Anti-Drug Media Campaign: Aspects of Advertising Contract	 
Mismanaged by the Government; Contractor Improperly Charged Some 
Costs (01-AUG-01, GAO-01-1017T).				 
								 
This testimony discusses the Office of National Drug Control	 
Policy's (ONDCP) advertising contract for Phase III of the	 
National Youth Anti-Drug Media Campaign. GAO found that the	 
contractor, Ogilvy & Mather, improperly charged the government	 
for some of its labor costs incurred under this contract. Ogivley
& Mather submitted time sheets claiming hours that some employees
said they did not work on the anti-drug media campaign. In	 
addition, the company made little progress toward restructuring  
its accounting system to meet government requirements until	 
nearly two years after the contract was awarded. The government  
poorly managed aspects of the award and administration of the	 
contract. The Department of Health and Human Services (HHS)	 
should not have awarded this cost-reimbursement contract without 
determining whether the contractor had an adequate cost 	 
accounting system. In addition, HHS should have reviewed the	 
appropriateness of the large amount of money that the technical  
representative recommended be disallowed from the contractor's	 
invoices, or arranged for an audit of the contract. The technical
representative appropriately brought allegations of improper	 
billing to the attention of ONDCP management, but ONDCP 	 
management did not take prompt action to investigate the	 
allegations. Because the contract has not yet been audited, the  
appropriateness of the disallowed charges and Ogilvy's actual	 
incurred costs under this contract remains unknown. This	 
testimony summarized a June report (GAO-01-623).		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-1017T					        
    ACCNO:   A01488						        
  TITLE:     Anti-Drug Media Campaign: Aspects of Advertising Contract
             Mismanaged by the Government; Contractor Improperly Charged Some 
             Costs                                                            
     DATE:   08/01/2001 
  SUBJECT:   Contracts						 
	     Erroneous payments 				 
	     Labor costs					 
	     Contract oversight 				 
	     Advertising					 
	     Public relations					 
	     Drugs						 
	     Contractor violations				 
	     Contract costs					 
	     Cost reimbursement contracts			 
	     Cost accounting standards compliance		 
	     ONDCP National Youth Anti-Drug Media		 
	     Campaign						 
								 

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GAO-01-1017T
     
Testimony Before the Subcommittee on Criminal Justice, Drug Policy and Human
Resources Committee on Government Reform House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10 a. m. EDT Wednesday August, 1,
2001

ANTI- DRUG MEDIA CAMPAIGN

Aspects of Advertising Contract Mismanaged by the Government; Contractor
Improperly Charged Some Costs

Statement of Bernard L. Ungar Director, Physical Infrastructure Issues

GAO- 01- 1017T

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

Mr. Chairman and Members of the Subcommittee: We are pleased to be here
today to discuss our report entitled Anti- Drug Media Campaign: Aspects of
Advertising Contract Mismanaged by the Government; Contractor Improperly
Charged Some Costs (GAO- 01- 623, June 25, 2001), which contains the
findings from our most recent report regarding our review of the Office of
National Drug Control Policy?s (ONDCP) advertising contract for Phase III of
the National Youth AntiDrug Media Campaign. We first reviewed certain
programmatic aspects of the media campaign in a July 2000 report. 1 During
that review, allegations were made that the government was not adequately
managing aspects of the Phase III contract relating to costs incurred by the
contractor (the advertising agency of Ogilvy & Mather) and that the
contractor was overbilling the government. In October 2000, at the request
of former Chairman Mica, we testified before this Subcommittee about our
initial investigation of ONDCP?s actions after it received allegations that
Ogilvy was overbilling the government. 2 We reported that the former ONDCP
Director knew about these allegations, including possible fraudulent
conduct, in April 2000. We also reported that the Director agreed with the
need to audit the contract after ONDCP transferred contracting
responsibilities from the Department of Health and Human Services (HHS) to
the Navy.

