriated to spend, but should be whether ttch dollar app r o p r iated is 
being spent in the most cost efficient and effective nanner. 

DCAA will continue to test and report on the contractor's systems and the 
accuracy of the contractor's 533 rep ort s. If the contractors fail to taka 
effective corrective actions or fail to maXs 2K;ceptable progress in resolving 
the reported system deficiencies, contractx^al remedies should be considered 
siich as withhold on public vouchers or disallowance of cost. 

5. DlSPOSlti np nf Aivj it ReSUltS 

a. Accounting counsel and any additional audit service which you may 
require will be provided upon request. Requests for assistance may be 
directed to Mr. Michael McConnell, Br a nch Hioiager, Ms. Carol Darby, or 
Messrs. Gary Catt, Barry Ccpeland, Qui Kuropata, and Gary Mack, Supervisory 
Auditors at (713) 946-6595. Our telefax nm^»r is (713) 946-8480. 

b. Please advise this oriice of the status ot final disposition or 
audit reconmendations as we intend to perform a follow-up review within one 
year of the report issuance date. 

c. We wish to express our appreciation for the contractors' sx^jport and 
cooperation extended during the reviews. We also invite your comnents and 
suggestions on this audit report and our related audit support. 

d. We have attached to the original copy of this report a Contract 
Audit Follow-up Sunmary Sheet in accordance with reissued DoD Directive 
7640.2 dated 12 February 1988. 


Michael S. McConnell. Branch Manager 



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Audit Report No. 3521-93D11020OO4 


Page 1 of 1 































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2. §99 






Contractor did not provide the requested data. 




Mr. DiNGELL. It says, "Contractor information contained in this 
audit may be proprietary. The restrictions of 18 U.S.C. 1905 should 
be considered before this information is released to the public." 

That is the second paragraph. The first paragraph says, "Under 
provisions of Title 32, Code of Federal Regulations, Part 
290.26(b)(2), any Freedom of Information Act request for audit re- 
ports received by DCAA will be referred to the cognizant contract- 
ing agency for determination as to releasability and a direct re- 
sponse to the requester." Then they go on down and if you look, you 
will fmd in the letter which was enclosed, or rather in the informa- 
tion which is enclosed with the report, you will see it says IBM — 
at the top, it says "FY 93, management costs in thousands." 

There is an asterisk, bonuses; another asterisk, fees; another as- 
terisk, total; another asterisk and then these words appear: "Con- 
tractor did not provide the requested data." 

Now, you got this in March. What did you do about it when you 
got it in March? 

Mr. Easley. We probably should have been more proactive to 
offer our assistance to DCAA 

Mr. DiNGELL. When did you first find out that this information 
was withheld by the contractor? 

Mr. Easley. In the draft report. 

Mr. DiNGELL. What did you do about it when you found out 
about it? 

Mr. Easley. It was a draft report they had provided us for our 
comments. We didn't do anything regarding going to IBM. 

Mr. DiNGELL. Why not? 

Mr. Easley. It was DCAA's report. It was not a final report. It 
was a draft report mainly for our editorial type of comments. 

Mr. DiNGELL. Don't you think you should have gotten the infor- 
mation? Do you agree that this information is proprietary and 
should be withheld or do you think that the government should 
have this information? 

Mr. Easley. The government is entitled to it. 

Mr. DiNGELL. You think the government is entitled to it, but you 
got this in March and you didn't do anything about it. Why didn't 
you do something about it? 

Mr. Easley. As I mentioned, it was a draft report 

Mr. DiNGELL. It is a draft report, but it is true that IBM with- 
held the information. Now, you can say it was a draft report, but 
they wouldn't make the information available for a draft report. 
Couldn't they have made the information available for a draft re- 

Mr. Easley. Yes, sir. 

Mr. DiNGELL. What did you do about it? 

Mr. Easley. I should have or somebody on my staff should have 
immediately gone 

Mr. DiNGELL. You didn't do anything about it, did you? 

Mr. Easley. Not at that time. We have not gotten the informa- 
tion yet from IBM. 

Mr. DiNGELL. They claim it is proprietary. Do you agree with 


Mr. Easley. Not in a typical classification sense. The other nine 
companies that gave me similar data stamped "this is confidential," 
mainly so it wouldn't be publicly disclosed to other companies. 

Mr. DiNGELL. So you have proceeded in entire ignorance during 
all this period? You still haven't gotten the information about what 
management costs, bonuses, fees and the total of these things 
were — and General Dailey and NASA don't have it either. 

Do you fmd this acceptable, General? 

General Dailey. I am concerned that we did not take any action 
at that time. In discussing it during the break as to why we didn't, 
normally when a draft report comes out like that, it would be ac- 
companied by a request from DCAA if they wanted us to pursue 

As Mr. Easley has said, we should have been more proactive and 
that is what I meant by the requirement to develop a closer work- 
ing relationship with our auditing agencies. 

Mr. DiNGELL. DCAA didn't get the information for the fmal re- 
port either, did it? 

General Dailey. No, sir. 

Mr. DiNGELL. DCAA works for NASA. Information that they sub- 
mit to NASA is used by NASA in connection with its review of its 
contracts. NASA relies on DCAA for these reports. You let IBM go 
for 5 months without submitting the information to you. 

Did you know about the fact that this information was not made 
available to you at headquarters, General? 

General Dailey. No, I did not. 

Mr. DiNGELL. What is the policy on production of information by 
your contractors? Are they supposed to do it or not? 

General Dailey. Yes, sir, they are. They are expected to do it. 

Mr. DiNGELL. Everybody else submitted it. IBM did not. Do you 
fmd that curious, Mr. Easley? 

Mr. Easley. Yes, sir. 

Mr. DiNGELL. Did you find it curious. General? 

General Dailey. I do and I think that Mr. Easley has admitted 
that he made a mistake by not pursuing it when he was notified 
of it through the draft report in March. 

Mr. DiNGELL. I yield back to my good friend with apologies for 
taking so much time. 

Mr. SCHAEFER. Mr. Easley, I want to make sure I got this cor- 
rect. In my questioning about the IBM information, you said you 
just received the information. And "recently," I think, was the 

Mr. Easley. The audit report, the final audit report just came in 
week before last. 

Mr. SCHAEFER. The information in March was what we were 
talking about here, that IBM was not furnishing it, and if I am not 
mistaken in my prior question, it was asked and you responded 
that you had recently received it and the fact that IBM had not 

Mr. Easley. Still had not complied. 

Mr. SCHAEFER. Just recently? 

Mr. Easley. That they still had not complied. 

Mr. SCHAEFER. In other words, you knew before about the March 


Mr. Easley. I don't know the precise date. I knew about it be- 
cause it was a very thick report. 

Mr. SCHAEFER. Some time in early to mid- 1993, NASA reahzed 
that things were wrong with Space Station Freedom and in re- 
sponse, NASA ordered a complete overhaul of both the physical 
configuration of the Space Station and of the contracting agree- 
ments for it. 

What did NASA do at the time to stop as much work as possible 
so that there wouldn't be any more money wasted on the Space 

Ms. McInerney. We started redesign. A policy was issued to the 
Work Package Centers that gave direction to the contracting offi- 
cers, who in turn provided direction to the Space Station Freedom 
contractors not to incur overtime, not to have overtime expense, not 
to increase their staffing levels. 

No options were to be exercised. No new task orders issued. No 
new modifications made against the contracts. 

On a case-by-case basis, if a need arose to do any of those types 
of contractual actions, a request was put together and submitted to 
the Station Redesign Team and the team would evaluate each ac- 
tion on a case-by-case basis based on the design configuration that 
was being developed during that time period. 

If they felt with absolute certainty that that work effort was not 
required, they would turn down the request and say, "Do not go 
forward with the contract action." If it was necessary because the 
Station Redesign Team felt that was significant technical content 
that would be carried forward in the design, then they gave ap- 
proval for that contract action to continue. 

After the Redesign Team action was over in June and the transi- 
tion team picked up and the move was made to the host center at 
JSC, there was still a continual vigilance of this process. The con- 
tracting officers would forward their contract actions to the Pro- 
gram Office at JSC. When the design was further refined during 
the transition process, direction was provided from the Program Of- 
fice to the respective contracting officers for the Work Package 
Contracts to delete work that was no longer needed for the for- 
ward-going design. 

There was a series of letters that went out through the period 
of October and November. That activity was done in order to try 
to control, in order to conserve resources and have the contractors 
spend their resources in what would be considered the forward- 
going work under the new Space Station program. 

Mr. Schaefer. So as soon as you made this movement knowing 
that the overhaul was going to be there, you informed, by letter , 
the individual contractors that were involved? 

Ms. McInerney. That is correct. Each contracting officer issued 
a letter to their contractor saying what was going on. 

Mr. Schaefer. Mr. Chairman, I would like, without objection, to 
ask that they provide us with the letters in which they informed 
the contractors that this overhaul was taking place in order to stop 
the pajrment and the use of money. 

Mr. DiNGELL. We will pursue that on behalf of the gentleman. 

[The following was received.] 


See the attached memorandum from NASA Administrator to senior management 
regarding measures to be taken to minimize expenditures during the redesign proc- 
ess, followed by letters from the NASA contracting officers to the work package 
prime contractors. 

Omca at tt%« Karr^nuarmot 

wasn>ngTon DC 2C646-0001 


Februacv 25, 1993 


Off icials- in-Charge of Headquarters Offices 
Directors, NASA Field Installations 
Director, Jet Propulsion Lalxsratory 

FROM: A/X lainistrator 
StTBJECT: Space Station Freedom 

NASA has been directed to redesign Space Station Freedom (SSF) 
as part of a program that is more efficient and effective and 
capable of producinq c,reater returns on our investment. The 
revised Station program will strive to significantly reduce 
development, operations, and utilization costs while achieving 
many of the current goals for long duration scientific research. 
The redesigned Station will taite advantage of, to the maximuB 
ejrtent possible, the investment we have made. It is important, 
however, to conserve our resources while the redesign effort is 
underway, and until it has progressed through its initial design 
phase. With this in mind, and in the interest of not expending 
any unnecessary funds, the following direction is effective 
immediately and will remain in effect until further notice: 

a. No new awards (or new work modifications) which relate 
in whole or in part to the SSF, including support service 
contracts, should be issued nor should options under such 
contracts be exercised. 

b. For existing contracts whicii address the SSF program in 
whole or m part, SSf-related activities should not be 
accelerated. ."^ew SSF-related change orders, tasx orders or task 
<a GS iqmrjen ts . etc. , should not be issued. 

c. Change orders which have been issued may be definitijad 
and increaentaL funding modifications may be executed, however 


solicitations tor new SSF-relatad contracts or new wcrlc 
modifications should not b« issued. 

d. Ml SSF concractors should be advised that nc overtlse 
IS aucnorized and tnat staffing mcreoaea are profiibiced. This 
direction does not. of course, preclude any previously planned 
staifing reductions. Th«s« reductions should be implemented 
■judiciously to ensure no ma^or disruptions in the wor)cforce . 
Exceptions to this direction will tym g-rante<l only in coap«lling 
cases. Such requests should b« sabaitte<l to the Headquarters 
Office of Procoremant (Code US) who will process th»» to Code A 
for approval. (Requests aay bo transmitted to tie Code HS fax 
machine at 202-368-4065.) Requests shall clearly identify and 
support the necessity for the proposed action and shall include, 
at a miniaum, tJie inCor-»ation contained in ti\a enclosure to tJiis 

Ho further action should b« taJcen until written approval to 
proceed is granted. 

Questions should be directed to Carol Sane or Foster Foumier 
of Code HS at (202) 358-2080. 

Daniel S. Goldin 


1. rzTLZ jona DEflcajPTiox or ths coimukcT iwolvzd. (include 
the najte and a description of tiie contract under which t-he 
requested action would be performed. Indicate whether tJie 
contract covers only SSF activities or whether other progxaAs 
are also supported.) 

2. TTTPl OF COMTaxCT. (Including whether it is Level-of-Ef fort . 
Do not u&e abbreviations.) 

3. cmiRZjrr vxlcj* or tht contract rxcLtroiMC the vaovoato actioh. 
(Estimated cost and fee.) 

rBOH ITEM 1. ABOVt. (Include Che najse and a clear, concise 
description of the specific work for which authority is 
requested. ) 

3. TYPZ OP ACTIOH. (Indicate whether the proposed action is a 
new contract, new work under existing contract, option exercise, 
solicitation. Change order, task order or task assignment, etc.) 

<. DOLLAB VXmr OF TSZ PRjOPOBED actioh. (Provide the estimated 
cost and fee of tt»e specific action proposed. If this is a new 
contract, provide the value of the basic effort and any options 
separately . ) 

7. »HY AOTHOIllTY TO PROCEED 18 IflEDED. (Provide clear, concise 
rationale to support the request (including, for example, 
whether a proposed change would reduce the cost of SSF-related 
activities). Identify whether there are any "drop dead" dates 
involved, the basis for such deadlines, and any Impact for 
failure to meet those dates.) 




U 3. Qo* 1 

Sooce Acm.n.sKai'on I w/ VI3/ \ 

Lyndon 8. Johnson Sp*c« C»ni«f 

Houston Texas 

BB-93-617 «AR 3 5993 . 

McDonnell Douglas Space Systems Compeuiy 

Attn: Mr. Larry P. Morata 

Vice Presldent/Ganaral Manager 

5301 Bolsa Avenue 

A95-J800. 17-828 

Huntington Beacn. CA 92647 

Subject: Space Station Fre»<k>m 

The NASA Administrator has advised that the Agency has been directed to redesign Space 
Station Freedom (SSF) as part of a program that Is mora eflident and ettectJve and capable of 
producing greater returns on our Investment 

Consistent with the Administrator's direction, you are hereby advised that for existing contracts 
which address the SSF program In whole or In part. SSF-related activities should not be 
accelerated. ■ No paid overtime is authorized for SSF-related efforts, and any staffing Increases 
which are a result of SSF-related activities are prohibited. 

This direction Is effective immediately and will remain In effect until further notice. If you have 
any questions, please contact the contracting officer that has cognizance over your contract. 

R. E. Easley ^ 

Director of Procurement 


Space Aamimstration ■ 

Lewis nesearcn C€ntef 
CTeveiand. Ohio 



March 10, 1993 

Rockwell International Corporation 

Rocketdyne Division 

Attn: Fred Ounn M/S LA-54 

6633 Canoga Avenue 

Canoga Park, CA 91303 

Subject: Conservation of Resources 

As you are aware, NASA has been directed to redesign Space Station Freedom to 
achieve a more efficient and effective program. The revised program will 
strive to significantly reduce development, operation, and utilization costs 
while achieving many of the current program goals and taking full advantage of 
the investment made to date, while this redesign activity is in process, it 
is imperative that the program conserve current resources. 

