Environmental Cleanup: Defense Indemnification for Contractor Operations
(Letter Report, 11/25/94, GAO/NSIAD-95-27).

Public Law 85-804 authorizes the Defense Department (DOD) and other
federal agencies to indemnify contractors against losses from unusually
hazardous or nuclear risks.  Any actions taken under the law must be
reported to Congress annually.  Reported actions can include specific
contractors' claims for costs already incurred or the inclusion of
indemnification clauses in contracts to protect DOD contractors from
future risks.  This report provides information on (1) how the military
services used Public Law 85-804 to indemnify contractors for
environmental cleanup in selected cases and (2) how DOD described the
resulting actions in required reports to Congress.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-27
     TITLE:  Environmental Cleanup: Defense Indemnification for 
             Contractor Operations
      DATE:  11/25/94
   SUBJECT:  Indemnity
             Environmental monitoring
             Contractor responsibility
             Department of Defense contractors
             Government liability (legal)
             Defense contracts
             Pollution control
             Cost sharing (finance)
             Environmental law
             Hazardous substances
IDENTIFIER:  Eau Claire (WI)
             Maxey Flats (KY)
             
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Cover
================================================================ COVER


Report to the Chairman, Legislation and National Security
Subcommittee, Committee on Government Operations, House of
Representatives

November 1994

ENVIRONMENTAL CLEANUP - DEFENSE
INDEMNIFICATION FOR CONTRACTOR
OPERATIONS

GAO/NSIAD-95-27

Environmental Cleanup


Abbreviations
=============================================================== ABBREV

  CERCLA - Comprehensive Environmental Response, Compensation, and
     Liability Act
  DOD - Department of Defense

Letter
=============================================================== LETTER


B-259130

November 25, 1994

The Honorable John Conyers, Jr.
Chairman, Legislation and
 National Security Subcommittee
Committee on Government Operations
House of Representatives

Dear Mr.  Chairman: 

As requested, we are examining selected actions taken by the
Department of Defense (DOD) under Public Law 85-804.\1 Specifically,
this interim report provides information on (1) how the military
services used Public Law 85-804 to indemnify contractors for
environmental cleanup in selected cases and (2) how DOD described the
resulting actions in required reports to Congress. 


--------------------
\1 Under P.L.  85-804, the National Defense Contracts Act of 1958, as
implemented by Executive Order 10789 and the Federal Acquisition
Regulation, three major types of actions may be taken:  advance
payments; contract adjustments; and any other actions under authority
of the act, referred to as residual powers.  A frequently reported
action under residual powers is indemnification of contractors
against losses from unusually hazardous or nuclear risks that are not
otherwise insured. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Public Law 85-804, as implemented, authorizes DOD and other federal
agencies to indemnify contractors against losses from unusually
hazardous or nuclear risks.  The law requires that if any actions are
taken under the law, they be reported to Congress annually.  Reported
actions can include specific contractors' claims for costs already
incurred or the inclusion of indemnification clauses in contracts to
protect DOD contractors from future risks. 

The Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA), as amended, commonly known as Superfund
(42 U.S.C.  9601-75), imposes liability for cleanup on a variety of
potentially responsible parties, including owners, facility
operators, and generators of hazardous substances.  Under CERCLA, DOD
is included among parties responsible for environmental cleanup of
its facilities.  If DOD pays cleanup costs related to a contractor's
activities, the contractor remains a potentially responsible party
under CERCLA, and DOD could seek reimbursement or possible
contribution from the contractor or its insurer. 

In May 1993, we testified that DOD officials had stated that
indemnification of contractors for environmental cleanup would
seldom, if ever, occur.\2 However, we also noted that the Army has
included indemnification clauses in contracts at facilities where
environmental cleanup is necessary.  We expressed concern about the
substantial costs that could be involved and suggested that DOD
expand guidance to the services to fully describe the types of
situations that might warrant contractor indemnification for
environmental cleanup. 

In November 1993, a House Committee Report on contractor
reimbursement issues cited DOD's position that it uses Public Law
85-804 to indemnify certain contractors against unusually hazardous
or nuclear risks, not for environmental cleanup costs.\3 In July
1994, we reported that the Army was paying for environmental cleanup
costs at its Army ammunition plants.\4 Army headquarters officials
stated that the Army was paying because it owns the facilities and is
one of the parties responsible for cleanup under CERCLA, although
field officials said they believed Public Law 85-804 was the basis
for payment. 