Our June 2001 report discussed whether Ogilvy properly charged the
government for labor costs incurred under this contract, and whether the
government adequately managed aspects of the contract award and
administration related to costs incurred by the contractor. We focused on
labor charges submitted by Ogilvy because the allegations pertained to labor
costs. We reviewed these costs by examining the labor invoices that were
submitted to the government for work done under the ONDCP contract, and then
interviewing a sample of Ogilvy employees whose time sheets were revised
regarding the amount of time that was charged to the government. We asked
these employees about why the time sheets were revised and who made the
changes. We collected other information by conducting interviews and
reviewing contract- related documentation at HHS, which awarded and
administered the contract during the first 2 years

1 Anti- Drug Media Campaign: ONDCP Met Most Mandates, but Evaluations of
Impact Are Inconclusive (GGD/ HEHS- 00- 153, July 31, 2000). 2 Anti- Drug
Media Campaign: Investigation of Actions Taken Concerning Alleged Excessive
Contractor Cost (GAO- 01- 34T, Oct. 4, 2000).

Page 2 GAO- 01- 1017T Anti- Drug Media Campaign

for ONDCP; the Navy, which assumed responsibility for administering the
contract for ONDCP in November 2000; the Defense Contract Audit Agency
(DCAA), which was asked by the Navy to review Ogilvy?s accounting system and
audit the contract; ONDCP; and Ogilvy. We did not determine the contractor?s
actual costs incurred under this contract. Although we did not focus on the
technical aspects of Ogilvy?s performance, ONDCP officials said that they
were very satisfied with Ogilvy?s technical performance regarding the anti-
drug media campaign.

Phase III of ONDCP?s National Youth Anti- Drug Media Campaign was initiated
in January 1999 as a 5- year effort to reduce youth drug use. The campaign
consists of nationwide print and broadcast advertisements that are to run
through December 2003. Although paid advertisements are the centerpiece of
the campaign, they are part of a broader ONDCP effort that includes
partnerships with community groups, corporate participation, public
information and news media outreach, collaboration with the entertainment
industry, and use of interactive media. Paid advertisements for the campaign
are to be supplemented by matching advertisements donated by media outlets.

In December 1998, on behalf of ONDCP, HHS competitively awarded a cost-
reimbursement contract to Ogilvy, with performance to begin in January 1999.
That contract has a base year and 4 option years, for a total estimated
value of $684 million. Of the $128.8 million value of the contract award for
the first year, $18.9 million was for Ogilvy?s labor costs, and the
remainder was for media and subcontractor costs. According to HHS, a cost-
reimbursement contract was used primarily because ONDCP?s specific needs for
the advertising campaign could not be determined in advance and the cost of
performing the work could not be forecast with a reasonable degree of
accuracy, and therefore a fixed- price contract was impractical.

According to ONDCP officials, because the Executive Office of the President,
of which ONDCP is a part, did not have the procurement resources to award
and administer a large contract, ONDCP arranged for HHS? Program Support
Center (PSC) to serve as its contracting agent. This arrangement gave HHS
overall responsibility for awarding and administering the Phase III contract
in return for a fee, and ONDCP was to monitor technical aspects of the
contractor?s performance.

In November 2000, attorneys representing Ogilvy disclosed to the Justice
Department?s Civil Division that they had conducted a preliminary review
Background

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

of Ogilvy?s ONDCP contract costs, and found certain ?slices of
unreliability? in the company?s accounting system and employee time sheets.
The attorneys said that they disclosed to the Justice Department
deficiencies in the company?s timekeeping systems, which they said resulted
in possible underbilling of labor costs from January through June 1999, and
possible overbilling of labor costs for the last quarter of 1999. Also, in
November 2000, ONDCP transferred contracting responsibilities from HHS to
the Navy after a breakdown in ONDCP?s working relationship with HHS
regarding the contract. In December 2000, the Navy asked DCAA to review
Ogilvy?s accounting system and conduct an historical audit of costs incurred
under the contract. In January 2001, the Navy exercised the option to Ogilvy
for the third year of the contract (Option Year 2), with an estimated value
of $137 million.

We found that Ogilvy did not properly charge the government for some of the
labor costs claimed under the contract, and did not have an adequate
accounting system that could support a cost- reimbursement government
contract of this value. Although the government disallowed nearly $7.6
million out of about $24.2 million in total labor charges submitted by
Ogilvy during the first 19 months of the contract, attorneys for the company
have proposed that about $850,000 be disallowed for that period. The amount
of money that the government overpaid or should reimburse the contractor for
labor costs incurred cannot be determined until DCAA audits the costs
claimed by Ogilvy. The Navy has asked DCAA to audit the media campaign costs
for 1999 and 2000, which it plans to start soon.