Rocketdyne Is therefore directed to take all necessary and prudent actions 
required to conserve available program resources while minimizing any adverse 
impact to the overall program schedule. To this end, Rocketdyne is directed 
to defer any increases to current staffing levels and prohibit paid overtime, 
unless It is required in an emergency situation, pending further program 

With respect to Rocketdyne' s Subcontractor team. Rocketdyne is authorized to 
proceed with subcontract/subcontractor actions that are currently planned and 
covered in the FT93 budget. However, prudent actions to conserve resources 
while minimizing schedule impact shall be observed by the subcontractor team. 

Exceptions to this direction will be granted only in compelling instances. 
Such requests shall be submitted to this office and clearly support the 
circumstances surrounding the request. If additional information is needed, 
please contact me or Bob Schneider. 


Ronald W. Sepesi 
Contracting Officer 


6000/R. L. Thomas 
8100/R. A. Schneider 
■ i540/0fficial File 



SoaCS Acmmisiradon' • 

Lewis Research Center 
Gevsiano Oio 


MAR 2 3 1993 


Roc)cw«ll International 
RocXetdyne Division 
Attn: FredericJc D. Dunn 
6633 canoga Ave. LA-54 
Canoga Park, CA 91303-2790 

Subject: Conservation of Resoxirces 

As of March 19, 1993, the wp-04 Request for Overtime 
Authorization has been disapproved. Roc)cetdyne shall taOce 
immediate steps to comply with the direction as prescribed in 
my letter dated March 10, 1993. LeRC ac)cnowledges and approves 
Rocketdyne' 3 overtime usage during this transitional period 
while exceptions to the general overtime prohibition were being 

If additional information is needed, please contract me at 216- 

/?/ Fciolo Scpis, 

Ron Sepesi 
Contracting Officer 


8000/R. L. Thomas 

1540/R. w. Sepesi 

1540/K. R. Brocone 

154 0/L. J. StauJaer 

isa-O/K. K. Martin 
Vlr540/Official File 

1540/RWSep«si:sms: 3/22/93: K:\dunn. or 


Natinnai Aeronaotics and ,• • - ^ f\IACr/\ 

Space Administration I VJl V^Jf \ 

Lewis Reseerc^ Centar 
Cleveland. Omio 



fWJZt BS3 

Rockwell International Coitj. 
Rocketdyne Oivision 
Attn: Fred Ounn M/S LA-54 
6633 Canoga Avenue 
Canoga Park, CA 91303 

Subject: Conservation of Resources 

Reference is made to my letters dated March 10, 1993, and March 23, 1993. 
and a Code memorandum dated March 24, 1993. 

Based on the latest program offir* correspondenre which provided additional 
yuidance and interpretation relative lo the conservation of program 
resources, Rocketdyne is authorized to proceed with subcontractor actions 
and activities that are currently planned and supported by the Fiscal 1993 
budget in order to maintain SSF program progress, cause minimal disruc.ion 
in completing work package COR actions, ana to support the Program COR 
sclieduie in June 1993. 

Prudent management actions shall be adopted by Rocketdyne and its subcon- 
tractor team to minimize current year expenditures, avoid unnecessary 
hardware or program build-up, and discontinue actions beyond that neeoed to 
mainta n the current schedule. Near term activities m support of post PMC 
reauir ments are not considered prudent in light of the current program 
redesign. These activities shall be discontinued. 

Paid overtime at Rocketdyne is still prohibited under the latest program 

Rocketdyne is requested to provide this Office with a copy of the guidance 
that is provided to your :,uOcont^ac>.or team as the result of this 


Ronald H. Sepesi 
Contracting Officer 














lS4U/0fficial File 
1540/RHSepesi :amn:03/25/93 


AP52 (93-03-113-E) 

MAR 2 6 1393 

Boeing Defenae fc Space Group 

Missiles fc Space Division 

ATTN: Wayne R. Wldenar, Contracts Manager 

Space Station Freedom Program 

P. 0. Box 240002 

Huntsvllle, AL 35824-6403 


Contract NA38-50000, %ace Station Redesign Activity 

Clarifications and directions have been received from NASA 
Headquarters relative to the current activities involving the 
Space station Freedom redesign effort. Effective immediately, the 
following directions apply: 

1. With respect to subcont 
subcontracts that are currently 
Fiscal Year 1993 budget so that 
complete the project Critical De 
CDR scheduled to start in June 1 
to talce any action that would pr 
on the SSF progran as currently 
efforts on the pa -t of Boeing to 
redesign are encouraged. 

racts, Boeing shall proceed with 
planned and covered under the 
there is minimal disruption to 
sign Reviews (CORs) and the system 
99 3. The Government does not want 
event Boeing from malting progress 
contracted; however, prudent 
mitigate expenditures pending SSF 

2. Options contained in the wpoi contract will not be 
exercised unless an exception is granted by NASA Headquarters. 
(See paragraph c, below.) 

3. Change order direction previously issued against the 
contract will be negotiated and deflnltlzed. Configuration 
directives approving Engineering Change Proposals (ECPs) which 
reflect worlc previously authorized will be Issued. 

4. All new WPOI change order direction will be handled as 
follows : 

a. Configuration directives and/or contract change 
orders that do not affect any change to cost or schedule may be 
issued by the Contracting Officer. Such directives and/or change 
orders shall be actual "zero-dollar" changes and the documentation 


ero dollars 

Lin-luJe B al^l B i i i a iil. — iiiOii_oi.iuy LlioL 
the change. 
iha'nge"Vc" the 
pursuant to 

001181.3 mil 
aire defined as 


Vnclu3'e ' 

CODE irr*C amply lng_w_lth 
that" Yhere'"ls h'o ' 
siONATuefcr*nge3 authorizec 
Cont ira.c t . Chaoge.^ 

o nt'fa c fc " Va" I u e 
Clause H. 3, 

and" 'does' nb€ 

lal Provision for 





b. Any configuration dir»ctlv« «ad/or change ordar 
direction that modifies program cost and affects direct labor 
resources will have to be approved by the Deputy Aseoclate 
Administrator for Space Flight. This includes directive or change 
orders that would result In a reduction in the contract value. 

c. In the event that approval must be requested for an 
action, as described in paragraph b. , above. Boeing shall provide 
the following information to the Contracting Officer: 

(1) A description of the effort. 

(2) Enough information to enable full understanding 
of the compelling reasons for seeXing the exception. 

(3) The Impact (dollars and narrative explanation) 
should the exception not be granted. The impact must identify the 
number of employees (prime and subcontract) that could be laid off 
due to disapproval of the exception request. 

d. The Contracting officer will expedite the request to 
Headquarters, on a case-by-case basis, for the requisite approval. 

Any questions should be directed to John C. Gather, 205-544-1743, 
or A. S. Bunnell. 205-544-8024. 

Original Signed By 
Stephen P. Baale 

Stephen P. Beale 
Contracting Officer 

APS2 ss O/F Copy 
AP52 S3 R/P Copy 
AP52 SS C/F Copy 















Mr. SCHAEFER. Can you provide the subcommittee with the be- 
fore and after figures of how much NASA was spending before it 
realized that things were seriously out of control at the Space Sta- 
tion and how much NASA cut spending when it began cutting back 
in light of the huge overruns and the lack of control? Provide us 
those figures, too? 

Ms. McInerney. Unfortunately, I don't have that data here. 

Mr. SCHAEFER. I understand. I mean to provide the committee 

[The following information was received.] 

Space Station Freedom contractors were on a gradual buildup as the program pre- 
pared for its Critical Design Review (CDR) in June 1993. NASA management recog- 
nized this buildup as absolutely critical to successfully completing CDR, which was 
important to both the Freedom program and the redesign effort. From September 
1992 to June 1993, total Space Station monthly costs increased from an average of 
$164 million to $180 million. Of this amount, the previous three prime contractors' 
cost increased from $109 million to $124 million, accounting for most of the total 
monthly increase. 

Since CDR in June 1993, costs have been reduced, reflecting the redesign efforts 
and the new management and contractor arrangements. Since October 1993, total 
monthly costs have averaged $135 million, with the prime contractors representing 
$100 million, or 75 percent, of that amount. 

Mr. SCHAEFER. Since the time of the configuration of the con- 
tracting effort last year and the selection of Boeing as a prime con- 
tractor, has the Space Station had a baseline? 

Ms. McInerney. Do you mean Space Station Freedom or the new 
Space Station? 

Mr. SCHAEFER. The new Space Station. 

Ms. McInerney. The Space Station program came out with a de- 
sign at the end of the redesign activity, which was in June, en- 
dorsed by the Vest Committee, accepted by the White House. 

There were two activities that the Space Station Program Office 
conducted. One was called a System Requirements Review in De- 
cember which further defined the baseline and put it in place and 
then they recently had a System Design Review in March of this 
year this which established that as the baseline. 

Mr. SCHAEFER. So you have a baseline? 

Ms. McInerney. That is correct; a technical baseline. 

Mr. Schaefer. Is there a financial baseline, cost? 

Ms. McInerney. The cost baseline is under negotiation. The 
Space Station office has conducted two fact-finding sessions over 
the last 2 months with the contractors. It has included participa- 
tion from DPRO and DCAA and this is leading into activities that 
will begin shortly with the final negotiations of the estimated cost 
and fee for the contracts. 

Mr. Schaefer. So we do not have a financial baseline. That is 
being negotiated? 

Ms. McInerney. That is correct. 

Mr. Schaefer. How much has been spent on the Space Station 
in the absence of the baseline? 

Ms. McInerney. We can provide that. 

Mr. Schaefer. Thank you, Mr. Chairman. 

[The following information was received.] 

The Space Station Freedom contracts were novated on February 1, 1994, and 
NASA signed a Letter Contract with the Boeing Company. Since that date, the pro- 
gram has obligated $580.7 million through June 30, 1994. 


Mr. DiNGELL. General, you are familiar with the fact that in 
1992, NASA promised the President that it would correct defi- 
ciencies that GAO identified in NASA's financial management sys- 
tem, are you not? 

General Dailey. Yes, sir. I am. 

Mr. DiNGELL. And GAO at that time promised that it would cor- 
rect the deficiencies through increased emphasis on the issue at 
headquarters level; is that right? 

General Dailey. I believe it is. Yes, sir. 

Mr. DiNGELL. And that initiative is designed to enhance the ef- 
fectiveness and efficiency of post-contract award management, the 
improving of oversight and the utilization of contract administra- 
tion services from DOD and by providing training in management; 
that these ends would be accomplished, is that right? 

General Dailey. I can't say for sure on that, sir. 

Mr. DiNGELL. We have here a situation where we find, first of 
all, that the centers in the case of the information we are talking 
about refused to make the information available to you. You never 
knew that IBM refused to tell you about their management costs, 
did you? 

General Dailey. No, I didn't know that. 

Mr. DiNGELL. And one of the problems that seems to be here is 
that the centers seem to act as if they don't work for you. Mr. 
Easley doesn't tell you what is going on down there. 

General Dailey. There are many things that Mr. Easley doesn't 
tell me with regard to what he does when he carries out his own 
duties. He is responsible for significant areas of management at the 
Johnson Space Center that he does not convey to me on a regular 
basis. He has been entrusted with the authority to do that. 

Mr. DiNGELL. I have a letter here from Johnson Space Center in 
response to the draft of the DCAA audit dated May 10. I would like 
to read a portion of it. 

It says as follows: "The draft, in nearly all cases, indicates that 
the contractors are not complying with NASA Handbook 950.2b, 
Contractor Financial Management Reporting System, for preparing 
NASA Form 533. While this is true, NASA has directed each of the 
contractors on required reporting. 

"The handbook, as written, is incorrect and is in the process of 
being rewritten to comply with the current requirements. There- 
fore, we disagree with the statement that contractors are not com- 
plying with the reporting requirements and that the 533 Handbook 
takes precedence over what NASA has directed the contractors to 
report. The fact that contractors could not provide a copy of a 
NASA deviation would not be a basis for a prime and/or sub- 
contractor to ignore contractual direction in terms of reporting." 

This letter was written by the director of procurement at the 
Johnson Space Center. He has been in that job since 1989. I believe 
that is you, isn't it, Mr. Easley? 

Mr. Easley. Yes. 

Mr. DiNGELL. Mr. Easley, I want to ask this question of the Gen- 
eral and then I have a couple of questions. 

General, do you agree with that letter? 


General Dailey. I don't and I don't believe Mr. Easley does ei- 
ther. I believe he wrote a letter subsequent to this and corrected 
the statement about the NASA Handbook; is that correct? 

Mr. Easley. That is correct. 

Mr. DiNGELL. I am curious. 

General Dailey. This letter has been superseded. 

Mr. DiNGELL. Withdrawn? 

General Dailey. Yes, sir. 

Mr. DiNGELL. Why was it written in the first place? 

Mr. Easley. Where it said that it was incorrect, it was subse- 
quently, by changing the wording to where — the handbook itself is 
correct. We had augmented the handbook. At no time have we ever 
instructed, to my knowledge, a contractor to report differently from 
what the handbook required, but rather to augment and provide 
some additional information. 

Mr. DiNGELL. What does augment mean? 

Mr. Easley. Additional; in addition to. 

Mr. DiNGELL. What form does this augmentation take? 

Mr. Easley. It takes on a variety of different forms depending 
on which 

Mr. DiNGELL. Does it mean that you write a new section which 
applies to all contractors or that you just write a letter to a con- 
tractor and say disregard this part of the handbook? Which do you 
do when you augment? Do you augment by adding a new para- 
graph or section or set up a new handbook or do you write a letter 
to the contractor and say, "Don't pay any heed to that part?" 

Mr. Easley. No, sir. We comply with the handbook, but we have 
additional information depending on which type of contract and 
what kind of system that it provides. Some of our 533 reports may 
be a very few pages, 5 or 6 and others may be 15, 20, 30 pages 

Mr. DiNGELL. Are these part of an individual contract? Are they 
done for everybody in the industry? What form does it take? Does 
this become a section of the handbook? 

Mr. Easley. No, sir. The additional reporting requirements, that 
is very key — it is in addition to what the handbook requires would 
be additional reporting requirements that might be needed for a 
project manager. 

Mr. DiNGELL. Do you clear these augmentations with General 

Mr. Easley. No. They are cleared between my organization and 
the Comptroller's organization at our center who has a major hand 
in evaluating the cost reporting for contractors. 

Mr. DiNGELL. General, what authority does Mr. Easley need to 
augment these requirements in the handbook? I am trying to un- 
derstand, is the handbook something which gives instructions to 
Mr. Dailey and everybody else? Does Mr. Daily control the editing 
of the handbook? What are his authorities to make changes in the 

General Dailey. The handbook is an agency level document that 
is produced by our headquarters. 

