NASA Procurement: Contract and Management Improvements at the Jet
Propulsion Laboratory (Letter Report, 12/30/94, GAO/NSIAD-95-40).

The current contract for running the National Aeronautics and Space
Administration's (NASA) Jet Propulsion Laboratory contains improvements
in several areas--award fee, selected cost controls, scope of work, and
number of contract deviations.  In addition, steps have been taken to
address internal control concerns.  For example, policy changes have
drastically curtailed the lending of computer equipment to employees and
greatly reduced meal and beverage costs.  NASA has not yet reviewed the
reasonableness of paying college tuition for dependents of lab
employees.  However, NASA has asked the Defense Contract Audit Agency to
review the lab's compensation package, singling out the tuition
assistance benefit for special scrutiny.  The ultimate success of both
the contractual and oversight changes at the lab will depend on
effective implementation.

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

 REPORTNUM:  NSIAD-95-40
     TITLE:  NASA Procurement: Contract and Management Improvements at 
             the Jet Propulsion Laboratory
      DATE:  12/30/94
   SUBJECT:  Laboratories
             Aerospace research
             Internal controls
             Research and development contracts
             Contract administration
             Contract modifications
             Contractor performance
             Computer equipment management
             Contractor personnel
             Fringe benefits

             
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Cover
================================================================ COVER


Report to Congressional Requesters

December 1994

NASA PROCUREMENT - CONTRACT AND
MANAGEMENT IMPROVEMENTS AT THE JET
PROPULSION LABORATORY

GAO/NSIAD-95-40

NASA Procurement


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

  DCAA - Defense Contract Audit Agency
  FAR - Federal Acquisition Regulation
  FFRDC - Federally Funded Research and Development Center
  JPL - Jet Propulsion Laboratory
  NASA - National Aeronautics and Space Administration
  OMB - Office of Management and Budget

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


B-259019

December 30, 1994

The Honorable John Glenn
Chairman, Committee on Governmental Affairs
United States Senate

The Honorable Carl Levin
Chairman, Subcommittee on Oversight of
 Government Management
Committee on Governmental Affairs
United States Senate

This is our third and final report on selected contract provisions
and internal controls at the Jet Propulsion Laboratory (JPL).  As you
requested, we reviewed the current contract between the National
Aeronautics and Space Administration (NASA) and the California
Institute of Technology (Caltech) for the operation of the JPL and
analyzed whether modifications made to it and other management
changes adequately address the concerns raised in our previous
reports. 


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

JPL is NASA's only Federally Funded Research and Development Center
(FFRDC) and is operated under contract by Caltech.  JPL is NASA's
field installation for solar system exploration and is a major
operating division of Caltech.  Together, these overlapping roles
contribute to unique JPL management and oversight challenges. 

FFRDCs are operated under agreements funded by sponsoring federal
agencies to provide for research or development needs that cannot
readily be met by the agencies or contractors.  JPL work is primarily
funded by NASA; however, other sponsors can fund JPL efforts under
reimbursable arrangements with NASA.  JPL's total 1994 business base
was just over $1 billion. 

JPL receives work projects directly from NASA program offices.  It
can also submit proposals to, or respond to non-competitive requests
from, other work sponsors using up to 25 percent of the JPL direct
workforce.  Both the NASA-directed work and the non-NASA work must be
determined to be appropriate for JPL to perform based on the scope of
the sponsoring contract.  Caltech has operated JPL for NASA since
NASA became an agency in 1958 and conducted work at the same site for
other federal entities as early as the 1930s.  The current contract
is in effect from
September 20, 1993, to September 30, 1998.  It provides a framework
of procedures, regulations, and other guidance for funding specific
tasks.  Rather than signing separate contracts for individual work
projects, funding for JPL is provided under "task orders" for
specific work.  Cost allowability is governed by the contract and by
the Office of Management and Budget's (OMB) Circular A-21, "Cost
Principles for Educational Institutions."

In our first report to the Committee, we discussed JPL's fixed fee,
selected cost controls, scope of work, food and beverage charges, and
tuition payments for dependents.\1 Our second report discussed the
management of NASA equipment by JPL, particularly loaning it to
employees and controlling it at Caltech's campus.\2


--------------------
\1 NASA Procurement:  Proposed Changes to the Jet Propulsion
Laboratory Contract (GAO/NSIAD-93-178, July 15, 1993). 

\2 NASA Property:  Poor Lending Practices and Controls at the Jet
Propulsion Laboratory (GAO/NSIAD-94-116, Apr.  18, 1994). 


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

The current contract for operating JPL contains improvements in
several areas--award fee, selected cost controls, scope of work, and
number of contract deviations.  In addition, actions have been taken
to deal with internal control concerns.  For example, policy changes
have drastically curtailed the lending of computer equipment to
employees and greatly reduced meal and beverage costs. 