Some of Ogilvy?s labor invoices included charges for time that its employees
did not work on the contract. According to Ogilvy officials and an internal
company E- mail, after learning in the summer of 1999 that revenue on the
ONDCP contract was about $3 million lower than projected, certain Ogilvy
managers instructed some employees to review and revise their time sheets.
Ogilvy?s attorneys provided documents indicating that these revisions added
about 3,100 hours to the ONDCP contract, which increased charges to the
government by about $238,000. We interviewed some of these employees, who
told us that they initially did not record all of the time that they worked
on the ONDCP contract, and that they revised their time sheets to increase
the number of hours that they claimed to have worked. However, some of the
employees also told us that they did not work the amount of additional time
that was Findings

Ogilvy Improperly Charged for Some Labor Costs

Page 4 GAO- 01- 1017T Anti- Drug Media Campaign

added to their time sheets, or they could not fully explain why they
increased the number of hours to the ONDPC contract. For example, one of the
employees said that she did not work the 485 hours that she added to the
ONDCP contract, and another employee generally could not recall the work
that he did for ONDCP with respect to most of the 402 hours that he added to
his time sheets.

In another audit step, we reviewed time sheets that Ogilvy submitted to
ONDCP as support for the labor invoices in 1999, and found hundreds with
scratch- outs, white- outs, and other changes to the amount of time billed
to the ONDCP contract. These changes all lacked the employees? initials. We
interviewed 12 Ogilvy employees whose time sheets were changed to add time
to the ONDCP contract about why the changes were made. 3 Four of the 12
employees said that they did not make the changes indicated on their time
sheets regarding ONDCP and did not know who made the changes, which added at
least 55 hours to the ONDCP contract. 4 The other 8 employees said that they
made the changes for various reasons, such as making corrections for
mathematical errors, charging time to the wrong account, and recording the
wrong office departure times.

We found other problems associated with Ogilvy?s billing the government for
its ONDCP work. Ogilvy inconsistently charged the government for paid
absences and training and incorrectly billed fringe benefits for temporary
contract employees. In June 2000, a consultant retained by Ogilvy to review
the company?s billing on the ONDCP contract reported that employee
timesheets contained problems such as erasures, scratchouts, and white- outs
without the employees? initials on the changes. The next month, Ogilvy
suspended billing the government for its labor and has not submitted another
labor bill to the government from July 2000 to the present. We referred our
findings regarding Ogilvy?s improper billing under this contract to the
Justice Department.

The government did not adequately manage aspects of the contract award. HHS
awarded a cost- reimbursement contract to Ogilvy before sufficiently
determining whether Ogilvy had an adequate accounting system to support this
type of contract. HHS also did not obtain a required statement from

3 These were not the same employees who revised their time sheets after
certain Ogilvy managers instructed them to do so. 4 More hours may have been
added, but it was not possible to determine what numbers had been whited-
out or marked- out on some time sheets. The Government

Mismanaged Aspects of the Contract

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

Ogilvy that would have disclosed the cost accounting practices that the
company planned to use. The disclosure statement would have increased the
likelihood that deficiencies in Ogilvy?s cost accounting practices would
have been identified and addressed earlier.

The government also did not adequately administer the contract by resolving
billing problems when they arose or by auditing the contractor, despite
clear indications that Ogilvy?s cost accounting system and timekeeping
procedures were deficient. The HHS contracting officer followed the
technical representative?s recommendations to disallow nearly one- third of
the labor charges that Ogilvy submitted during the first 19 months of the
contract without reviewing the appropriateness of those disallowances or
arranging to audit the contract.

As we reported to this subcommittee last October, ONDCP?s technical
representative wrote a memorandum in April 2000 to the then- ONDCP Director
about Ogilvy?s billing irregularities, including a former Ogilvy employee?s
suspicions of fraudulent conduct. In this memorandum, the technical
representative recommended an immediate audit of the base year of the
contract. However, the HHS contracting officer informed us that ONDCP did
not provide her with a copy of this memorandum or any other credible
evidence of improper time charges and, therefore, an audit was not needed.
The technical representative said that it was an ONDCP management decision
not to share the unsubstantiated allegations of improper time charges with
HHS contracting officials. ONDCP said that it lacked evidence substantiating
the allegations and that an audit of the questioned billings was expected to
occur immediately after the responsibility for contract administration was
transferred from HHS to the Navy.