Mr. DiNGELL. Does Mr. Easley have the authority to change it 
whenever he feels the mood is upon him? 


General Dailey. It provides guidance for various activities and 
the centers are authorized to modify or to augment this in cases 
where it is necessary to do so. But it is done with the — I believe 
at the center director level. I am not sure where they do it within 
the center, but we have delegated that authority. 

Mr. DiNGELL. Is that done in writing or do you just say fellows, 
change it any way you like? 

General Dailey. It is part of the policy and it reflects that. 

Mr. DiNGELL. Is that written down somewhere? 

General Dailey. I think that — I don't know. I will have to check. 

[The following information was received.] 

Attached is the portion of NHB 9501.2B where NASA Centers are authorized to 
modify or augment requirements set forth in the handbook. 


For lelevjnc s»-icricns ;: ^^HB ■'"'iuL.J. zee cue followinq: 

L. Piefjce, pdijijtapti 4 

2 . Pdtaqiaph 102.3 '. 

3. Pdiaqraptin 103.3. and 103.4. 

4. Paiagraphs L04.l.d., 104. 2. c. and 104. 2. d. 

5. Paiaqraph 300.4. 

6 . Patagraph 301.7. 

In lerins o£ the specific request, I believe ic should be 
noted that, in every case, there is no stipulated NF533 
reporting structuie in the NHB; Chapter 2 provides guidance, 
but It 13 Che intention of the system that a customized 
reporting structure be developed for each particular 
contract. In this sense, the NHB is "augmented" for every 
contract, because each one specifies the structure to be 


used £or reporting on that contract. The most direct 
response to the request would be to simply quote Paragraph 

"Exceptions to the requirements and 
procedures set forth in this Handbook are those 
variations to the system, which due to unique - 
reporting requirements or capabilities of the 
contractor's management system, require special 
attention (e.g., substitution of contractor's 
internal reports for specific data requirements, 
elimination of detailed long-range cost 
projections on support service contracts where 
NASA controls the application of labor to the 
contract, etc.). These exceptions may be approved 
at the Installation level in accordance with the 
local management procedures." 

Other instances in which authority is specifically given to 
"augment" the NHB are: 

1. Paragraph 102.3. - "NASA contractors are expected to 
submit cost reports in which the cost information is fit'ced 
to the technical and schedule reporting structure. The 
exact level and the detailed fitting of this data is based 
upon NASA project management requirements and the 
contractor's management system capability." 

J P'rT 1 -rlJ.' .1 r !ue ■ lac es : , n . : : ^■..■\ I _■ i . ■■ l ri ■_('., . • 
I n:-.i: anc.'-' ■• wnt^te r t:e conr i . j.-' '^: .nretn,,! ni.inci'ieiiir^tir ,/-;r.'» 
['[►^'•lii'1' ' • :ihmi33ion by ^ he -f^"'.: : ■-' I i.''^. the submittal 
date will be negotiated. 

}. Re jubscicucicn of contiac:or lepoicing tcimjts: 
"Contractors' i.nteinai automated ptincoijt. I'^poits may "be 
substituted for the 533 reporting format?, with the 
contracting officer's approval. 30 long as ttie substitute 
report" contain data elements equivalent to c he 
corresponding 533's." 

4. Re the initial report: Paragraph 300.4. "An "Initital 
Report" in complete detail, time-phased for the expected 
life of the contract, will be submitted by the contractor 
within 10 days after authorization to proceed has been 
granted, unless otherwise specified by the contracting 
officer. " 

5. Re reporting during contract close-out: Paragraph 
301.7. - "During this time period, since no significant 
additional costs are being incurred, 5 3 3 repotting may be 
required on a quarterly basis only at a summary level, by 
direction of the contracting officer." 



Mr. DiNGELL. Can you tell us, Mr. Easley, where is the authority 
that you have to change the handbook? 

Mr. Easley. First of all, I don't recall changing the handbook. It 
would not be a deviation to augment if we have supplementary in- 

Mr. DiNGELL. Let's look at what you said here. You said, "The 
handbook, as written, is incorrect and is in the process of being re- 
written to comply with the current requirements." 

Do you agree with that, General? 

General Dailey. It turns out that the handbook is being rewrit- 

Mr. DiNGELL. Was that correct at the time this letter was writ- 

General Dailey. May I pursue this for a moment, sir, because it 
is a fundamental issue to the way we operate the agency. We put 
out guidance at the headquarters level that provides overall direc- 
tion to our centers as to how they are to do business. They have 
to have ability to adjust to specific cases, but they don't override 
the guidance that comes out from the headquarters 

Mr. DiNGELL. They do in this specific case, do they not? 

General Dailey. This letter is no longer valid. It has been super- 
seded by another transmission from the same individual indicating 
that he made a mistake when he wrote this letter. 

[The letter referred to follows:] 


^rVlA.^atf 13:42 

- K0.615 Pe02 

HaDoral Aar or^auDcs and 
' Soace Ajjminisiraoon 

Lrndon B. Jo^naon Spao* C«>Kar 

HousK>n. Texas 


JUL 6S94 

DafaoM Contract AuJil Ao«ncw 

Houston Brancti ORIc* 

Attn: Mr. MchMt S. McConnel. Brwrct\ Managv 

M7B G\JI Fre«way. Suto 600 

Hoottoa TX 77017 

Sutojfuct Report on AuiSis of lh« Budgeting arvl FViancM Cortrel Systanis 

Raferonce my Mlar dated May 10. 1994, Mma sutitect, wtiich provWed our cofrvTMnt* 
reeardlng thm draft audit report. 

K haa come to my attention that we uMd a bad chotoa of vMXdt deaing wtih the NASA 
Hartdbook 9501 .2B. Contractor FInarKlal Management Reporting Syitem. Aocorifr>g<y, in 
peragrapn 1 of General Comments, please dele t e the sentence begirmiig virflh the words. 
'TTwHarMftook.aswrtten. IskKorract...*. arxisubstitutaOiefoaowtng: TT^e Handbook Is 
correct and Is lt>e official doctinent; however. In a number of cases Itie contract schedule has 
supplemented the Harxlbook requirements. Thus, the audit must consider rsporling based 
upon the HarObock rsqurements as wel as any si^jptemental oor«act requlrsmentx.* 

I regret any cortfusion this may have caused. 




l| - S 



Mr. DiNGELL. I wonder why Mr. Easley would write a letter in 
which he would say the handbook as written is incorrect. Why did 
you say that? 

Mr. Easley. First of all, I signed the letter. My staff prepared 
the letter, but I take full responsibility for it. 

Mr. DiNGELL. Do you agree with your staff? 

Mr. Easley. The intent was to say it is additional information 
over and above. It is an incorrect statement to say that the hand- 
book is incorrect. That was not the intent. 

Mr. DiNGELL. The question to which this all refers is the report- 
ing requirements that were imposed, that DCAA said were imposed 
by your handbook; isn't that right? 

Mr. Easley. That is correct. 

Mr. DiNGELL. Now, why did you tell them that this was not prop- 
er, that the handbook was incorrect on the reporting? Do you still 
maintain the position that it was incorrect on reporting? 

Mr. Easley. The handbook was not the single reporting require- 
ment. We had other requirements in addition to the handbook. 

Mr. DiNGELL. But your letter was about a disagreement that peo- 
ple had with DCAA, yourself and contractors, right, over the re- 
porting requirements. Were you trying to amend the reporting re- 

Mr. Easley. I think the real disagreement was not on the report- 
ing requirements, but were the contractors complying with the con- 
tractual reporting requirements. 

Mr. DiNGELL. Were they complying with the reporting require- 

Mr. Easley. Were the contractors complying? Not in all cir- 

Mr. DiNGELL. When you said that the handbook was incorrect, 
were you saying that the behavior of the contractors was correct or 
that the behavior of DCAA was correct? 

Mr. Easley. I wasn't getting at the behavior. The behavior of the 
contractor was incorrect in that we were not getting the total infor- 
mation that the contract required them to submit in terms of the 
financial in all cases. 

Mr. DiNGELL. I am curious why you said that the handbook as 
written on this point of the reporting by the contractors was incor- 
rect. Because you were essentially saying that the contractors 
didn't have to make the reports that DCAA said they had to make. 

Mr. Easley. As I said earlier, the word incorrect is not a 

Mr. DiNGELL. Let's address my question. It always makes me 
happier when people do that. It makes me unhappy when they 
don't and we don't want me to be unhappy today. 

Why was it you told the contractors in this letter that DCAA was 
incorrect on the question of reporting? Why did you do that? The 
handbook says they have to make certain reports. The reports that 
were supposed to be made dealt with questions of management, 
compensation, fees, bonuses and so forth. Why did you write that 
the handbook was incorrect on this? 

Mr. Easley. It was an extremely bad choice of words. It should 
have said that there were additional requirements. 

Mr. DiNGELL. Were the additional requirements that there was 
to be more reporting or less reporting? 


Mr. Easley. More. 

Mr. DiNGELL. What were those additional requirements? 

Mr. Easley. Many of our contracts depending on what they were 
would have additional requirements to report by certain types of 
work breakdown structure. 

Mr. DiNGELL. What are those requirements? Are they in writing 

Mr. Easley. Each of our major contracts typically will have a 
separate augmentation deliverable which will describe those which 
we can make available to you or your staff. 

Mr, DiNGELL. But nowhere in your letter did you say that they 
were to provide more information. You inferred that they did not 
have to provide the information which was required in the hand- 
book; isn't that the clear inference of the language of your letter? 

Mr. Easley. Unfortunately that can be interpreted that way. 

Mr. DiNGELL. Is there any other interpretation that I can assign 
to this? 

Mr. Easley. I can't answer that. 

Mr. DiNGELL. So you are telling everybody that they don't have 
to submit all the information in this letter. 

General Dailey I guess prudently said that you should withdraw 
the letter, but you didn't clear the letter with General Dailey. 

When did you find out about it, General? 

General Dailey. I found out about it simultaneously with the 
correction that came out when the letter correcting the situation 
arrived also. It came in in the same package. 

Mr. DiNGELL. So somebody else wrote the correction; is that 

General Dailey. No. Mr. Easley wrote it also. 

Mr. DiNGELL. The correcting letter went out July 6. What was 
the date of your letter, Mr. Easley? 

Mr. Easley. July 6th is the correcting letter. 

Mr. DiNGELL. July 6? Your letter was May 10, was it not? Gen- 
eral Dailey's letter was July 6th. 

General Dailey. Then he wrote another letter on July 6 correct- 
ing it. 

Mr. DiNGELL. Why did you send the July 6th letter after you had 
sent the May 10th letter? 

Mr. Easley. Due to the interpretation that had been put in the 
May 10th letter, that was being perceived as the handbook was in- 
correct and that was not intended — that was an error put in the 
May 10 letter. 

Mr. DiNGELL. When did DCAA brief headquarters as to their 
findings? You have two letters. May 10, your May 10 letter says 
you don't have to pay any heed to the handbook. Your July 6 letter 
says you do. 

When did DCAA brief headquarters? 

General Dailey. I think it was around July 6, but I am not sure 
of the exact date. 

Mr. DiNGELL. So I note here that the document headed "NASA 
Johnson Space Center, Defense Contract Audit Agency, Budgeting 
& Financial Control System Audits, dated July 6, 1994." I assume 
that that is what triggered the withdrawal of the letter; is that 


right? That was essentially the briefing paper I gather that DCAA 
used in briefing NASA on this particular point; is that right? 

General Dailey. I can't answer what triggered the letter. 

Mr. Easley. May I address that? The thing that triggered me to 
revising the letter was the fact of a conversation between head- 
quarters' financial people with members of my staff regarding the 
interpretation and that was why we clarified the letter. 

Mr. DiNGELL. I am trying to understand why the letter was with- 
drawn and let me ask you a question. Do you think you need the 
information that was sent out in the handbook? 

Mr. Easley. Absolutely. 

Mr. DiNGELL. In the reporting? 

Mr. Easley. And we never have 

Mr. DiNGELL. Why did you write the letter of May 10? 

Mr. Easley. The purpose of the letter of May 10 was two rea- 
sons. One, to provide any clarification; and second, we had — of the 
10 companies that had been audited my staff working with DCAA 
and other business managers at the center — had provided com- 
ments back on the other 8 companies and the remaining 2 compa- 
nies had not provided the comments. 

Mr. DiNGELL. You said the handbook as written is incorrect and 
is in the process of being rewritten to comply with current require- 
ments. How was the handbook incorrect in what it told the contrac- 
tors to report? 

Mr. Easley. Probably Mr. Holz could address that. 

Mr. DiNGELL. The handbook set forth requirements that you are 
supposed to carry forward to get information from contractors. How 
were those information collecting and reporting sections incorrect? 

Mr. Easley. As you have been told, there is a revision to the 
handbook that is in process now and I would defer that to someone 
from the office that is revising the handbook. 

Mr. DiNGELL. Well, let's come back here now. We seem to have 
disagreement with the Johnson Space Center disagreeing with the 
DCAA audit. Indeed, in a four-page letter, the Director of Procure- 
ment at Johnson attempted to dismiss and rationalize all the 
DCAA findings, and without objection, we will put that in the 

[The letter referred to follows:] 

86-145 0-95-5 


Lyndon B- Jo^naon Sp*o« Cmrtmr 

BO-M-30 MAY 1 694 

DaftftM Contr»c( Audft Ao«oey 

Houston B'Viiii OfALM 

Atm: Mr. »4c^M4 S. MoConn«fl. Bnncft Manaoar 

8870 diJt Frs«M«y, Sufta 600 

HourtDO.TX 77017 

8u&t«ct Raport on Aixits of e>« Budgeting and Rnanotai Control Syvtams 

W« apprvciat* tn« opportLnAy to rwww th« tub^^ct draft avfdlt rapo^ prky to R ba<Ag pubn«hed. 
Mo*t o< tha cxxitrac&nQ o<Ttcan ateo l^ad ar opportunrty to rr>a«< oo«-oo-ooa wtm your kaad 
audtor for the r^tp^cst^t contactor. Thara ara soma la«oa« or rN»ur>d«rTtan04n9* thai naac to 
b« etartftad prior to fl^ (toCLmaot &«nQ putrfiahad. and t^aaa wara sddraasad In tha maatinqa. 
Tha intfviduatf contractor-Cry-oontractor dataOa pra\V>ut>y prw^dad to you ara not providad In 
ns (attar hoMWvar. w« trust Chay\*4) &a 9 van proparoonak)ar«t>orL For furthar ampfiaai*. 
soma of tha major tsauea are addraasad baiow. 