NASA has not yet reviewed the reasonableness of paying the college
tuition of JPL employees' dependents.  However, in September 1994,
NASA requested that the Defense Contract Audit Agency (DCAA) perform
a comprehensive review of JPL's compensation package and identified
the dependent tuition assistance benefit for special scrutiny. 

The ultimate success of both the contractual and oversight changes at
JPL will depend on effective implementation.  NASA's Management
Office at JPL will be challenged by the demands of its oversight
responsibilities.  Better coordination of audit resources could help
in that challenging task. 


   CONTRACT CONCERNS ADDRESSED
------------------------------------------------------------ Letter :3

Changes have been made to address the concerns raised in our July
1993 report.  First, the fixed fee under NASA's previous contract
with Caltech was replaced with a fee structure that bases two-thirds
of the fee award on NASA's assessment of JPL's performance.  Also,
new reporting and review procedures could provide control over
selected costs comparable to that at commercial contractors. 
Similarly, although the scope of work was not substantively modified
for NASA tasks, it was narrowed and oversight was increased for
non-NASA work performed by JPL.  Finally, the total number of
deviations from the Federal Acquisition Regulation (FAR) in the
contract was reduced. 

In addition, our concern regarding the tuition asistance benefit will
be addressed as part of NASA's recent request to DCAA for a review of
JPL's compensation package. 


      AWARD FEE LINKED TO
      PERFORMANCE
---------------------------------------------------------- Letter :3.1

The previous contract provided Caltech with a fee range of between
$11.4 million and $15.4 million, based solely on the volume of work
conducted at JPL.  This arrangement was contrary to NASA's goal of
considering performance in awarding fee to contractors and counter to
the agency's policy of not paying fee or profit on contracts with
universities.  We recommended that NASA authorize a deviation from
its policy against paying fee to educational institutions only if its
purpose and amount was adequately justified and, if a fee was
authorized, to base the amount on performance. 

For the new contract, NASA approved a policy deviation allowing fee
payment to a university and created a new fee structure.  Under the
contract's "Management Performance Incentive Plan," Caltech is paid
$6 million plus an additional performance-based amount of up to $12
million.  The incentive criteria for the performance-based fee is
specified in the contract, with assigned weights of 65 for technical
performance, 25 for institutional management, and 10 for outreach
programs.  Two evaluation boards and an award official will determine
the fee amount, based on ratings by individuals familiar with JPL's
work for NASA and non-NASA sponsors.  NASA's award decision is not
subject to the contract's dispute clause and no incentive fee is paid
if performance is less than satisfactory.  NASA awarded a total fee
of $16.5 million for 1994. 

NASA may also indicate emphasis areas prior to each rating period. 
For 1994, no areas were emphasized due to extended contract
negotiations.  Eight areas have been identified for 1995--including
cost containment, improved compliance with JPL policies, increased
cultural and gender diversity in senior management, and effective
social and educational outreach programs consistent with overall NASA
and federal government initiatives in these areas.  According to NASA
officials, efforts pursued under any emphasis area must still fall
within the contract's scope of work. 

We noted in our July 1993 report that Caltech received a higher fee
than any of the other large FFRDCs administered by educational
institutions that receive fees.  Based on past ratings, Caltech is
unlikely to receive less fee under the new fee structure.  For
example, Caltech could be scored one point above a
poor/unsatisfactory rating--61 out of 100--and still receive an
incentive payment of $7.3 million on top of the $6 million fixed fee. 
This is more than the $13.1 million fee paid for the last year of the
previous contract. 

Justifying and paying fee is an issue for all FFRDCs, not just JPL.\3
NASA officials believe that JPL is the only FFRDC receiving a fee
linked to performance and intend the $12 million performance-based
fee as a strong incentive.  If the incentive award fee concept is
successful at JPL, performance-based fees could be considered for
other FFRDCs that receive fees.  Its success will depend largely on
NASA applying a rigorous scoring system to help ensure a fair
evaluation clearly reflecting performance. 


--------------------
\3 Inadequate Federal Oversight of Federally Funded Research and
Development Centers, Subcommittee on Oversight of Government
Management of the Committee on Governmental Affairs, U.S.  Senate,
July 8, 1992. 


      GREATER COST VISIBILITY
---------------------------------------------------------- Letter :3.2

In our July 1993 report we noted that selected costs, called "burden"
costs at JPL, were not being thoroughly reviewed by NASA.  The
current contract identifies DCAA as the responsible organization for
reviewing JPL's annual submission of such costs and includes new
reporting requirements for them as proposed by Caltech.  According to
NASA, these new reporting requirements improve the visibility of such
costs.  DCAA also believes the current contract language and the new
reporting requirements could improve NASA's control of these costs. 
The key is the "auditability" of JPL's cost submission and the
supporting documentation.  DCAA has asked for specific cost data
similar to that it requests from commercial contractors.  JPL
officials intend to provide the requested data. 