Contract administration was also impeded because the HHS contracting officer
and the ONDCP technical representative did not have an effective working
relationship, which eventually led to the transfer of contracting
responsibilities from HHS to the Navy. The contracting officer said that the
technical representative did not work within the boundaries of his
appointment. However, ONDCP indicated that the technical representative
started performing duties normally done by the contracting officer only
because the contracting officer was not actively engaged in the
administration of the contract, gave the technical representative
permission, or acquiesced to the technical representative?s performing the
duties. Further, the technical representative said that his working
relationship with HHS contracting officials deteriorated because he refused
pressure from the contracting officer to recommend payment for

Page 6 GAO- 01- 1017T Anti- Drug Media Campaign

costs that he believed to be questionable or unsupportable. In some
instances, we found documentary evidence to support the different parties?
accounts of events, although with regard to other incidents, we found no
documentation to resolve the differing views.

In November 2000, Ogilvy hired PricewaterhouseCoopers to restructure its
accounting system to meet government contracting standards. This included
developing a disclosure statement regarding Ogilvy?s accounting system,
which was required to be submitted at the beginning of the contract. On
March 9, 2001, more than 2 years after the contract award, Ogilvy submitted
a disclosure statement. Ogilvy was also required to submit an incurred cost
proposal to establish final costs incurred for 1999, which was originally
due no later than June 30, 2000, and an incurred cost proposal for 2000, by
June 30, 2001. On March 2, 2001, Ogilvy provided an

?advance copy? of an incurred cost proposal to the Navy, which was not
certified, for 1999. On July 11, 2001, Ogilvy provided a certified incurred
cost proposal for 1999 and 2000.

Ogilvy also indicated that it has taken actions to improve the preparation
of employee time sheets. In January 2001, Ogilvy issued its employees
revised time sheet guidance prepared by PricewaterhouseCoopers containing
detailed time sheet procedures and penalties for falsifying them. Also in
January 2001, PricewaterhouseCoopers began providing time sheet training to
Ogilvy employees.

For its part, ONDCP indicated that it has taken actions to improve the
administration of the contract with Ogilvy, such as transferring the
contracting responsibilities from HHS to the Navy. ONDCP also indicated that
it split the technical representative?s duties so that the Media Campaign
Office will have various technical representatives, rather than having one
technical representative, handling all of the media campaign contracts. In
addition, ONDCP said that its media campaign staff have been trained and
certified as technical representatives. According to ONDCP, since
contracting responsibilities were transferred to the Navy, communication has
been substantially enhanced between the technical representatives and the
contracting officer, and regular meetings are scheduled with the technical
representatives, the contracting officer, and the contractor to resolve
issues.

With regard to the next contract option year, which begins in January 2002,
ONDCP officials said that they are considering options and contingencies. In
late July 2001, ONDCP officials said that they are Actions Taken Since

the October 2000 Hearing

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

conducting market research with the Navy to determine whether the contract
should be resolicited, are developing a statement of work for a possible new
contract, and are considering whether any new contract should be fixed-
price. ONDCP expects to decide by August 30, 2001, whether to exercise the
next option year or whether reprocurement should be initiated.

DCAA, which began reviewing Ogilvy?s accounting system in March 2001,
determined last week that the company?s accounting system was adequate with
regard to the ONDCP contract. DCAA also plans to routinely review Ogilvy?s
future labor invoices when the company resumes submitting them, and soon
will begin to audit Ogilvy?s 1999 and 2000 costs.

Ogilvy did not properly charge the government for some of its labor costs
incurred under this contract. Its submission of time sheets claiming hours
that some employees said they did not work on the anti- drug media campaign
was clearly improper. In addition, the company did not make substantial
progress toward restructuring its accounting system to meet government
requirements until nearly 2 years after the contract was awarded.

The government poorly managed aspects of the award and administration of the
contract. HHS should not have awarded this cost- reimbursement contract
without determining whether the contractor had an adequate cost accounting
system. In addition, HHS should have reviewed the appropriateness of the
large amount of money that the technical representative recommended be
disallowed from the contractor?s invoices, or arranged for an audit of the
contract. The technical representative appropriately brought allegations of
improper billing to the attention of ONDCP management, but ONDCP management
did not take prompt action to investigate the allegations.