1. Tha< 

draft. In naarty tJ C8S««, tndJcatas that tfta comtractort ara not oomphhr>g \wttti 
NASA handbook 95C1 -2B. Contractor Dnartcial Uanasamarn RaportJng Syatam. for 
pr«p«r1r>g h(A8A Form 533. Whla tmi U tnja. KASA haa (£rectsd aac^ of tha contractor! on 
raqutrad reporttng. Tha Handbook, as wrtttan. la Irysxraa and la In tha prooaaa of baino 
rawrlttan to comp^ with tha currant requiramonta. Tharaform, w diaagraa \*i4th ir>« rtstarnant 
that oontra<aon ana not comp^ylno yjQh roporting raqutramants and that tha SS3 Har>dbook 
takaa pracadarxra ovar what NASA haa dU'actsd tha oontraaton to rapod Tha fact (hat 
oon tr a ctort axrtd notprevSda • copy of a NASA deviation vh^tuU no< ba a basiafora prima 
tndJor autoontractor to Ignora oontractuaJ direction In tarma of raporttng. T>Ma m*ior 
(Srraranoa of optnlor ha« at^atantial rippia afTact throughout tha rapon and ihafafora naada 
to ba adijraiiad. 

2. A numbar of yotr commarKS ralavant to *est}mala to oomplata* do not daarty raiata to tha 
lavai-of-afTorT (LOO anvironmant which \$ tha pradorrUncta typa undar Iha audltad 
oontracti. Tha contract* ara for a t-Oe* (houra) to ba provWad durt^g a aat panod of tlma, 
•a opposad to a ipedflc datfvaraWa task or and Itam. Thaaa houn ara thim tumad on 
fvocgh tha lasuanoa of indMdual task ordara that typicoffy contain an agraad to staffing 
(aval. Tha fund^nantal dttTaranca ba t waan lO€ contracang varsus 'compietion form* ¥.Wi 
daflnad datvarabtes neada to ba a<sdrass«d throughout your rapon 

3. A nurnt>ar of your comrnonts daaBng with tha foto^Mng tarms "authorti»d.' "daflnmrad." 
and •undafinWzad.* as thay ralata to changa order*, gtvaa reason to baSava thara Is tony 
mlaundarstandino on tr>a proper usage of rvasa tarma. NASA may tsaua Tllractton to a 
contractor, pcrauant to tha changes dauaa, whkh 'authorlzas' tha contractor to proceed 
and Incur coat Thaaa costs ara than treated mra raportad as 'authortiad.* Thay are 
■undaOnnxair unlfl sueti tlma as thay ara aubs«quent}y negotiated and 'd«Arkttze<r to the 
oontract by tha Issuance of a bflataral suppiamantaJ agraamanL This matter naada to ba 
co rmc t ad In savaraj areas in tha raport 


4. TTm mpart rafw In runarout p<acas to 1n«d«quct» oontreU ov«f bonu«*« and vwardt.' and 
ImplM evoughout that th«y must M t>«d to 'p^ffomwxa.' Many oonpantot. du« to a 
ahrlnkjng a«ro«p«o* marliat art maidng mar»QTnTH dadsiont to offar "Vrnp auma* or 
bonus«a u part of ovsrafl eompa^^s'i^O'^ pacts?**, and t^a^Bfo^• «outd not b« a plannad 
'parformanca baaad* awvd. A numftw o< t^a««. ir not all, ara kn fxa approvad by tha 
adm a i totratfv oontractnQ officar. This mattAr n««d« ts b« addra«*«d Ifwoughout t^a rapoft 

6. Ragardtng ^dla Hmm aocounta,* w ballava that mmritr la most appn3p<^atary d«att vwfth 
ffVTXigh floorchedta. vwtitefi wa both hava raaponstbttty for cooduoing. 

Q. Oh^an Dn«t tha mutSt b^Q9n July 1963, ttma and drcumxtancea (suc^ s> novation of a«vanii 
oontracta/tubcootncts) has caus»d tavaral statamara to ba inaccunta today. TN* 
condition naad s to b6 r»vt«wd ttvouQhoU tha mpon. 

7. SpaoMc oommants by ooo tiaOw foflcMva: 

a. Tha pdma contractor, McOonnaH Oougias Spaca Syatams Compttiy (M058C), flowd 
down tha S33 reporting raquiramonts that wart on tha prim* oontracL 

b. Paga 1. first parBO^iph, que«tlonad I8M subcontTBet va4ua as oontsinlng '...sJgnmeant 
•mounts of unda/inMzad. unnagotUtad work...* This dollar amount did Inctuda au(horu«d 
woiii m tha form d c o <it f »c t d^^riQ* ordart. S— Q^ntni cotrvnants abova. 

e. Ptga 1, last sentaoca of taoond parsgrBph, la ncA daar and i^paan to ba contradictory. 

d. Ptga Z, fourth par a g -ap^v nexl to lut sarttarca atataa. "Wa haw »ean no avtdenoa to 
■how thafr ooats wera approvad by NASA.' NASA doa« not 'approva thaaa ooata.' and 
tha fact that thay «ra "daflnitizad' or "unda/WttzaC does not craats tha raquirarnant for 
Qov amm ant approvaL Tfm kndafnlUzad, unnagottatad coats wfll ba naQotiatad. 

a. Paga •, aacond paragraph stataa. '...changlno tha mathod In which softwara la to 
ba bavaloped shetM ba definmzad and negotlatad bofora K ooors.* Is our prvfarrad 
matftod; howavar, thts doaa not pracKxla NASA frorn tnutng a changa ordar whan 
daamad approprlaia that h«« not baan doflnmzsd. and doa« rwt maka tna oo«t Impact for 
tha diractad work as inaflowsbto or Inapproprvata. In »a<mon, part of tha cost growth 
undar this subcontract was dVactty attrtbutabia to tha fafiura of tf^a Oovammant to prov^da 
Qovarrvnent Fumlahad Eqiipmant at tha raqulrad tima. Negotiation in advanca of tha 
impact of not moating tha contract raqiiramam by tha Govanrvnant was not prvcttoaL 

r. Paga 8, last paragraph, la Inoonalatant wtth tha chartgaa dauaa whan auch dlrvcdon la 
;^yan by tha prtrna oontractor. 

ABp**vffit B • eaaaai 

Datafla atraady providad In maadng. 

a Pagal.fWpara^rvph. stataa that ovar$1B)Bon of ur>daflnmzad and uwagotiatadoeat 
raaiita in mkrapraaantation of eoat varlanoaa. Tha oontractor w«s provlbad dnacbon to 
raport m Ma marvwr. Without tha Inclusion of thaaa ooata in tha 633 raport. our abURy to 
monrtor ooata would hava bean aigmflcantty t mpa ctad. Onfy by Induing undaflnttizad 
changas In c ontract vaiua can vartancsa ba k)ant}f>ed. aincm undafWttrad chargaa ara 
Indudad (and ahocM ba) In tha oontrvctora astlmata at oompMlorL 

b. Paga Z ^r*t paragrapft, stataa that falura to comply wtth Ka own mar^agamant raporbng 
raqubvnants haa raauftad in s>gnifV:«nt coat growtha.' It cannot raaaonabfy ba corviudad 
that faJkffa of MD88C to oompfy with Its own managamant raportng raqulramanta r«au(tad 
In aigntftcant coat growth. WhOa wa do not dlaagraa that K would hava baan prafarabta to 
t\K^ had a mora timaty comprahanalva aatimcta at oomplation. tha raason for coat growth 
la mora attrtbutabla to othar factors. 


c. Paga 2, ttxm p«f«9r«ptv Aut^or^ Commart*. ^toc^ ttatM '...fiiay ooutd not loota 
dooum«rrtat)on to tuppon t^« oov*mm«rTt dir»ct)cr\ prc7vkj»d...* rve«dt to b« oofmctsd 
tircm ■ oo^ Q< l^« an>aion ti in fact > part of UOSSC*» comm*nt». 

d. Pag* 8. ffrit pangrsph, tf<ajs*at cost growlh proc»««. ON^n tt^ct Vyrt \m no prvcOcal 
vwy for l^w Gov«mm«it or prlmA oor«r«ctor to pr»cis«^y tbentify >M^*n n oocun, proposing 
and nagotUtiog prior to lncurr»rce« of any co<t gnTMh te not practicabia. 

a. P»o* ^0 tfiotirxt pro6(ams cor«amtng ttsfl^ («vai8. ThU kuua d»al« wnh chanoas 
dlr«ctad by Iha Govamrnart in fact, a dract-va-indrect anafysia wt« cooductad by DCAA 
wth NASA partidpabon and ca aJso pan of tha SU ravWw actMtiaa. An indiract rata 
ravi9w was eonductad for th« Houston oparations, and prior to r»<j««ign. a slmHar (annuaO 
rwtaw was t»ir>g »ct>aduied for tha H un tinqtor Baact^ oparatksns. 

AaQan<«x P . Baodlx 

Datads etr—ify provxlad in meatJnQ. 


a^'aady prwfc^ad In megttng. 

ADoy>dtx F - SsnlQ« 

D a taii atr^vtf pmwio^ \r maatlno. 

Oatais atraady providad in maadnQ. 

Aoeendbi H . WSOC 

DataJIs ^raady provMad in maaflnq. 

Af>oaf>dbi I ■ CA£ Link 

Oatate airaady provldad In maaOnQ. 

ADoandIx J » Boetnt^fEPC 

DataiU aJraady pr^/tdad In maatlne. 

in summary, w9 do appraciata tha opportixUty to rw-Zivmitf draft ("aport, and w ^njtX tha 
afiova commants and tfxvsa fumishad tn tha ona-oo-ooa ma«tln^ vv^B Pa gtvan propar 
oonaidaration pnor to puNlshing tfia rapon For furthar discussions, faa^ fraa to oontact 
JofV) J. ThM at 715-4«3^109. 


US/W. Drapar 
BCA). Hyda 
BQ/W. Bays 


Mr. DiNGELL. Nowhere in the letter does the director agree with 
any of the audit findings or indicate anything will be corrected. Do 
you agree with the DCAA audit or do you disagree? 

General Dailey. We agree with the audit, sir. 

Mr. Abbey. The Johnson Space Center agrees completely with 
the audit and we have initiated action to take into account all the 
recommendations and developed an action plan to fix it. 

Mr. DiNGELL. Mr. Easley, you wrote the letter. 

Mr. Easley. I signed the letter, correct. 

Mr. DiNGELL. You signed the letter or you wrote the letter? 

Mr. Easley. I did not write the letter. I signed the letter. 

Mr. DiNGELL. Do you agree with the letter? 

Mr. Easley. The letter could have been better written. I fully 
agree and support the findings by DCAA. The purpose of the letter 
was not to disagree with the findings, but to find clarification prior 
to final publication of the report. 

Mr. DiNGELL. Here we have an unfortunate situation where 
headquarters has one policy and you, Mr. Easley, in Johnson Space 
Center, has a different policy. 

Mr. Abbey. The Johnson Space Center policy is the same as Gen- 
eral Dailey's in headquarters. 

Mr. DiNGELL. Would you please inform Mr. Easley of that. 

Mr. Abbey. He has been informed. 

Mr. DiNGELL. It will help us all because it will probably prevent 
other hearings like this or at least help reduce their frequency. 

Mr. Abbey. I certainly agree and we have so informed all the 
people that are involved at the Johnson Space Center. 

Mr. DiNGELL. Don't you have sort of a historical problem that 
you have one set of policies in Washington that you are going to 
control costs and have adequate reporting and Mr. Easley and all 
the good folks who are working in the Space Center have a dif- 
ferent policy. Every time DCAA comes forward with an audit, they 
have a letter saying that the handbook is incorrect or disregard the 
audit because we don't agree with it. 

At the same time, Mr. Easley is not getting the data that he 
needs on things like fees, management costs and bonuses. Is this 
a problem. General? 

General Dailey. It could be a problem at the present time and 
it is one that we are working on actively in the management re- 
forms that we have incorporated that I mentioned earlier. I think 
that this particular incident is an isolated case where we have had 
the individual involved has corrected the error with a subsequent 
letter showing that he acknowledges that he is aligned with the 
agency policy in this regard. 

But this is part of the cultural change in the management dis- 
cipline that we are instilling in the agency and I think that we 
have the structure in place to make sure that this change takes 
place. I do not view this particular incident as a serious breach of 
policy by a center. I think that it was in this case perhaps a mis- 
judgment by one of our senior supervisors that has been corrected 
in writing. 

Mr. DiNGELL. Well, General, I was an infantry man back in 
World War II, I guess a little before you were in, but I have some 
recollection of how it was done in the military and I manage the 


committee and administered a Congressional office and have run 
some businesses. It has always been my rule that when I told 
somebody we were going to do something, we did it. 

I sense that the problem here is that you have to see to it that 
folks at NASA understand that when you say something is going 
to be done, it is going to be done. I think that perhaps is a critical 

This is not the only example of where the Johnson Space Center 
failed to see serious management problems. Let's look at the per- 
formance evaluation given for McDonnell Douglas for the period 
October 1992 through March of 1993. The additional rating that 
the center gave for the cost control performance was "good;" overall 
rating was "excellent." Then the NASA Inspector General released 
a report that criticized McDonnell Douglas's cost control manage- 
ment during the same period as the performance evaluation. 

You are familiar with that, are you not? 

General Dailey. Yes, sir. I am. 

Mr. DiNGELL. And Johnson Space Center then revised both rat- 
ings downward and incorporated some of the IG's findings in its 
evaluation. Does Johnson Space Center communicate with or been 
communicated with by the IG? Can you tell us the answer to that 
Mr. Easley or Mr. Abbey? 

Mr. Abbey. Yes. We do take action on those recommendations 
and since that time, Mr. Chairman, we have taken action and real- 
ly put into place a whole new team to administer that effort. Mr. 
Easley works for our new Director of Business Management, Terry 
Hesse, who is here today and we have taken action to implement 
all recommendations of the DCAA audit and other appropriate au- 

Mr. DiNGELL. The Center is supposed to oversee the contractor's 
performance everyday; is that right? 

Mr. Abbey. Yes, sir. 

Mr. DiNGELL. And supervising and overseeing the performance of 
the contractors everyday means they ought to be knowing what 
they are doing; right? 

General Dailey. Right. 

Mr. DiNGELL. And how well they are doing? 

General Dailey. Yes. 

Mr. DiNGELL. But here they missed all the deficiencies that were 
found by the IG, so they had to reduce a cost control performance 
of "good" and an overall rating of "excellent" as a result of the In- 
spector General's findings on the matter. Does that indicate to you 
that the Center there is doing a good job of supervising costs or 
does it indicate that maybe we ought to fire them and put the IG 
in charge of business down there? 

General Dailey. In fact, we have made major personnel 
realignments in this program as a result of our restructuring. 