--------------------
\2 Environmental Cleanup:  Unresolved Issues in Reimbursements to DOD
Contractors (GAO/T-NSIAD-93-12, May 20, 1993). 

\3 Reimbursement of Defense Contractors' Environmental Cleanup Costs: 
Comprehensive Oversight Needed to Protect Taxpayers, Fifth Report by
the House Committee on Government Operations
(Nov.  22, 1993). 

\4 Environmental Cleanup:  Inconsistent Sharing Arrangements May
Increase Defense Costs (GAO/NSIAD-94-231, July 7, 1994). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The Army granted relief under Public Law 85-804 to a contractor for
$5 million for environmental restoration at a plant in Eau Claire,
Wisconsin.  Also, the Army included the Public Law 85-804 clause in
contracts with operators at 20 of its ammunition plants in the early
1990s to indemnify against unusually hazardous risks (defined as
including, in certain circumstances, environmental releases of
hazardous substances).  The presence of this clause in a contract
does not mean that all of a contractor's environmental cleanup costs
would be indemnified.  Such a determination in certain cases could
only be made based on the assessment of whether a contractor's claim
is consistent with the definition of unusually hazardous risk
contained in the clause.  DOD expects cleanup at these plants to
total $800 million.  The Army has not determined the amount for which
contractors could be liable, and the portion, if any, affected by
these indemnification clauses is unknown.  The Navy includes Public
Law 85-804 nuclear indemnification clauses in its nuclear-related
contracts.  According to the Navy, the clause contractually obligated
the Navy to pay the three contractors' share of the costs for
cleaning up low-level radioactive waste at Maxey Flats, Kentucky. 
The Navy has obligated $5.8 million for its own share of this cleanup
and currently estimates the contractors' share will be another $2
million.  Air Force officials stated they were generally not in favor
of indemnifying contractors against environmental cleanup costs. 

Our review of DOD's reports to Congress for 1962 through 1993
indicated that the reports generally do not provide sufficient detail
to determine whether the contracts or actions listed are environment
related.  The Army reported its payment of $5 million for cleanup at
Eau Claire, Wisconsin, providing a detailed justification.\5 Also,
the Army reported the inclusion of indemnification clauses in
contracts for 18 of the above 20 ammunition plants.  The report did
not specify whether the clauses encompassed environmental cleanup and
cited potential cost as zero, explaining that the costs could not be
determined.  Navy officials stated that the contingent liability
provisions in the Maxey Flats contracts were reported in the 1960s,
but they have not yet identified the specific year reported.  We
found no reports showing projected or incurred costs on behalf of
contractors involving Maxey Flats. 


--------------------
\5 An Army official recently stated that the $5-million
indemnification may not have been an action under the law and the
Army was further researching this case. 


   ENVIRONMENTAL INDEMNIFICATION
   UNDER PUBLIC
   LAW 85- 804
------------------------------------------------------------ Letter :3

In at least two instances, the Army and Navy have used Public Law
85-804 to grant relief to contractors for environmental cleanups.  In
the cases examined, the Air Force has not. 


      ARMY HAS USED PUBLIC
      LAW 85-804 AUTHORITY TO
      INDEMNIFY ENVIRONMENTAL
      CLEANUP
---------------------------------------------------------- Letter :3.1

The Army used Public Law 85-804 in 1988 to reimburse the National
Defense Corporation for $5 million in environmental cleanup costs it
had incurred at the Eau Claire, Wisconsin, facility.  The relief was
granted to ensure the corporation could continue to produce parts
deemed essential to the national defense.\6 According to the Public
Law 85-804 report, payment was to be funded from an Army procurement
account. 

The Secretary of the Army issued memorandums of decision in 1990 and
1992 authorizing the inclusion of Public Law 85-804 clauses in
contracts with ammunition plant operators, as well as other
contractors, subcontractors, and third party contractors whose
ultimate customer is the government.\7 The Army included the Public
Law 85-804 clause in 20 contracts with ammunition plant operators. 
DOD expects cleanup at these plants to total $800 million.\8 The Army
has not determined the amount for which contractors could be liable,
and the portion of funding, if any, affected by these indemnification
clauses is unknown. 

The Secretary of the Army's memorandums define unusually hazardous
risks in part as including ".  .  .  the risk of release, including
threatened release, whether on-site or off-site, sudden or nonsudden,
of any substance or material .  .  .  ." Also, documents supporting
the decision show that "environmental releases of hazardous
substances" are included in this definition.  Headquarters officials
acknowledged that the Army's definition of unusually hazardous risks
could encompass environmental contamination. 