Because the contract has not yet been audited, the appropriateness of the
disallowed charges and Ogilvy?s actual incurred costs under this contract
remains unknown. In assuming contracting responsibilities for the ONDCP
contract, the Navy must determine the allowability of costs charged to the
contract, including Ogilvy?s nonbillable hours. We believe that the
government should not exercise the next contract option year with Ogilvy
unless substantial progress has been made toward resolving these issues and
ONDCP has considered both Ogilvy?s administrative and technical performance
under the contract to date. Conclusions

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

In our June 2001 report, we recommended corrective action to ONDCP and HHS
to address the problems we identified. We recommended that the ONDCP
Director should direct ONDCP staff to work with the Navy to

 review the appropriateness of the disallowed costs and temporary contract
employee labor charges from Ogilvy?s invoices and determine the amount of
money that the government overpaid or should reimburse the contractor
regarding these invoices;

 ensure that Ogilvy has an adequate cost accounting system for continued
performance under the contract;

 coordinate the roles and responsibilities of the contracting officer and
the technical representative and ensure that these roles and
responsibilities are effectively carried out.

Further, we recommended that ONDCP request that the Navy not exercise the
next contract option year with Ogilvy until the company has adequately
restructured its accounting system to meet government requirements and ONDCP
has considered the contractor?s administrative, as well as technical
performance, under the contract to date. In this regard, ONDCP and the Navy
should immediately begin to plan contracting alternatives for the subsequent
Phase III media campaign should they decide not to exercise the next
contract option year with Ogilvy.

To improve HHS? compliance with contracting procedures and prevent the
awarding of cost- reimbursement contracts covered by the Cost Accounting
Standards (CAS) to companies lacking adequate accounting systems to support
that type of contract, we recommended that the Director of the HHS Program
Support Center (PSC) direct that PSC?s controls over contracting procedures
be assessed to ensure that they are adequate for awarding and administering
CAS- covered costreimbursement contracts. These controls would include
ensuring the adequacy of potential contractors? cost accounting systems,
obtaining the required disclosure statements, arranging for audits of
contracts when significant billing problems arise, and resolving billing
disputes involving substantial disallowances on a timely basis.

In providing comments on our draft report, ONDCP agreed with our
recommendations and said that significant progress has been achieved toward
resolving the problems that we identified. The HHS Program Support Center
agreed with our recommendation that controls over contracting procedures
should be reexamined, particularly with respect to Recommendations

Agency Comments

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

assessing an offeror?s accounting system. Ogilvy?s attorneys did not comment
on the recommendations.

We met with ONDCP officials on July 25, 2001, to discuss additional progress
made since our report was issued and incorporated in this statement what
ONDCP officials told us. ONDCP officials indicated that they are working to
implement our recommendations and provided a July 20, 2001, letter from the
ONDCP Acting Director to the Navy stating that ONDCP and the Navy should
jointly conduct market research as a basis for deciding whether to exercise
the next option year with Ogilvy or resolicit the contract. The letter also
indicated that unless market research indicates that the contract should
remain cost- reimbursable, either in full or in part, the contract should be
fixed- price. In addition, ONDCP informed the Navy that Ogilvy cannot be
retained under a cost- type contract unless it has an accounting system that
complies with the Federal Acquisition Regulation.

Although ONDCP is working to implement our recommendations, much remains to
be done to settle the problems existing with this contract. The 1999 and
2000 costs need to be audited, the amount of labor costs to be paid for
those years must be determined and possibly negotiated, and labor costs
incurred since July 2000 have to be billed and determined. Moreover, the
government has to decide if it is prudent to continue this contract or seek
other contractual means to carry out the media campaign.

For information about this testimony, please contact Bernard Ungar,
Director, Physical Infrastructure Issues, on (202) 512- 8387. Individuals
making key contributions to this testimony included Bob Homan, John Baldwin,
and Adam Vodraska.

This concludes my prepared statement. I will be happy to respond to any
questions you or other Members of the Subcommittee may have. Recent Actions
Taken

on Recommendations Contacts and Acknowledgments

(543006)
*** End of document. ***