Mr. DiNGELL. But it has happened and we must assume that if 
this is the kind of performance review and supervision of the con- 
tractors that is given by the center, there is need for substantial 
change. Must we not make that assumption? 

Mr. Abbey. Mr. Chairman, we have taken action on the award 
fee structure and the way we administer the award fee structure 
and given emphasis on the right areas I believe and we are taking 


area action to change that taking into account the DCAA audit. We 
will put the emphasis in the right area and judge the contractors 
in the right fashion. 

Mr. DiNGELL. Can you, General, or you, Mr. Abbey, explain to us 
how Johnson Space Center could have so easily missed all the defi- 
nitions that were found by the Inspector General? 

Mr. Abbey. I think they tended to put — in our award fee evalua- 
tions, they didn't put the emphasis on the right area and we have 
taken action to put that emphasis in the right area. 

Mr. DiNGELL. Why is that? 

Mr. Abbey. I think they were perhaps putting emphasis more on 
drawing releases at that time in that there was a great deal of 
pressure trying to get McDonnell Douglas to release drawings at 
that point. 

Mr. DiNGELL. We have quoted on several occasions from the 
opening statement of General Dailey in which he says the very sur- 
vival of the Space Station program depends on how successful 
NASA and its contractors control and reduce costs proactively. 

Here you have a Center that can't find a whole plethora of things 
wrong with the behavior of one of your major contractors. They are 
working with them everyday, the Inspector General sees what has 
been done and comes to the conclusion it has been poorly done. 
Happily, the rating was corrected. 

General, did you instruct that rating be corrected or did some- 
body else do that? 

General Dailey. That initiative was taken by the center as a re- 
sult of the Inspector General report, I believe. This was a situation 
where it was not detected by 

Mr. DiNGELL. I am trying to understand — here you have an agen- 
cy that has a major subordinate institution. We have gone through 
a number of instances where we find that there have been signifi- 
cant failures by the subordinate institution. I am curious — what is 
to be done to correct this problem? 

You have the Space Center not rating its people properly, having 
very large cost overruns, not auditing, not scrutinizing its contrac- 
tors in a proper fashion. What do we do? 

General Dailey. I think we have already done it and that is 
what I have been talking about in the restructuring not only of the 
management structure, but — the Space Station does not report to 
Johnson Space Center. It reports to the program director here at 
headquarters. The center now provides support in personnel and 
facilities, but the management structure is direct from the Office 
of Space Flight through the Director of the Space Station program 
to the program manager, who is located at Johnson. 

Mr. DiNGELL. Well, your thesis is that you are correcting this by 
intensifying the review and the reporting and the disclosure and 
the control. 

General Dailey. That is right; and training. 

Mr. DiNGELL. In NASA here. 

General Dailey. No, this 

Mr. DiNGELL. I am curious. You have come to this decision with 
regard to the Space Station. I wonder if Johnson Space Center is 
doing well enough that we can trust them to deal with other Space 
Stations without the same kind of intensive supervision? 


General Dailey. I think they are. The initiatives that we have 
instituted are agency-wide. They don't apply just to Johnson, but 
to the entire agency. We have made dramatic changes to the way 
we do business in terms of instilling and installing discipline into 
the system and responsibility and accountability. We know exactly 
who is responsible in each case and who does what. As I mentioned 
in my initial comment, we had an unwieldy management structure 
by which Johnson and the Space Station program were trying to 
operate, and we think we have corrected that through this consoli- 
dation to a single prime and a host center. 

Mr. DiNGELL. Let's talk about contractor employee bonuses. 
What is the purpose of a contractor employee bonus? 

General Dailey. To incentivize the individuals involved in the 

Mr. DiNGELL. Can you make the statement that the contractor 
employee bonuses have provided an incentive or that they have 
only provided additional income? It is clear they have provided ad- 
ditional income. Can you tell us that they have also provided incen- 

General Dailey. I can't say with certainty, but I assume that 
they have. 

Mr. DiNGELL. Let's come back to the Holy Ghost. I have great 
faith in him. I believe in him, but I never shook his hand or met 
him, never had a word with him, but that is belief. You and I have 
been talking for the best part of the day, so I know you are there. 

Do you know that these bonuses are providing incentive or that 
they are simply providing additional income? 

General Dailey. I don't know with certainty, as I said, sir. 

Mr. DiNGELL. In some instances, it is related to the size of the 
salary on a company-wide basis. In some instances, it is related to 
the share of the contract. In some instances, it is bottomed on other 
things. But do you have any information whatsoever that would in- 
dicate that any of these bonuses were done on the basis of an in- 
centive basis? 

Is there any difference in award amongst the companies that 
would indicate that they are done on other than simply a salary 
augmentation basis? 

Ms. Lee. The particular employee bonuses are again a compensa- 
tion plan. Each company 

Mr. DiNGELL. I agree with that. They are a compensation plan, 
but are they an incentive plan. 

Ms. Lee. It depends on each company. Each company has a com- 
pensation plan 

Mr. DiNGELL. Don't you scrutinize these things? 

Ms. Lee. DCAA does our compensation plan review. 

Mr. DiNGELL. They do it pursuant to the rules. Apparently you 
have no rules that address this question, do you? 

Ms. Lee. They would follow the cost accounting standards in the 
Federal Acquisition Regulation. That would be the guidance on 
what is and is not allowable on the compensation plan. 

Mr. DiNGELL. DCAA was here today saying that they are not 

Ms. Lee. We are reviewing those specific compensation plans. We 
have talked to DCCA about redoing it, but we have in hand two 


compensation plans that have been reviewed and have been ap- 
proved. We need tighten our relationship with DCAA and find out 
what the conflict is. 

Mr. DiNGELL. IBM just flat refused to provide the information, 
as we have discussed with Mr. Easley, who said that the handbook 
was wrong on this particular matter. The subcommittee has asked 
for this information, and we asked our dear Mr. Easley here; we 
said, "Can you give us that information?" He said: "We are unable 
to provide any IBM data. The subcontract was novated to Boeing 
under SSPO in February 1994. Neither the McDonnell Douglas of- 
ficials who were Prime to IBM, nor the Loral officials who acquired 
the IBM Division were able to provide the data." IBM said that 
that information was proprietary. 

I am trying to find out what controls you have and what policies 
you have on this and how you administer them and whether you 
have to wait until your affairs are audited by DCAA to know 
whether you are making correct payments or not. 

Don't you have, General, any in-house system of checking these 
things out yourself? 

Ms. Lee. We do have to wait until the DCAA audit is finished 
before we make complete and final payment. We do make adjust- 
ments based on that. 

Mr. DiNGELL. We are just talking about the bonuses. We are try- 
ing to find out how you control the bonuses. This is not apparently 
a new thing and it didn't start this week nor did it start in March 
when IBM refused to provide the information to Mr. Easley and he 
said they didn't need to because the handbook was wrong. 

What are your policies of auditing these things as you go along 
so you know what is happening. For example, if they won't tell you 
the information on bonuses because it is proprietary, will they tell 
you the information on the cost of a particular part or component? 

Ms. Lee. We can pursue that information, yes. 

Mr. DiNGELL. Pursue, but I am asking what current policy you 
have in place which deals with these questions, because unless you 
have policies to control the amount you pay to assure that you have 
adequate and full reporting by the contractors, you simply are not 
going to be able to get the information you need to control costs 
and costs will keep going right up just like they are. 

Now what policies do you have to look at your contracts as they 
go on to know what is going on before this committee requests a 
DCAA audit? 

Ms. Lee. On the bonuses, we have a compensation review plan 
that is in the NASA FAR supplement to the Federal Acquisition 
Regulations that requires our folks to, I believe every 3 years, en- 
sure that there has been a current compensation review and that 
our contractors are complying with that. 

Mr. DiNGELL. But you and General Dailey are sitting down there 
and you don't know what there is in the way of an ongoing continu- 
ing program you have to assure that you are able to control these 
costs. As a matter of fact, you haven't even be able as of this 
minute to get the information from IBM and good Mr. Easley here 
says that the handbook is wrong and they don't have to submit it 
and you. General Dailey, had to get him to withdraw it. 


What ongoing mechanisms do you have in there to supervise the 
behavior of the contractors, to know on what they are spending 
money and whether they are reporting to you properly? 

We are having a vast discussion here today about the fact that 
they wouldn't deal with you properly on the subject of bonuses. 
This makes me suspicious that just possibly they are not dealing 
with you properly on other matters. On one contract, you have a 
$492 million item and you have $100 million the DCAA says is 
being improperly billed for, and you have criminal investigations 
ongoing, but you have no way to deal with these questions in hand. 

Is it because you don't have adequate revenues to properly super- 
vise your contracts? Is it that you lack the will to properly do it, 
that your regulations are inadequate — what is it that is wrong 
down there? 

General Dailey. I believe that we have all the controls and all 
the revenues necessary to do what it is that we need to do. We are 
talking about things that have happened in the past under a dif- 
ferent structure under a different set of circumstances. We are 
talking about 1 contractor out of 10 that failed to provide informa- 
tion in a specific area of which there were many other elements 
that are provided, and we are going to pursue that contractor to 
get the information that is required. 

DCAA provides us with the audit service as to the bonuses that 
are paid and we operate on their recommendations. That is the sys- 
tem. They provide us with that service. We hire them to do that. 

Mr. DiNGELL. Here you have one, April 29 of this year. You have 
Boeing paid $75 million for mischarging on defense contracts. What 
I am trying to have you tell me is, what internal mechanisms do 
you have to assure that your contractors report properly, deal with 
you truthfully, bill you correctly and properly and are properly au- 
dited and supervised by your agency, not wait and say, "We don't 
have any responsibility for this. This is DCAA's chore." 

What do you have that does this? 

General Dailey. Our program management system that is in 
place for each program. 

Mr. DiNGELL. You told us you are just training your managers 

General Dailey. Those are the managers of the future. 

Mr. DiNGELL. What changes have taken place between the time 
we had this fuss over the question of whether they submitted data 
on their management compensation and bonuses to assure you that 
the system is going to run differently? 

General Dailey. We are talking about since last March. 

Mr. DiNGELL. That is right. That is 5 months ago. 

General Dailey. It has been for the last 18 months that things 
have been happening. The information that we are dealing with 
today is based upon past performance that happens in periods prior 
to incorporation of some of the management reforms and also prior 
to the new structure being incorporated. 

The fact that these events are taking place at this time are based 
upon previous activities that were not influenced by some of the 
new management schemes that we have in place. So I am predict- 
ing that we have the controls in place so that we will be able to 
properly manage in the future. 


Mr. DiNGELL. Can you tell us why you shouldn't disallow any 
and all charges where the contractor cannot or refuses to provide 
proper supporting data? IBM simply says we don't have to provide 

General Dailey. We have means by which we can penalize them 
for failing to respond. 

Mr. DiNGELL. The refusal antedates March, and it is now almost 
the first of August. Are you dealing with them on that matter Mr. 

Mr. Easley. I have started action with McDonnell Douglas to 
deal with that. 

Mr. DiNGELL. Have you told them you are going to lay sanctions 
or penalties in place to procure the data. 

Mr. Easley. They know we will pursue recovery of the cost if de- 
termined to be unallowable. 

Mr. DiNGELL. Have you told them you are going to lay any sanc- 
tions or penalties in place? 

Mr. Easley. Not sanctions or penalties, but we will get full re- 

Mr. DiNGELL. The FAR strictly limits the basis for employee bo- 
nuses. Bendix has been paying bonuses based on the amount of 
time that employees were billing to your projects. Is that proper? 

Is that proper. General, Ms. Lee? Is that correct? Is that what 
should be done? 

Ms. Lee. Can you repeat it again? 

Mr. DiNGELL. The FAR strictly limits the basis for employee bo- 
nuses. Now, Bendix has been paying bonuses based on the amount 
of time employees were billing to your project. Does that comply 
with the requirements of the Federal Acquisition Regulation, FAR? 
This apparently is a practice that has been going on for awhile. 

Mr. Easley. Let me address that. Based on the information — 
there are two components of the bonuses. One is a true bonus, 
which is incentive compensation; the second piece is in lieu of a sal- 
ary increase, in lieu of getting a 2 percent, 3 percent, 4 percent 
raise, called a lump sum. It was categorized as a bonus. 

Bendix and McDonnell Douglas were two companies that had 
done some of that with their employees, but it was in lieu of a sal- 
ary increase. 

Mr. DiNGELL. Let's look at this. Bendix is paying bonuses based 
on the amount of time of billing a project. In other words, bonuses 
are not based on performance, but they are based on who is charg- 
ing the most time to NASA: "Fellows work late; it will increase 
your pay because not only will you get overtime, but you will also 
a bonus based on your billing." 

It goes back to the classical argument about working by the hour 
as opposed to working by the job. What comment do you have to 

Mr. Easley. I would need to review that further to make an in- 
telligent remark about exactly how it is set up. 

Mr. DiNGELL. You are familiar with the booklet on MORE pre- 
pared by the Mission Operations Space Team — that is MOST. The 
subcontractor indicated that most criterion for excellence in produc- 
tivity is an increase in the number of man-hours that contributes 
directly to contract tasks, is that right? 


I am quoting from DCAA's report on their audit. 

Mr. Easley. I cannot verify that, no, sir. 

Mr. DiNGELL. Would it concern you if that were so? 

Mr. Easley. You say in terms of the number of hours worked on 
the project. 

Mr. DiNGELL. Let me read you the language. It says, in its book- 
let MORE, prepared by the Mission Operations Space Team, 
MOST, the subcontractor indicated that the MOST criterion for ex- 
cellence in productivity is the increase in the number of manhours 
that contribute directly to contract tasks. 

MOST set the excellence standard at 92 percent of the available 
hours. We believe that instead of direct hours charged the meas- 
urement of productivity should be the objectives accomplished. 

Do you agree with that or not? 

Mr. Easley. I will agree with that. 

Mr. DiNGELL. In other words, what is the result of the higher 
percentage of direct hours charged? How much more productive are 
these additional hours? Can the same objective be accomplished 
with fewer hours? 

The fact that 92 percent or more of the available hours were 
charged directly to the contract tasks does not prove that NASA re- 
ceived a higher return for its contract subcontract dollars. Do you 
agree with that? 

Mr. Easley. I assume they are getting at the productive effort 
that is being accomplished. 

Mr. DiNGELL. That is the basis on which bonuses are paid. In 
other words, the more time they charge, the more they get in bo- 
nuses as opposed to greater productivity and efficiency. 

Do you have any say at all on bonuses down there General? 

General Dailey. No, sir. 

Mr. DiNGELL. Do you have any say? 

