NASA Needs to Better Assess Contract Termination Liability Risks and Ensure Consistency in Its Practices
GAO-11-609R: Published: Jul 12, 2011. Publicly Released: Jul 12, 2011.
The National Aeronautics and Space Administration (NASA) procures most of its goods and services through contracts, and it terminates very few of them. In fiscal year 2010, for example, NASA's procurements, ranging from small contracts for human resources consulting services to multimillion dollar contracts to build and operate spacecraft, totaled approximately $17.4 billion, representing about 83.4 percent of the agency's obligations that year. That same year, it terminated 28 of 16,343 active contracts and orders--a termination rate of about .17 percent. This rate is about the same--less than 0.2 percent--for each of the past 5 fiscal years. NASA contract terminations--the complete or partial cancellation of work under a contract before the contract's period of performance ends--are rare but could become more common in the future. The federal government is facing real fiscal limitations and will have to make difficult choices about upcoming priorities. This reality makes it more important than ever that NASA manage its projects as efficiently and effectively as possible and within its budget. This is a struggle for NASA. Our work has shown that NASA's large-scale projects tend to cost more and take longer to develop than planned. In this time of calls for greater fiscal austerity, NASA recognizes that it has to operate within its budget and that its projects must be affordable and sustainable over the long term. If NASA cannot address some of the issues that have led to cost and schedule growth for its projects in the past, tough decisions may need to be made about whether or not to start new projects or which projects to terminate, as additional funding could be scarce. As demonstrated by the proposed cancellation of NASA's Constellation program, a program that we have reported to be at risk of not meeting cost and schedule goals, the cancellation of a project can have potentially significant financial impacts. After the President proposed canceling the Constellation program in his fiscal year 2011 budget request, NASA reported that the agency's costs associated with terminating the various Constellation program contracts could reach close to $1 billion. As we reported previously, responsibility for these potential costs became an issue between NASA and its Constellation contractors. The questions about responsibility for potential termination liability costs, coupled with the Constellation program's constrained budget profile, led to disruption in work activities at some contractors. Because of these questions regarding responsibility for potential termination liability costs and the impact they could have on NASA's ability to execute its projects effectively, Congress asked us to assess NASA's policies and practices pertaining to the management and funding of contract termination liability, as well as interactions between the agency and its contractors related to termination liability.
NASA's policy on management and funding of contract termination liability is to rely on the FAR's limitation of funds or limitation of cost clauses, which act as a mechanism to limit the government's liability in the event of a contract termination to the amount of funds currently allotted to a contract. We found that NASA's acquisition professionals generally do not monitor or track the potential termination liability costs of its contractors nor does the FAR require them to do so. The agency has not issued detailed instructions or provided guidance to direct contracting officers and others on how to monitor or track termination liability and to supplement the reliance on the relevant FAR provisions. As a result, resource analysts and financial managers inconsistently monitor and fund potential termination liability across the projects we reviewed. According to NASA acquisition professionals, contractors are ultimately responsible for tracking their potential termination liability and ensuring that they reserve sufficient funds to cover any potential termination liability out of funds that NASA allots to the contract. Several contractors reported that their potential termination liability was covered in their allotted funds, while other contractors reported that NASA did not provide sufficient funds to cover potential termination costs. In some cases, NASA contractors said they did not view insufficient potential termination liability funding as a risk because NASA's past practice on contract terminations was to provide additional funding to the contract to cover the agreed-upon termination settlement costs and they assumed this would be the continuing NASA practice. While allowed under the FAR, NASA's inconsistent practices for funding potential termination liability costs can still have negative consequences for NASA's long-term relationships with its contractors, especially if the agency decides to terminate a major project. Moreover, as the federal government deals with its fiscal limitations, NASA's contractors may perceive contract termination as a greater risk in the future and may be less willing to continue contract performance without full funding of their potential termination liability. We are recommending that the NASA Administrator review the agency's current practices regarding termination liability and, as appropriate, establish guidance to ensure consistency among NASA's projects.
Recommendation for Executive Action
Status: Closed - Implemented
Comments: On March 26, 2012, the Assistant Administrator for Procurement issued Procurement Information Circular to provide guidance to all NASA Centers relative to termination liability on NASA contracts. The circular reminded NASA contracting officers that NASA relies on the appropriate limitation of funds clause to manage and fund potential contract termination liability. These clauses require contractors to manage their obligations and to include any potential termination liability costs within the allotted contract funding under the limitation of funds clause. Therefore, contractors are required to include potential termination liability costs, as well as the costs of performing work on the contract, when they submit their incremental funding requests. Contracting officers were directed to ensure that contractors understand that the amount in the limitation of funds clause covers potential termination liability. This action is responsive to our recommendation.
Recommendation: The NASA Administrator should review how the agency's acquisition professionals monitor potential termination costs and establish guidance as appropriate to ensure consistency across the agency. The agency should ensure that the guidance it develops provides instructions to acquisition professionals on adequately addressing potential termination risks on their contracts, and on how potential termination costs would be funded in the event of a termination.
Agency Affected: National Aeronautics and Space Administration