As discussed in our July 1994 report, there is confusion among Army
officials as to whether relief had actually been granted under
indemnification provisions.  Command and field officials told us that
the Army is paying the cleanup bill at the ammunition plants because
the operators could be indemnified for such costs under Public Law
85-804 anyway.  Headquarters officials, however, said that the
contract indemnification provisions are not invoked because the Army
is paying the cleanup costs directly.  Under CERCLA, the Army has
assumed responsibility for environmental cleanup of its facilities. 
For that reason, plant operators have not incurred costs and
therefore have had no reason to submit claims for environmental
relief. 


--------------------
\6 Public Law 85-804 authorizes extraordinary relief when the
President or a designee "deems that such action would facilitate the
national defense."

\7 According to one official, the Army is currently drafting a
memorandum to eliminate indemnification for third parties because the
Army believes that private insurance coverage is available to such
contractors. 

\8 Defense Environmental Cleanup Program, Annual Report to Congress
for Fiscal Year 1993 (Mar.  31, 1994). 


      NAVY HAS USED PUBLIC
      LAW 85-804 AUTHORITY TO
      INDEMNIFY CONTRACTORS FOR
      LOW-LEVEL RADIOACTIVE WASTE
---------------------------------------------------------- Letter :3.2

According to Navy officials, the Navy uses Public Law 85-804 to
indemnify contractors only under limited circumstances.  The Navy
authorizes Public Law 85-804 clauses in contracts for procurement of
nuclear-powered vessels, missiles, and components or subcomponents
because these contracts involve nuclear or unusually hazardous risks
for which the contractor cannot obtain insurance.  They believe the
Navy has no need to indemnify its facility operators because their
operational risks are not considered unusually hazardous. 

The Navy also used Public Law 85-804 to indemnify three
contractors--Newport News, Electric Boat/General Dynamics, and
Ingalls/Litton Systems--for disposal of low-level, nuclear waste at a
site at Maxey Flats, Kentucky.  These three contractors were
identified, along with the Navy, as potentially responsible parties
under CERCLA.  The Navy assumed all three contractors' shares of
remediation costs, stating that it was contractually obligated to do
so. 

A Navy official stated that the Navy has not yet paid any money
pursuant to an indemnification claim.  The total cost to the Navy for
the Maxey Flats cleanup will not be known until the Navy signs a
consent decree with the Environmental Protection Agency.  However,
the Navy is responsible for 12.4 percent of the cleanup bill, of
which 4.5 percent represents the three contractors' portion.  A Navy
attorney stated that this 4.5 percent is currently estimated to be $2
million.  According to a Navy Facilities Command official, the Navy
has obligated $5.8 million for its share of the cleanup at Maxey
Flats since 1987, and the money has been funded through the Defense
Environmental Restoration Account. 


      AIR FORCE HAS NOT USED
      PUBLIC LAW 85-804 AUTHORITY
      TO INDEMNIFY ENVIRONMENTAL
      CLEANUP
---------------------------------------------------------- Letter :3.3

According to Air Force officials, activities under facilities-use
contracts at contractor-operated facilities do not involve unusually
hazardous risks and, therefore, do not need to be indemnified under
Public Law 85-804. 

We reported in July 1994 that a 1987 memorandum from the former Air
Force Systems Command said that Plant No.  44's operator, Hughes
Missile Systems Company, was indemnified from responsibility for past
groundwater contamination.  However, according to an Air Force
official, further investigation showed that the operating contract
between the Air Force and Hughes made no reference to Public Law
85-804 and the 1987 document ".  .  .  in no way was, or was intended
to be, an indemnification of liability for future remediation costs
occasioned by contamination of the groundwater at the facility."

The Air Force recently negotiated a lease with Hughes that replaced
the facilities-use contracts that have governed Hughes' operations at
the Tucson, Arizona, plant since 1951.\9 Under the lease, the
government will continue funding remediation projects for
contamination that occurred prior to the lease.  However, according
to Air Force officials, the decision to fund the remediation at Plant
No.  44 has nothing to do with determining ultimate liability for
cleanup costs.  Air Force Systems Command officials stated that the
Air Force intends to seek contributions from the contractors that
operated its facilities. 

The lease between the Air Force and Hughes does contain a Public Law
85-804 indemnification clause.  Air Force officials stated that the
clause is not intended to grant relief for environmental cleanup.  We
are continuing to review the above issues in our ongoing work. 


