Further Improvements Needed in Navy's Oversight of Contracting for Facilities Construction on Diego Garcia

NSIAD-84-62: Published: May 23, 1984. Publicly Released: May 23, 1984.

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GAO reviewed the Navy's oversight and management of the acquisition of facilities for its base on the island of Diego Garcia in the Indian Ocean. The Navy awarded a cost plus award fee contract for various improvements to the island.

GAO believes that, under a cost plus award fee contract, strong contract administration is vital to protect the Government's interests. GAO found that: (1) the Navy did not ensure that the contractor's resources were effectively employed; and (2) ineffective management by the Navy caused problems and weaknesses that affected the contract. The Navy did not ensure that the contractor established effective management information and control systems before the beginning of construction. More than 18 months after contract award, the contractor did not have operational systems to provide: (1) accurate and timely financial information; (2) effective materials management; or (3) effective resource management. In addition, GAO found that: (1) the financial management reports used by the Navy and the contractor were unreliable; (2) accounting system data were sometimes incomplete; (3) there was no analysis of the differences between estimated and actual costs; (4) cost estimates did not always reflect the most current information; and (5) while the Navy expects cost overruns, the magnitude of the overruns is uncertain. GAO believes that the Navy is not able to judge the reasonableness of the costs incurred or the reliability of estimated costs under the contract.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: An accomplishment report was processed on September 2, 1983, for $137,213.

    Recommendation: In order to correct existing problems and weaknesses in the administration of the Diego Garcia contract, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to require the contractor to develop procedures for filing and processing claims to prevent another backlog of reports for materials missing or damaged.

    Agency Affected: Department of Defense: Department of the Navy

  2. Status: Closed - Implemented

    Comments: The result was better cost control.

    Recommendation: In order to correct existing problems and weaknesses in the administration of the Diego Garcia contract, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to require the contractor to complete a physical inventory and reconciliation of all materials and supplies periodically.

    Agency Affected: Department of Defense: Department of the Navy

  3. Status: Closed - Implemented

    Comments: The Navy has issued revisions to procedures to handle additions and deletions consistency. An accomplishment report was processed on June 11, 1984, for $181,494.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to handle future additions to and deletions from the contract consistently.

    Agency Affected: Department of Defense: Department of the Navy

  4. Status: Closed - Not Implemented

    Comments: Defense concurs and states that it is general policy. However, it claims there are exceptions to general policy and it cites cases of initial advance procurement of long lead items and of procuring pre-engineered facilities. The Navy would preclude the same situation from happening again.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to furnish the contractor materials and equipment when doing so is economically advantageous to the Government.

    Agency Affected: Department of Defense: Department of the Navy

  5. Status: Closed - Not Implemented

    Comments: Defense concurs that fee allowance should be clearly defined. However, because of the many cases that could arise, it feels it cannot incorporate language into the contract to address all cases. Defense also feels it is the duty of the OICC to negotiate a fair fee in accordance with existing guidelines.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to incorporate into the contract the understandings concerning fee payments for items the government furnishes to the contractor and for work added to the contract.

    Agency Affected: Department of Defense: Department of the Navy

  6. Status: Closed - Implemented

    Comments: OICC instruction 4335.1 was revised in February 1984.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to instruct the Officer in Charge of Construction (OICC) to amend the OICC instruction detailing the award fee evaluation procedures so that it sets forth the range of percentages to be used in conjunction with each of the seven grading categories.

    Agency Affected: Department of Defense: Department of the Navy

  7. Status: Closed - Implemented

    Comments: Defense has instructed the Navy to consider this management procedure for future cost plus award fee contract implementation. Savings could only be measured on future cost plus award fee contracts.

    Recommendation: In order to ensure that the Government's interests are adequately protected in future cost plus award fee contracts, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to require an independent review of the contractor's management information and control systems to verify that they are fully operational during the early stages of the contract and before the contractor is allowed to begin actual construction.

    Agency Affected: Department of Defense: Department of the Navy

  8. Status: Closed - Implemented

    Comments: Additional emphasis will be placed on ensuring that sufficient fee consideration is given for mobilization period in future cost plus award fee contracts.

    Recommendation: In order to ensure that the government's interests are adequately protected in future cost plus award fee contracts, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to ensure that the amount of award fee allocated to the initial contract periods is commensurate with the importance of preconstruction tasks and thereby provides motivation for the contractor.

    Agency Affected: Department of Defense: Department of the Navy

  9. Status: Closed - Not Implemented

    Comments: Recommended for the future cost plus award fee contracts. This type of contract is very rarely used. OICC instruction 4335.1 was revised and fee sufficiency will be the subject of increased scrutiny to ensure that proper motivational impetus for the contractor.

    Recommendation: In order to ensure that the government's interests are adequately protected in future cost plus award fee contracts, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to ensure that the percentage scores used in the award fee grading process provide the maximum motivational value and preclude the guarantee of a large portion of the award fee.

    Agency Affected: Department of Defense: Department of the Navy

  10. Status: Closed - Implemented

    Comments: Defense stated that it is its policy and practice to enforce all contract provisions. The Navy said the contractor has taken about 20 actions since the initial negotiations which render its accounting system more reliable. As the contractor progresses, the OICC is demanding more contractor involvement in a viable financial management systems.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to enforce the contract provisions that require the contractor to maintain a viable financial management system.

    Agency Affected: Department of Defense: Department of the Navy

  11. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to ask the Defense Contract Audit Agency or the Naval Audit Service to review the contractor's cost accounting and cost estimating system to determine whether all necessary corrective action has been taken to make the system accurate and timely.

    Agency Affected: Department of Defense: Department of the Navy

  12. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: In order to correct existing problems and weaknesses in the administration of the Diego Garcia contract, the Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to require the contractor to demonstrate that essential management information and control systems (i.e., materials control and resource leveling) are fully operational and reliable.

    Agency Affected: Department of Defense: Department of the Navy

  13. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of the Navy should direct the Commander, Naval Facilities Engineering Command, to place a greater emphasis on monitoring contractor-generated financial information and substantiating the validity of the reports so that they can be effectively used as management tools.

    Agency Affected: Department of Defense: Department of the Navy

 

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