Mr. Easley. The way we handle those types of things is what 
Ms. Lee was saying, is in compensation reviews, and we have re- 
quested those over a year ago on 10 of our contracts which some 
have been completed 

Mr. Dingell. You haven't got them yet, have you? 

Mr. Easley. We have received two compensation reviews, 

Mr. DiNGELL. Two out of how many? 

Mr. Easley. We probably requested fifteen or so. 

Mr. DiNGELL. Out of fifteen, you have gotten two. Was IBM one 
of them? 

Mr. Easley. No, sir. DCAA gave us compensation reviews on 
Loral and Lockheed. They have others scheduled. 

Mr. DiNGELL. What did you find on that? 

Mr. Easley. The DCAA report indicated that the reviews were 
in compliance with Federal Acquisition Regulation on total com- 
pensation, which includes bonuses. The FAR includes them. 

The section cited of the FAR includes salary package as well as 
bonuses and other forms of incentive compensation. I will be glad 
to provide your staff with copies of those reports. 

Mr. DiNGELL. That would be appreciated. 

General, we have kept you a long time. Thank you very much for 
your assistance to the committee today. 

The committee stands adjourned. 


[Whereupon, at 3:15 p.m., the subcommittee was adjourned.] 
[The following information was received.] 


MSJH RBCXEr ». 20 Bmptmbmc 1993 

to. 041S 

at (I wnntfTCut BSfUJOM 

caatn, dc. 

Otter tba prorlKLoDa of Title 32 Oote of TmOmrml Jkxprlaltien saguIatlcDs» ?urt 

290.26 (b) (2), UIT ri ■■ill ■ of Tntnimm trirwt J^ot rKJlMMtS fOT CUdit r ap ULf 

ty DOUl will ba x«f«cx«d to tarn oognixszit ooBtzaotliij >qmxrf for 
mm to rklaAMMXlty and m dixaot r*iprmi« to tlw rvquaator. 

niiti^'T*-"- infOBBBtdjOQ coBtmlzMil ill this Budit r ^ aut oKf ba pzoprlatary. Um 
r^rtzlotloDa of !• QK3 190S ■faould bs oaoadterad b«fer« this Infrmiarion is 
to tb« plAtlin. 

mis rvpoct aar not b« r^l— art to mxtf rmOarml wtjmxrf outsite tba OapartsMot of 
iTifw witbout tba w^pcarmi. of Baadquartan, xxxk, maatpt to m aovDOT 

iwjij^al Inj tba mmt in tM^otiirtioa or at^i n1 ■tarlny ita occxtzaot. 

cansacrt kxxvs 

rest amcudt obs ckut 



•■7« oucr mftmmAt. •urrc •ee 

Mlftlt Aipart BO. 3Sai-«3C130aOOOL 20 Saptaobax 1999 

sOBTaart Xudlt nipart on Ooatxaotar M^il j| — 

n^iwi— I 1 1 II ST»t«M Mxrlaw (OCSB) 

moo, B3u«toD n— idapoy 

jam Lloyd »Hm«-«>. 

2120 T»»i— >w<» Btrace, Beat l« 


1. ffirprrr iM ftmrrr "^ *"'^^*^ 

a. im pert of our . ■mn »■>»»■ iw sjait of th* Tnnrh— 11 iriij1i>— i lnj and 
^BXf, nvi (LEBO, wa rarlawad tba ocntraotor'a aaploy** 
•ywtvu Tb* L'l'liii"— o' ou^ Twrimt mx* t» (1) dcta^da* tba 
of tiM ocatraocor** iiin,i«Mariiii aywt^ for aatabliahljag aad 
aalntalalm raaaonabla ■%i1iijn ymtgmm and a ala rl aa ocxmiMtmit vlth tba aacrioaa 
pcovldad cad la oaqillaDaa with na 31.aoi-«r (3) datamrtna tD« umiUautjur «a 
ocBctllattM vltH Ita oeaipaBaatlca policTlaa aad poDoaadaraai (3) JilanHfy •OT 
\aisiMaonabla ooata aad aystaa daflcl«»iaa that raqulxa ocotxactor oozraotl'ra 
a gH '-' F and (4) rapor« en tiia ratlahrillty of tba o rptra otar'a 
to pKorlda xaaaonahla ua^iarwaHi'Ti aoata. 

a« i11aai«aari la p«iiji ^ * t a, wa oeodUBtad our audit 
vita 9«iazmll7 aooa^tad /man— if amiitlnty atandanSa. 
ataadaxda raqolxw that wa pXaa aad nrf i iia tha atadit to obtain 
lawiiaiMM ahDut «tMtbar tba data aod r a oor d a rwlaaad axa fraa of aatarlal 
.ri lali—il Xa a«llt Innliirtaa trnminivg, on a taat baaia, avldaaja 

m^partAag tha ■■■iiile and diaoloauraa in tha data and l a oot da raviaawd. Aa 
BHit alao liMiliilaa aaaaaalag tha a mnaitla y prinnlplaa uaad aad algnlflnant 
aatlartaa a^to by tba ooBtxaotar> •• wall aa avaluatia? tba ovarmll 
yia— iHI I in «a ballava that our udit pxaridaa a raaamahia baaia for our 


a. M pazfosBad our rarlav "^ tt I t?? tba parlcd Crca 7 DaoMitar 1993 througb 
7 Jvam 19*S» TbB laiilaa imludad aa avaluatlao of tba aantraafaar'a 
P>fH H «^/ ^ ■. . » t%ii »« f jab iMiii l.ptiaaa, job avaluatleo plaaa, aalart/Mga 
atnwtuzaa, aad ani1iij)«a !_.»■». »if.«i tllaa. *a oce^arad apmaiita job 
olaaaifiaatlcaai to *—-* — ■*- oantainad la waga aad aalary aurvaya laflaotiag 
tba omv a ti tlva labor aadcat. 

2. rMi-r.ii^t.i-..»« ^ffmr^J Ti ^ t-ha 9mrimr 

Our laaulta of aullt ara quallflad to tba aztaot that aubaaquHit iwrlwfa by 
IX3A, tlM ooBtzact MkcLniatratien offloa, or othara, of laauraaoa, paoalaB, and 
otbar triixjm baoafita aay ■milaaaii tba fladiaga of thia rariav. rurtbar, «a 

ICR "»f " I »^- on ccox 


Audit Mpaxt ND. 3U3.-VX3J030001 

did Dot t«*t rA)mttimt or not Um carcrmator'm Lataor ■kill kIx ••■ ac^p«t«bl« to 
ita ^>^^^ six IrrlHallT ytupu— »* for u-iUt/t pcrfozaKDoa. «• will r«vl«r tbls 
Ib tba nmmx futm*. 

r I mill will ITiijIiwi liij fe gffiin— O j^ m ix t ia • itwirtiary oC Um lookbaad 
i'> n iii H »M/i«, aaXataaaaa> r^n pt^rrmAm^ aa^ b^a baai in milMtmoa* ■Ir**^ 1 JaoBxy 
IMO. uao ia pdaarilT »J 9i ^ In ptowldlDg ■■jin— rltirj, aolKxtifla, 

t«cl8>iflal> md ■■aa^^iKft K^port mktIoi* to Um itotiooal AaroDutlaB aad 
BpMOM Mtaialatrmtiea (MMOk) la tha tpmom fiixttla piu^ ^ cad tb* dwmlopiag 
Spaas 8t«tlon taeogam. Tbm uuulxauUa r aOae baa jiiiaiiiiwnf oon t r aot a vltb tlM 
jkO^ and BBV7. UBO l iiii j iiili ti on 1 Jouaxr 1993, to aatatallataad a 
uj o ^mB f Tnrin^art Brrrl i ii—iil il ni«T— m\a^ TaiJimlmjl >a ri-a|.i«nT fTimm 
taak o9ar laao't tximtiaQ m ujunanf aad fu e uc a mjriratamitMl. a£fOrt. 

izaca ompormta TiaarTif ii lai la Innatad at 3S3S Bay Araa Boulavazd, 
acuatoB, T«ia« atMxa tA* **■■■"■' '"7 l a um^aa ara wainfainad on a rwlanrtar yaar 

of alawi nxoccraBB aa folloaat 

X. KBO P iu^Li M mc&« jetnaaa apaoa Otar/Hbaaton» 

a. HkabiagtoB Aram Rm^ii M Ifcaliliijlm O.C 

3. —mil ProgziM nn, Jkaaa niaiaii.ft Ovtar, MsCfatt Tlald, A 

4. Btita Mmd* T«wt raollltr m&, ahita daztda Mat naUlty, Bav 

5. ifaita snda Ml—i la Rsa^a Aoqr, lOtita danda KlasUa tiMajm, mm 
•. An^/Sugw^ PKTTiag oc^aida Dtah 
7. Tilt aixmpagy Pto^bmi Bcnat 
•. Hmriam Bjmtmm P rugii a 0.8. uktt. Baa Cda^o, C3l 

9. opmaiMl yiujiMi niaalfian 

10. LaB01«r W ixMiu m HMft« uoiglaT Maaarctx OKitar, tTw^iliiii VA 

11. SMpsooilidK P iujUM OaUaSr Tnaa 

a. UBO'a aalaa tar cmMl ara «M?,7M -^m^ aad tar C3T 1992 (3««,9U 

■-^1^|^'»- AXsBt M paxosit o£ lOC'a aaUa tar taotb 7*axa az« to tHa a.fl. 

cTT 19 91 _ ar 1?M 

(OOO'a) ( % ) (000*a) ( % ) 

f S4,aai t.M $ 32,741 S.4d 


iippii'i IT. OBB OKLT 


Mldlt M(X>rt MO. 3S3X-43CU020001 

(000>«) ( % ) (OOO'a) ( % ) 

itarwlijn an iBiiMi i ni i . «iii 9 ja o.oa $ sg 0.02 


OT iMi err i9>a 

nr— Mo 9 1,1*0 « 3,941 l.M 

■W<»rt rr. 267 Q.Q7 

TOtlU. •_i^lM 0.31 »__l*ZiB lf«l 

f_U<2iA _UA2a $_32xfl« 9.79 

TotMi. B»xm $3ry,7— 100.00 $ 3««,»i» 100.00 

d. la D»i,iw»iw 19*1, tha ouuLi m utur baa 1,9U Mlulaa Boustcn lr<i^^^ 
■i^ili.iy— with >— ocrlitad i >iu — azaBaU. na^iMiaii Im of alxut 9«<,497,000. m 
niiiwJMi 1392, tba Eiabar o< aalariad B MrnUt^ locmtma ■nilnji— droppad to 
1,M3 witb ■— xriofd Qxoaa ecapaontlaa o£ wtoac 9«3,342,ooo. 

4. ffitrrnr "* Timir inantt 

a. ■» qnaliflart tbm raaults of cudlt a« — plalwaft in paxttgrapli 2 o£ t-M« 
{Import. CB ear oplaioD, tha ooBtiaotar'a «^j£7«« aeB«MDs«tien «7«t^ ia 
maampOblm for gvwmtiag ra— rw>Ma oosta. Baaad on • miyarlanD of Vm 
OBBtzaeteVa amaiag a walotitad wigaa and a>lari— to "»*<^»"^ aad looal luAjaU T 
ni^,iHi*al 1 1 III warrmf data, our z«vi«» <1ianTfTai no nw^iwaUnn oo*t* that woold 
b« ooDaldatvd vwrnaoDMblm VBOar ft* 3l.aoB-«(b). 

«a Idwtifiad a oenditioa ralativw to btBtOmmxidsg whidb, if 
uutfut ad, «aiild Izuraaa* ral J ahl 1 i ty on th* raaulta of th* ocBtraotor'a 
ocopaxiaon of its aalarl— with ■rramal. na^oat aurrajfa. Thia ooaditloD ia 
datmilad balon 

tbrn Balax7 data uaad by t3ia csntzaotsr «r« not mB^rabl* to tba 
TTiijTiiia Xizezmft O mn^i^y m uLv m i aaiary data aaad bf taoc for banatnaddng in tito 

(a) Tba oontxaotor oeoipaxad its ncnaqparrlaacy ■ijliwrlwy 

ayaia ; >a —iltirt** vith raaulta of tha Wivjtiaa marwf for a^pazyiaotr and 
ocnsivaryiaacy wijlnaarhi] avi a g a aalarlaa. TIM nm^rlaon of n rguwy r Tiaory 
■nrjlnaar aw a x ai i^ — '"-t*- vith both m i n ai y iat vi aorT and a^;i«rvlaor7 TijHnaara ia 
ifla ^V^upr iata liaiaiwa at^arviaoxy aalariaa ara uauallT hlghar than 
nmayaTViaoar aalariaa. 

rcK urriciAL on griz 


xnUt Mpart 3&ai<-«3cuoaoooi 

Cb) TIM oootxvator oca^sxvd ita m^Xaij ij i afUa with tb« taxtamr of 
y««ni ipTi»w dBCM nanhalnra (Sagtva la Um mijhaa •urvwy. ror «oc^^a«, 
IXBC (XB^Mrad Ita caiarr gxada oln* wltH tba mijT>— aurvwy for nitM fwmrm at 
Oam^ms, wmImtj ijcad* nlua b«a aaploTvas vltll varylag jtb of 
■laoa his oar bar atebmlxx'm 

TB adiiavw rvllabla raaulta for wImiy ocqp«xlaaD vlth vctaxaal 
■utvaya, wa rimi irf tlutt tlM acotzaotsz' aaz-t its data in Um b^h 
aa tba —UiiimI. muLvmj uaad. If tha <i> i r r Trtnr u*a« DccMa.f>«zvlaor7 
la Its tiMMiliMULiiiq, t2MB Um oaotxMTtar Btould acly aca«i«z« wltlt 
nrrwUMi vimarf tTin—ra inoliirtart In tb* ■Ktaxnil aaOJizy ■ucwy. rartlMr, if 
ttsm •actamal •aiaxy •urvwy u»«a Tvam of «iq>«rl«DCM Blnoa hant^lor'a Omjrum to 
davalop ■vr a^a —lari—y th* uuu l lan t fr r "V^iH foLIov thait »■■• i~-*-fr-Vl ttjt 

for tl W 1?MWT^rtTTJi 

O) r>.iii«.iiiii ., n — ot lon 

131 futur* iMiiil— illiij, U3« ocatzaotor will ox^axa ita -»^^rl^* 
in a uuLudaa oa with Um ocoipantlv* aurvay data. (Baa JtcfModiz X of thla mmt 
for tba t or* a rrrylata raapcoaa.) 

(4) >.v»t»»t- P^^^vItVW. 