--------------------
\9 Since the Air Force is trying to divest itself of its
contractor-operated facilities and will not receive funding to
maintain them in the future, the Air Force decided to lease the plant
to Hughes. 


   PUBLIC LAW 85-804 REPORTS
------------------------------------------------------------ Letter :4

Pursuant to Public Law 85-804, each agency using the indemnification
authority must report its actions in the annual report to Congress. 
If an action involves actual or potential costs in excess of $50,000,
the report must include the contractor's name, actual or estimated
potential costs, description of property or service involved, and
circumstances justifying the action.  In reviewing the Public Law
85-804 reports for 1962 through 1993, we found that 2,874 actions had
been reported.\10 Two types of actions were reported:  one type
includes a description of the action and justification, and the other
lists only the number of contracts with contingent liability
provisions by contractor name.  Only one action of the first type, in
Eau Claire, Wisconsin, cited environmental restoration. 

The annual reports generally do not provide specific information on
indemnification that could include environmental and associated
costs.  Other than the $5- million action, we found no cases where
any environmental cleanup costs had been specified in a report.  The
current reporting system does not provide a mechanism for linking the
actions with descriptions and justifications to those previously
reported as having contingent liability provisions. 

The information in DOD's report is submitted by the services and
other DOD agencies to the Office of the Secretary of Defense.  The
data is computed and reported annually to Congress in a document
entitled "Extraordinary Contractual Actions to Facilitate the
National Defense."


--------------------
\10 Actions may involve one or more services or DOD agencies. 


      ARMY REPORTING
---------------------------------------------------------- Letter :4.1

Only 1 of the Army's 255 reported actions cited environmental
restoration--the Eau Claire site.  In 1990, the Army reported an
action regarding 18 of the 20 ammunition plants, and the annual
report's narrative did not indicate that the action could cover
environmental risks.  We were not able to identify where actions had
been reported for the other two ammunition plants. 

When the Army reported the inclusion of the indemnification provision
in the contracts of the ammunition plant operators, it cited "actual
or estimated potential costs" as zero, stating that the costs could
not be determined.  According to DOD, it had spent about $300 million
for cleanup at the 20 plants, as of the end of fiscal year 1993, and
total costs are expected to be about $800 million.  According to an
Army official, the Army has not determined what portion, if any,
could be attributed to contractor activities. 

In 1988, the Army reported granting relief for environmental cleanup
costs to the contractor at Eau Claire, Wisconsin, and disclosed $5
million in costs.  As discussed previously, the Army's justification
for this indemnification was based on national defense concerns. 


      NAVY REPORTING
---------------------------------------------------------- Letter :4.2

The Navy reported 2,035 actions.  None of the reported actions cited
environmental cleanup.  Because the report format does not specify
the individual risks covered by the contingent liabilities, we could
not determine whether any were specifically intended to cover
environmental cleanup.  For the same reason, we could not identify
the three actions the Navy states it reported between 1962 and 1967
for Maxey Flats.  A Navy headquarters official stated they could not
identify the specific annual report in which these three contractors
were listed. 


      AIR FORCE REPORTING
---------------------------------------------------------- Letter :4.3

The Air Force reported 567 actions.  We found no indication that any
of the actions were related to environmental cleanup. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :5

This interim report provides information about selected cases of
indemnification for environmental cleanup and is based on prior and
ongoing work.  Our work was conducted at the Washington, D.C., area
headquarters offices of DOD, the military services, and selected
commands.  Information in this report was augmented with data from
our May 1993 and July 1994 reports and follow-up with the above
organizations.  We reviewed historical and projected environmental
cleanup costs, site status, and related contractual provisions. 

In addition, we reviewed Public Law 85-804 reports to Congress for
1962 to 1993 to identify whether they showed examples where
indemnification for environmental cleanup was known to be an issue. 

As requested, we did not obtain written agency comments on a draft of
this report.  However, we discussed our results with agency officials
and included their comments where appropriate.  We performed our work
from August 1994 to October 1994 in accordance with generally
accepted government auditing standards. 


---------------------------------------------------------- Letter :5.1

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after its issue date.  At
that time, we will send copies to appropriate congressional
committees; the Secretaries of Defense, the Army, the Navy, and the
Air Force; and the Director of the Office of Management and Budget. 
We will also make copies available to others upon request. 

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix I. 

Sincerely yours,

Donna M.  Heivilin
Director, Defense Management
 and NASA Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

David Warren
Uldis Adamsons
Patricia Foley Hinnen
Leticia C.  Villarreal
Bruce Brown