      BROAD SCOPE REMAINS, BUT
      MONITORING IMPROVED FOR
      NON-NASA WORK
---------------------------------------------------------- Letter :3.3

The prior contract's "description of work" was broadly written and
was characterized as "enabling language" by a NASA official.  The
broad scope provided limited guidance for differentiating between
work that JPL should conduct because of its expertise and work that
should be conducted by others.  For example, one area of activity was

     "Conducting (i) a program of supporting research and (ii) a
     program of advanced technical development, designed to make
     contributions to space science, space transportation, practical
     applications, technology and exploration."

The basic broad content and lack of specificity in the prior contract
remains in the current contract for NASA work.  However, there was a
change in the scope of non-NASA work.  The contract previously
specified that tasks undertaken for non-NASA agencies at JPL would
"focus on" efforts applying JPL developed technologies.  The new
contract replaces the words "focus on" with "be confined to."

However, the contract guidelines for non-NASA work remain broad. 
Therefore, the NASA Management Office at JPL--which reviews and
approves non-NASA task orders--becomes the key control for ensuring
the unique contribution of JPL to the work.  Beginning last year,
that office increased its oversight of the appropriateness of
non-NASA task orders, particularly for those involving computer
purchases.  The Management Office has delayed approving tasks until
further justifications have been provided and has asked JPL to notify
potential non-NASA task sponsors early in the process of the need to
document why JPL should do the work. 


      FEWER DEVIATIONS FROM
      STANDARD CONTRACT
      REQUIREMENTS
---------------------------------------------------------- Letter :3.4

NASA has reduced the number of contract deviations from standard
clauses established in the FAR and NASA's FAR supplements.  The
number of FAR and NASA FAR deviations that were in the old research
and development contract\4 were decreased from 22 to 15, and the
total number of standard clauses incorporated in the contract have
increased from 74 to 98.  For example, the standard "Payment of
Overtime Premiums" clause was restored.  As a result, a request for
overtime premiums must document factors associated with the request,
the effects of denial, and why other options would not be
appropriate. 

NASA's current contract with Caltech contains two new deviations from
prescribed cost allowability provisions.  The FAR defers to OMB's
Circular A-21, "Cost Principles for Educational Institutions," to
prescribe which costs incurred by educational institutions may be
recovered under government contracts and which may not.  Under the
Circular, costs incurred under an employee lawsuit under Section 2 of
the Major Fraud Act of 1988, including amounts paid to the employee,
are unallowable.  The Circular also provides that, in general, fines
and penalties resulting from violations of the law are unallowable
costs.  NASA's contract with Caltech, however, provides that if
Caltech litigates a third party suit and is found to have violated
federal law, Caltech's legal and judgment costs will be allowed if
Caltech can demonstrate that it had a reasonable expectation of
prevailing on the merits. 

A-21 also limits payment for advertising and public relations costs. 
The contract provides that this A-21 restriction does not apply to
JPL disseminating public information on NASA programs or activities. 
For example, costs associated with JPL public events marking NASA
accomplishments or the printing of program-related materials are
expressly allowable.  Similarly, the contract specifically allows
costs for promoting technology transfer to the private sector--a NASA
mandate--stating these costs are not a "cost of selling and
marketing," which A-21 does not allow. 


--------------------
\4 Previously, two contracts governed the Caltech-NASA
relationship--one for the research and development effort, the other
for management of the facilities.  The two are combined in the new
contract.  Most deviations were related to the research and
development effort and we limited our review of deviations to this
component of the old and new contracts. 


      DEPENDENT TUITION BENEFIT TO
      BE REVIEWED
---------------------------------------------------------- Letter :3.5

Dependents of JPL employees accepted at Caltech attend the university
tuition free, with the annual per student tuition--$15,900 in fiscal
year 1994--charged to NASA.  In addition, approximately 150 senior
JPL employees are eligible for tuition assistance of up to half
Caltech's tuition when their dependents attend other universities.\5
JPL considers this Caltech employee benefit a key element for
recruiting exceptional employees.  In 1994, 39 dependents of 30
senior employees received assistance for attending other schools. 

As our July 1993 report stated, dependent tuition is an allowable
cost under Circular A-21, if the benefit is granted according to
university policy.  NASA's 1980 approval of tuition reimbursement for
JPL dependents attending other than Caltech was conditioned on
Caltech limiting cost increases.  However, as figure 1 shows, JPL's
employee dependent tuition costs have continued to increase
significantly in recent years. 

   Figure 1:  JPL Employee
   Dependent Tuition Costs

   (See figure in printed
   edition.)