In ■aa wjo a baa ooaourrad witb our 
and durln? tba aodit px^iridad Um salary data In a Banaar vtiioti 
«• oouLa rwlaw, ao furtJBac asdon la iwjuirad at tba tiaa. ■• wiUL ravlaw 
«-M« omUt-inn in our oaoct miniMMai ii>i ravlav of LE8C to 

our raviaw «■• MaAtmA to an anHinatlan of tha ooBtraotor'a 
*fKXTp aii>gly/ wm aapraaa no tylninn oa tba ooBtraotor'a 
vfwtmk ot intazBal ooBtzola talcan aa a wbala. 

o. Urn illari— m tba r aa u lta of our rwlav and l a n i ia w nrtaMnfi vitb Mr. 
Arthur LMdca, Bibbb n aa ouiu aa Win a ryar . TSm oontzvotor'a im^iiimi to ear 
lan^aMMlitlnn la laoazpezatad In tba rrwtr a nrar 'a i — tn tiaa aaiil Im of ^^H■ 
xainrt, paraQncA 4.a(3}, abova. 

d. Oaa of tbla atidit r a yort inforr— tlm for ^l^ll^■.l^aa otbar tban tbat 
intanlad abculd not faa nMla wltbout prior ormaeMtation witb tbia of £loa 
ragardln? ita mylinaMlity. 

S. Btatna of oarraotiv^a ^otlop Titap on Prior n^..— .■■u-vh^^ 

Trcm our prior ravlav of tba oontraotor'a rmyTaatiop ayvtaa, rmit 
Audit Kafxxrt Mo. 3S21-0C120OM datad U Brnptmatmr 1990, «• ootad that ti» 
oontraotor had do fnrma 1 btBctBmxSdxxj and Inadaquata auparrlaory job 
daaoriytlana. TO ixin a uL thaaa occditlaDa, «« raacnaaodad tbat tba ouuu a ctor 
outadt to DC3A mrmrf U January tba foXlowlngi 


icR ur r iciA L nsB cklt 


Audit Jbapart 3S2l-«3CU020001 

list ot olMM*i.£i.emt±jc*m, tjf yauoi— •rmmm, 
to toxmrnl liMi — iMiijf anA 

Tihi>i1« Hating tba -^'»^~ Bad •otnal t™'^^*"*^^"""; 
«B(M, aad Tzate 1«««1« of aacft K^MrvlAarr 

nl ■—1 f 1 otltw aa tlMHs mvaxrlBcry qi»H rirtlop* ara not 
ip«al£l*d In tim po«itlan quid* 

TIM oontzaotor has baao oc^lTlag vitli tba abovv iiiiiiaw>1it1iiiia 

a. JtaasoBtiBg nmm— 1 advlo* or »/vMM/Tn»i mdlt aaxvloa wblab wkj bm 
raquLrad an b» n>H-ain*»1 br oBtaetlag Kr. <3bxt Oatt, St^axvlaorT Auditor, 
OrCLoa, at (7134 *4«-U*S. 

b. Wa aenld liJca to thmk tba ocartzaotor for thalr wv^petrt, and ooppacatleB 
.%Tr|Ti.j tiM ravlav, aacwoiaJJLy, Mr. Art L^dca wte almtya raapnnrtarl to our 
OB • tiaalt 

a, rtOM Hidit aaa parffimiail by Ma. Tita tL. Rabaag, Auditor. Ito aould 
^ y i — r<«»» ^poor oeaaaota aad aiijijaariiaM Sor liprovto? our audit 
aad^or ralatod audit airport. 

Sm DlatgUauticfi Llat 

m arrzcod, csa cklt 


MaSlt Mpart 1K>. 3531-9X33020001 AFSBWZZ 

DzmsoBTnm Lzsr 

NKtlonal AMccnaatlaa sad Bpmom A^tin 
Lyi^oB B. JobamoB. Bpmam Omtitmr 

OcBtractinj Of£iaaar 

BoiHtao, Twamm 770M 

LyodsD B. jotaaon fl^ao* cantar 
xx'illi '">^^"" o£ ZziapMoter OhmesI 
Biiildinq l, boob 16V»->JB 

Q.B« drlxQBaflBt&l Protiaot'.l rti Ky^Boy 

BcutbaxB Audit Dirl«lt»i 

of eioa o< tba Zaapaotor OsiKml 

AUSi OKltan L imrrt 

ir7S r— iiiii I— BtrMt, v.i., soita 27t 

AtlantA, OKXEvla 3030* 

If iTlTwl liijliwi lnj saA Dulwii.— CD. (t&IQ »C0) 
2C3S B«y I^i:*^ BooXavmrd 

BouBton, Tmtmm 770Sa 

rwr«r»« O w i t rttt JUSit J4«De7 
l^di^iaad O Lmiui*t"ion 
;^ISIt MddaBfe luditcjr 
4500 Vmrk ffTTfrta Boulcvuil 
^lit^r— . Ckll£ts3ila tut^-ou? 

DtfVIS* CLULXBflC kadlti ttJMMJf 

OBtzal Bagloa 
Kmft Ba[>-3 

10* D*ak«r oanrt, Suita 900 
Xivln7, Ttaas 790C2-2799 

Hmfrntmrn aaatxmet iuSLt Kjmtar 

xnari aso 

CinBieB Ststlcn 

XlaaaalrU, Tlrgisla 2a304-«17« 


TCul anxaxL obi chut 


*uatt Bnwrc 119. 3ui-9xajoaoooi appbciz a 

ingmaenng ^ itciences Jam on n 

T'ooCoroorra'ut*. j62> Itr Ar«> Oed CoroortitOMicn: (7i|i;a]-U0O 

AtjguM23. 1003 

Ma.TSa Rabanz 


2825 Bay ATM BNd. 

HouHon. Teas 77068 

SUbtacc Orrt C o tr m ana aa on Syauni Ravtvw Audi Rapon (Jiiy a. IBSO) 

Aud« Rapori Na 3U1-OC:300aO 

Oaar Ma. Ratianz: 

Par yov raouaai. 9im ttto* haa raviawad your 'draft audi raporT of Ju(y 6. 1983. I r\aya tound tna 
rapon to ba vary thorough and compMa. 

I woUd Uca to raapond to tha tv>o k)ar«flad traaa at banenmaiMig. 

tam 1: TTm um * a<*u i oomparad Rs nonauparvtaonr w mm aar l nq avaraga aalartaa with raa«m of 
t>M HugOM turvay Mr a u parYtaory and norNuparrtaory aalartaa. 

Pttrmrrr It It tha practioa o< LCSC to banohmartc lavarai vartation* dt Ka •uparvtaory and 
nonaupMVlaor^ tr^iaanng vrarlt taroa anabttig i» to looH al our ulartad rata tnyn d)varsa vtawriolnti. 
Ona of thoaa vahaitona la a ocrrvarmn of al LESCt tngmaa n (auparvttory and nonauparvttory) to tn« 
^H^naan m tha Hu^^iaa Burvay. Thia omoa gava you that compamon rathar than tha one you »>v» 
looking for (angmaara nonauparMaory to wigaiaa r i nonai«>arw«aory) m arror. Thl* o«tca w« tuppfy tha 
« W i U« l i a b a m fwrti vnaPon tar haya audti. 

Itam2: Tin m m* nwnf irt M aa lr urarlii -fT'^T r— -* i ■■p--'-- ■ - — 

■acftalora dagraa m tha Hugttaa Surwy. 

flaaponaa: LESCi doaa m^nk oomparlMna of >'• »nginaara aducaolon/exparianc* to tna Hughaa 
Suvay. For tuiua tian u rwwwng thia offlca wll Indudt ■ ctTBigm yaara Mnca dagraa variatloa 

TTw* you tor tha opptftiMTy to ravww tha 'dr«A* and ihte oWca looha forward to racsMng the final 


A. R. Lamka 

Mam par. Hionan Raaoircat 

ics omcxM. am atuL 



ftnyimr fOBCRT Mo. aSXI'93OU030OO2 I July L9V3 

MauK T cv uKVLBv or cxxa39dCR Bcpunzs 


OBiter tlM prwiAioBs of Tltla 32 ccxte of F'wteral MsqulAltico RagaLatlGni, part 
290.26(b) (2), «nr rm^V-w of mfnr—rliai Aact raquastA for audit nyatt a 
i«oadv«d t>7 EOJl vlXl b« r«f arrsd to tlm aogaixant t«»i t nwrHTv^ JM^vaoy^ for 
A-»»Ti»4w j»t- ■«<■«» «a to ralassabilifcT snl a direot rasfxasa to tba raquastor. 

OootZMOtzxr infozsatlfln onrra^nod la tbla audit report nay ba proprletaxy. Ttn 
rastrlcticns of IS OBC 1905 should be aaoBidemd b af ora this InfoiaBtion la 
Eftlaaaad to tHa public. 

ItdB l a mLt Bar oot ba TmXmmmmA to but fwa a r a l agenoy mitaitVi tba DapartSMot of 
DafaiMi vitbout tba aqpprov»l of Baadquartars, DC^A, wi i i a nt to aa ^aoor 
raqu^itln} tte raport in nagotiatirgi or irtrtfil wtariag ita oc aitr act. 


ajggrcii snucs atncs 


cotmjkA. ixaioM 



AExUt Si^iart K>. 33XL-«SOU020<X> 1 July 1943 


VOSSacTt AuiUc n^mi I OD oactr«rctar ayl oy— 
Cc^wiMBtilaa sy«t4B nwlav (OBCSR) 

t^l- »l ipTKIB I nrni —I I !■! OJIll iM 


TOt Oiaitzlbatixn Llrt 

1. PiLi-Li.m «mtl 6ocp» of ?M31t. 

&. A* P>ct oX oar aa^vbmmiv wyMt 
syataH. (LfiXB), wm twn.mtmA.-tim ocaexmatcx'm 
putpcoaa of our rarrl** wca to (1) dstaEadoa tba mamcfmar of tha <«r i ti M . H.ij«.'« 
Ti iiyf i r- *-''"" ayvt^ for —rani 1 alrivrj aod wiinraininr) raanooAbla a^xLoyn w^vft. 
aaa a&Larl«a acosLrtflDC vltli tb« Aos-vloaa prcTvldad aDd Ln ocacUXozua vltlt nft. 
31.205— «r (2) (^utmadam titm aoatxaotar'a rrayil 1 mam vitb ita 

poliol^ aad prooaduraai (3) t i ViHA fy snf \jarmn*rrtnr\1 m ooaXa sxxl 

A^fii~^mr,e-^if that, requlx* omI-L a ctnr oomr o ctl v aotLicD: aad (4) rg ^ a mr oa tb»> 
r »<<jihriH (-y of Uw 1 .1 1 1 1. i not ar'8 I ii^iwtfM itloo syst.^ to pcovlda rBaaaabl* 
ocBfaacaatlaa oa«t«. 

b. ExmiyC aa 11 mi mull in pmraqrasA 2, m ocss^hictad our sualt in 
tw-r^r'^jtTv-o viUl q^aeml ly aooaptjeA cjovariaaeDt oudltitt? jrimrlftrta. TTi i— 
staodnnls require thAt. «^ plan ana pcrtois tba auait to oKaxD reaflonabl* 
aosarBZEB «l^~i«- wbarcbar tA* <teCJk aod i i rmla mwrie m i a ar« Clm of BatarlaX 
ndAstatAiMit. Ml audit 1nnlnrt«w «zaBinlng, oa a tasc basis, 0<riamBamt 
~X \ ^' I iTVf ttM t"""' » aod (Haaloauzaa in tba. data and ra omd a ttI wriiii Aa 
auOiC aXao irv''"^*^ iiiiwinln? tba •ocowiti.Dq prinrrlpLBa oa«d aad significant 
estdaati^ i^ite br tlw oontxaotor, aa mUL aa mvmlxjmtixtj tha ovwnUX 
[jj_M— inrji-m «a ballavw ttis£ our audit pxtTvidaa a raaaooabla basia for cac 

c. tia p artuua ad cur rwlav (tnrtnr; tba par'tfrt Cram 7 nprll 1993 tiiraafik 
10 JVBM 1993. TXaa x ai i ,— I nalnrt a d . aa awa ut-t aa. of th^ m i l l a LAuU a^- 
P>^l f .tI ^a , / pi I ij ^t ^u i M , job iVawii l^iMnai, job sTaluaficci plans, aalary/«aq«B 
stxTJcturos, SDd a^xUiT«a peracoDal filas. ■• oa^iarad spaolXla job 
oJjualficatlcis to 1-Miiir— ■*■ ooairalnad la w qa and aalaLZT aurvaTa iraXlaoting 
tl>a cxa^>0CltivQ lii*Tr»r aanrt. 




Audit Report thJ. 3S21-4ID1JC20O3 

2. CJjrouagtMO fn ftfTtTTTT ^^ p»h^ 

TtM raoults a< mirHt ar« qualXfiad to ttM «xt«nt thafc mihniifUMiii i mil— Of 
attmr crlB^B benaflts osy ai^plaaKsC UM f irv^-inrjn of rhl« ravlow. 

a. Tb* oLMiLxa otor raaai««a Boae o< Its oanczmoca through mnn.'TnrjMM 
apaoa Oant«r locst«d in aoustoD. A^jprcadBStaly 9n Ls oovt typ*. Tb« vozIk Is 
vlrcuallT ^00 p«n. i »it gowcnBBBe umi i ii n ta. Barvloea <laiJ.v«r«(} ar* mijI imbi i hj 
vlch a BBMll ai*gi t of mmarfacturloj. LaraX cavJxrTs ■i^u.uaJjBtalr 1200 p— tW. 
IBIB waa prvvlauKly part of th« Lr»r»> Spaom KlaalcDB Grcx^. Oa 1 J aajax y IMl 
IMSB tiiir»n« A atJBd alooa divlriori. 

b. l^DB'a sal«9 ax« $1S0,816 nininn axxi $136,857 arilHoo for C7T 1M2 ai^ 
CraS93 raopactlwiy. T2>a rtatai \i% ar« p. r — jt m l as CoU.<mw> 

a. 8. 

err i na * err ins _ 

(3O0O) ( X ) ($000) { \ ) 

9 <,0«1 3.0 9 4,34* 3.0 

HOBttafaDM 173.555 »«.0 132.169 2£a 

Ttital QOTt. Bal«9 179, 64* 99.0 U6,5ia 99.7 

Tot&l salea iso,8ia loo.o 3i36,as7 loo.o 

• TtM ocBtraotar'a f jaga,] jmtx 1993 vaa a CiftAan Booth period, beqijEtisq 
I JatBiary 1991 aal aottXacj 31 )azxtfi 1992. 

4. Bummarr o' «r*1tt Pltmi^tn 

a. 1M qualleiad tba rsaolta of our anrUt as rt1nn»wai1 in paxmtjct^ptt 2 at 
t-ttim rqnrc. Ibe < iima»itnr 'B i « ayi a i' imt tloo oost ia vlthia aaoi(icabi/». 

ijiiiiVil li— <ia ^T ad tA th« aft i i a ■■ < i jt' i t. i 1 ymtjmm aod n«l«T-1ii» of oatlcnal. isidL. 
looKi pncof— iooal sad tactmical oo^xDattCloo aurvar data. Tbm ocntraotar>a 
iji^iaiiaar 1i ii [ill liil aa and nj. iir» * ii — ax* ormt/Wril ai l i f la t^ for "—■I' l-^HTHwry 
^ta ocecwnBafioD ayatoa. IB our <T^ninn, th* occtzaafcox-* a o^p^ora^i. 

oyst^ for noa fuutl T^ pwiFaiuo l la aooapCabla for y — -' ^-7 - 
La ao«t« vmdar rui 31.205-«a» . 

7GB ClflirTM. (KB CULX 


Aulit RspsrC 3U1-91OU02002 

b. Our Twtmi «aa ] inrlt^d to aa ax^ELastdoD of too ooDtxaetar' »■ 
. ■ i r y-rri " *- < >■— >yst.<n for n cii g x e ia itlvq peracnnel. DCJA CDrpor^be or floe la Ila» 
Yodc Is reviewlDg oxscutlw l«v«I salAslaa, (i.«. vioa preaideot Bud atom). 
l^oac^ii*ji.j , v* »»|ii ■■■ DO <Trln1nn oo Um reaaanableoaaa of lenral 
saXeflea or rjm omiLxa gtor' a s7«t«B of Irrt-anTl ooDtrela tJOuo aa a wtiol*. 

a. Tt>a raoulCs of our zvnmi ««ar» disoissad witb Um ocotxaotar's 

LH,il f il ■! I Kr. B^ n tm il , MDMr^ar or ''i ■ ^ ■■ wM- lop as^ Benaflts, oo 17 JUBV 


d. tlM infozBatioD mnfjiAnwd in this r^jurt Bftn>i3,d oot b« U9«d for oti^m 
purpoeas vitbout firvc dlAcuaaloij lea ■niHn a h illty wlUi our ofCloa. 

4. DJapaaition of ftudlt Resulta . 

a. Opoo requost, aoomiitlzxj i-utt— 1 and addltiooal auOlt sorvloaa wtllcb 
BB7 b« r«(]Uix«d CUD b* obtminad b? occtActlnj Kr. Boll Riropata, Sk^Mcvlaary 
Aooltor, at: ■■«— ^i-H'i f la cfirw> « (7ia) »4*-«59S, OK ras (713) xe - ai a o. 

b. T^<ji aoitlt «BS p«rfotBed bf Maz^arvt r . lr»Viwy . Ne vculd epfiraoiata ToctBr 
oaoMBita and w»jj—r li ma for la^uvwl ag cmt anrtit aai i l o— aod/or relAt«d au^b 

o. *■ wooia llJcs to L i . awi a ii ) tb« oootractor Cor tbair support and 
cooperotlcn <lurlog our rovlcar, eapeoxally, Kr. S^ Read, Bmaa RalatlcDB 
tODSjme, wbo aaways r wa t i TTKl a rt to our requests in a tinaly BasDor. 


Brwnrt) Hanagar 

copy fumlabodt 
Qiatxlbutlcn Lljtt 


roB omcm. ceb cnlx 


No. of 


Daf«08a Logistics tqeaof 
OOtM} - BMn ABtOB±o 

ravH: ooce-aBKAH/Bluitar 
2320 LaBraocti, Beat 1 

770O4 1 

KtotloDal McaoBitloB and Spws* VW nitration 
JctBmao B^ooB Oeetar 
jumii Virginia VlLLLa/Bca 
Bouaton, T«aca* 770Sa 

(^iticDAl %«axnmitlcs and spaoe MKlnlstxatxan 
jatansoD epaoe Cwit a r 
Jam: 8t«v* dsiazaVBcn 
HcMatcn, T«««« 770M 

H&dcDal Aaroomitlcs and Space V^riniirtratlon 
JotB)*oa BpfT oautT 
uratt Jaae Brsodaaitleo/BO 
Bouatoo, Texas 77058 

OxXWCtor of £loe ef Inapecitcrr rvmril 
MttiODal Jterooautlca and spaoa J^Kiaistratlan 
JotansoD epaos Csotar 
Ainii cede »-ja 
Boustoo, Tvsaa 77058 

D af maa QjiLi aot MKllt. Agency 
Osotxal Pffrjim 

106 Daokar CC., ata. 300 
Iivixxy, TBsaa 770«-2795 

PCR CttTiCLir. OBE-cuur 


Space Aammistraion 


Wasningion. DC 20546-OOCl 

=i?D'vroArtPoi Office of Inspector General 

The Honorable John 3/ 3ingell 


Sobcommittee on Oversigr.c and 

Attn: Robert L. Roach 
2328 Senate House Office Building 
Washington, DC 20515-2216 

Dear Mr. Chairman: -_■. ', r^j C 

Enclosed are copies of the three reports issued by my ottic«^^ 
during July 1994. In addition, the following is a brie^, 
summary of the most significant report. 

A survey of institutional support contracts at Johnson Space 
Center (JSC) found that JSC has not evaluated the feasibility 
and cost effectiveness of consolidating these contracts since 
1973. In the past 10 years, four .MASA Centers have achieved 
significant prograim improvements and cost savings through 
contract consolidations. The oenefits of these consolidations 
included: (1) reduced contractor interface; (2) reduction ir. 
contract administration resources for contract award process; 
(3) more direct chain of command; (4) improved accountaoil i ty : 
and (5) improved performance evaluation. .Kennedy Space Center 
(KSC), for example, consolidated all institutional functions 
into one contract m the early 1980s. KSC officials estimatec 
savings associated with the consolidation of S13.1 to S56.9 
million for fiscal years 1934 to 1989. 

JSC is contracting separately for institutional support 
functions based on problems experienced with the 1970 
consolidated contract and to .~eet small and disadvantaged 
business goals. We recommended that JSC's Directors of 
Procurement and Center Operations: (1) evaluate the 
feasibility and cost effectiveness of consolidating part or a.l 
of the institutional support service contracts; and (2) provice 
supporting rationale for the contracting method selected to 
obtain the institutional support functions. JSC concurred wit.-. 
the recommendation and indicated that the results of their 
excimination of the contracts should be available by the end of 
calendar year 1994. They indicated, however, that small 
disadvantaged business goals would be factored into this 
evaluation. JSC's corrective actions are responsive to our 
recommendation . 

If you or your staff have any q'jestions regarding any of the 
three enclosed audit reports, please call me at (202)353-1220. 


Bill D. Colvin 
Inspector General 

3 Enclosures "to ^ Is 


1 TMKi C0MCflU3 



•KB rv rrxjHTi rrAW omktqa/o^ ccmmmk 

*•»•»<* hOuSI 0»"CI Ilk 

H.^. ?liniBt of TUprunitatitits 

^ubuiuuBunt on 0utTsi)jlu and jnotftigatioiu 

of He 

(TwMlirf ■ £iKrg2 mi damt 

IDflsMngtoa, BC zotimmi 

August 29, 1994 


The Honorable Daniel S. Goldin 


National Aeronautics and Space Administration 

300 E Street, S.W. 

Washington, D.C. 20546 

Dear Mr. Goldin: 

Pursuant to Rules X and XI of the Rules of the U.S. House of 
Representatives, the Subcommittee on Oversight and Investigations 
of the Committee on Energy and Commerce is continuing its long- 
standing investigation of the adequacy of disclosures under the 
securities laws by government contractors. In particular, the 
Subcommittee is now examining the adequacy of those disclosures 
by ma^or publicly held companies holding significant contracts 
for work on the space station. During the Subcommittee's hearing 
on problems with budgeting and financial control systems 
involving major publicly held contractors on the space station 
held on July 27, 1994, NASA's Deputy Administrator, General John 
R. Daily, agreed to provide various documents and data for the 
record. Those documents and data are listed in Attachment A. 

To further the Subcommittee's review, we would also like 
additional information on the selection of the prime contractor 
for the new space station. Specifically, we request the 
document* listed in Attachment B. 

Please furnish the requested documents no later than the 
close of business on Monday, September 12, 1994. The definitized 
contract with Boeing can be provided when it becomes available. 
If you have any questions concerning this matter, please contact 
Robert L. Roach or Hilary C. Sullivan of the Subcommittee staff 
at (202) 225-4441. 

Thank you for your attention to this matter, as well as your 
agency's cooperation with the work of the Subcommittee. 

John 0. Dingell 


Subcommittee on 

Oversight and Investigations 


The Honorable Dan Schaefer 

Ranking Republican Member 

Subcommittee on Oversight and Investigations 


Ai-acr.mer.' A 
Material Requested of NASA Durir.j tihe Subcommittee Hearing 

1. NASA's cost estimate of Space Station Freedom (SSF) before 
its termination. 

2a. The date when SSF project management first knew of the 

pro;ject'3 cost overruns and the estimated project overrun at 
that time. 

2b. The date the pro;}ect was terminated and the estimated 
project overrun at that time. 

3. The bases for and analyses of the Boeing selection. (This 
should cover all associated documentation including, but not 
limited to, the pre-negotiaticn and post -negotiation 
memoranda on the Boeing letter contract). 

4. The amount of money being withheld from IBM. 

5. The schedule of when DCAA' s audits of Boeing's overhead 
submissions (1987-1993) will be completed. 

6. NASA's letters to the SSF contractors informing them of the 
project's overhaul and directing them on how to minimize 
costs incurred during that period. 

7. The space station's monthly expenditures before NASA 
notified its contractors of the overhaul and after such 
notification (six months of data for both periods) . 

8. The amount spent on the space station since Boeing received 
the letter contract. Include Boeing's expenses as well as 
other expenses incurred by NASA. 

9. NASA's written policy on augmenting or modifying NASA 
Handbook 950.2b. 

10. DCAA' s compensation reviews of Locicheed and Loral. 

Attachment B 

1. All correspondence between NASA and space station 
contractors regarding the selection of a single prime 
contractor . 

2. The data each contractor provided to NASA for consideration 
in the prime contractor selection. 

3 . The Boeing letter contract . 

4. The Boeing definitized contract, when available. 


National Aeronautics ana 
Space Aaminisiration 

Headquarters r i - 7' 

Washington, DC 20546-0001 

-5 9'A U-U2 



Reo^toAnno. LB:MDD:LA94-411f 


. -'."'■ '•■ ■ if-"'-'^'^ 

OCT 5 1994 

Honorable John D. Dingell 


Subcommittee on Investigations 

and Oversight 
Committee on Energy and Commerce 
House of Representatives 
Washington, DC 20515 

Dear Mr. Chairman: 

Enclosed is the additional matenal requested subsequent to the July 27. 1994, 
hearing at which Gen. Dajley testified on space station contracting. This 
information completes the matenal requested dunng that heanng. As indicated, a 
copy of the definitized contract wrth the Boeing Defense and Space Group will be 
furnished to the Subcommittee as soon as rt is available. 


Mary D. Kerwin 

Deputy Associate Administrator 

for Legislative Affairs 




National Aeronautics and 
Space Administration 

Lyndon B. Johnson Space Center 

2101 NASA Road 1 
Houston. Texas 77058-3696 

3 9999 05982 386 2 


RwMoAitnof. BB-94-049 AUG 2 4 1994 

Mr. Robert L. Roach 

Special Assistant 

Subcommittee on Oversight and Investigations 

Committee on Energy and Conservation 

2323 Raybum House Office BuiJdmg 

Washington, DC 20515 

Dear Mr. Roach: 

It was a pleasure to meet you at the pre-hearing meeting on July 21, 1994. On the 
following day, Ms. Hesse, Director of Business Management at the Johnson Space 
Center (JSC), met with you to review our action plan to address the Defense Contract 
Audit Agency (DCAA) audit findings of JSC's major contractors' budget and 
financial control systems. I have summarized the action plan below and want to 
inform you that individuals mvolved m these activities have been instructed to correct 
any other irregiilarities or deficiencies that surface during the implementation process. 

Improved External Commumcation 

• JSC and the Dallas regional office of the DCAA have agreed to work 
cooperatively in the disposition of all audit issues. Joint plannmg and strategy 
sessions are addressing verification of the unplementation of corrective actions. 

• JSC senior management, with DCAA participation, will brief the Chief Executive 
Officers and Chief Financial Officers of all JSC contractors on the results of the 
DCAA audit, as well as corrective actions being taken by JSC. Meetings will also 
be held with individual contractors to discuss outstanding audit issues. 

Oversight and Review 

• A JSC Oversight Committee has been established to review all JSC service 
contracts. The objective of the committee's work is to streamline and improve 
management practices and promote cost effectiveness in our procurement 

• AH current NASA Form (NF) 533 deliverable contractor cost reports will be 
reviewed by a senior JSC workmg group to detenmne if the basic intents and 


NASA financial requirements of the repon are properly instituted, including: use 
of appropnate work breakdown structures, proper accounting methodologies, 
logical and well-defined methods of determining estimates-to-complete, accuracy 
of auxiliary financial and schedule reports, and compliance with the NASA 
handbook on contractor cost and performance reportmg. 

• JSC contractmg officers are providmg written direction to contractors that 
responds to specific DCAA audit recommendations (numbers 1 through 6), as well 
as requinng contractors to establish formal wntten NF533 cost reportmg policies 
and procedures, proper mtemal financial controls, proper cost estimates, accurate 
budgetmg baselmes, and formal configuration management controls to eliminate 
unauthorized cost growth. 

• Award fee evaluation procedures are bemg clarified and improved including the 
development and application of a cnacal budgetmg and financial control systems 

• Government and pnvate mdustry will be benchmarked to deteraune the "best 
practices" beisg employed m level-of-eCfort contractmg. Contmuous improvement 
metncs will then be developed. 

• JSC will work closely with the DCAA to devise an optimal solution for contract 
management bonuses and "idle" time reportmg. 

Financial Training 

• Within 90 days, all contractmg officers, concractmg officer techmcal 
representatives, and busmess managers at JSC will attend intensive contract 
administration trainmg. 

• The JSC Comptroller will develop a more comprehensive and expanded contractor 
NF533 trainmg course which mcludes the DCAA's recommended improvements. 

Ms. Hesse is the JSC focal pomt for the overall coordmation and disposition of the 
DCAA audit recommendations and implementation of JSC s plan of action. She is 
placing key emphasis on providing verifiable results through audit trails, 
documentation, and substantiated evidence that we have met our objectives. I am 
confident that the proper processes and controls are being put mto place to establish 
JSC as a model organization with high cost efficiency, contract administration, and 
busioess management standards and practices. 


Carolyn L. Huntoon 


ISBN 0-16-046546-X 

9 78