We recommended that NASA decide whether and to what extent it should
continue paying dependent tuition support.  The NASA Administrator
responded that the tuition benefit is part of Caltech's general
compensation and benefit plan and that it would be reviewed as part
of a comprehensive JPL compensation review that NASA would conduct
during fiscal year 1994.  No review was conducted that year but, in
September 1994, NASA requested DCAA perform a comprehensive review of
JPL's compensation system.  The request noted that various parts of
the system had been reviewed by DCAA over the last 2 years and asked
that those results be incorporated into the comprehensive review,
together with additional areas of compensation that had not been
audited.  JPL's dependent tuition assistance program was specifically
targeted for review. 


--------------------
\5 Senior JPL employees include upper-level management in the
$72,800-$202,000 salary range, JPL Executive Council members, and
heads of divisions. 


   SOME INTERNAL CONTROLS
   STRENGTHENED
------------------------------------------------------------ Letter :4

NASA and JPL responded quickly to our concerns and recommendations to
rectify internal control weaknesses in the management of NASA
equipment.  Policies and procedures for employee equipment loans and
the tracking of equipment at Caltech have been improved.  Also,
changes in JPL's policies on charging NASA for food and beverages
have substantially reduced those costs. 


      RAPID ACTION TO CONTROL
      PROPERTY
---------------------------------------------------------- Letter :4.1

In our April 1994 report we recognized that employee home use of
equipment can be valuable, but noted that the frequency, duration and
growth of equipment on loan called for review.  We recommended that
NASA look at its employee loan policy to limit the type of equipment
and conditions for borrowing and that JPL's policy be made consistent
with NASA's policy. 

Both NASA and JPL have revised their policies.  JPL issued new
guidance on June 9, 1994, that severely restricts off-site use of
property.  They also initiated a recall of equipment not meeting the
new conditions.  Under the new criteria, equipment loans, including
overnight use of a portable computer, is not allowed without meeting
a critical need test and obtaining the approval of a division
manager.  The number of equipment items on loan dropped 88 percent
from 4035 (valued at $7.6 million) in September 1993 to 451 items
(valued at $760,000) by October 1994.  NASA's property manager at JPL
believes there will be a reduction in the future procurement of new
computer equipment, in part as a result of the returned equipment
being available for use at JPL. 

NASA's loan policy, issued July 18, 1994, allows for
mission-essential home loans of 30 days, or up to 180 days after
signing a loan agreement in which the employee assumes responsibility
for the equipment.  Both loans can be renewed once and require
approval by the property custodian, immediate supervisor, and the
division director/chief.  Loan renewal requests beyond 360 days need
approval by the Center Director or Director of Operations for NASA
headquarters. 

We also recommended that NASA require JPL to review and improve its
property control system, and evaluate and revise its procedures for
keeping track of inventory, including equipment located at Caltech. 
In response, JPL formed advisory groups to study and address property
control issues, and established a deadline of December 31, 1994, for
the groups' recommendations to be implemented. 

NASA requested JPL conduct a wall-to-wall property inventory, which
is now underway.  All equipment has been scanned, both at JPL and
Caltech, and NASA identification tags have been placed on all JPL
equipment at Caltech.  NASA's Property Manager noted losses are much
lower at this point in the inventory than they were when property was
last inventoried in 1992.  Then, 12,000 items were not located after
initial scanning, compared to 3,593 this time.  The reasons for the
differences will not be known until the 1994 inventory is complete. 

Our final recommendation--that JPL identify and dispose of obsolete
or excess equipment--will be addressed by one of the JPL advisory
groups in coordination with the NASA Management Office.  As part of
NASA's review of the JPL property system, NASA asked JPL to change
its procedures to speed disposal of equipment purchased for
reimbursable sponsors. 


      MEAL CHARGES TO NASA
      CURTAILED
---------------------------------------------------------- Letter :4.2

We reported in July 1993 that food and beverages charged to the NASA
contract had been growing rapidly and internal controls were weak. 
We specifically questioned the allowability of "working meals" and
recommended that they be identified in the new contract as
unallowable costs.  NASA agreed that the costs were unallowable but
decided against specific contract language due to new JPL policies
severely limiting food and beverage costs. 

According to the new JPL policies, working meals are not allowable
contract charges.  Restrictions were also placed on charges for
cafeteria services, which totaled almost $145,000 for fiscal years
1991 and 1992.  The new policy limits cafeteria charges to beverages,
and only for meetings over 3 hours that include non-JPL employees. 
The new policies strictly limit chargeable meals and refreshments at
JPL functions, and prohibit these charges for government employees. 
Food and beverage costs for the first 6 months under the new policies
were $35,000.  Almost three times that amount was charged to NASA for
the 6 months prior to the policy change. 

NASA requested a DCAA audit of all JPL food and beverage costs for
fiscal years 1991 and 1992.  The resulting report questions almost
$329,000 of the $406,650 in estimated costs for that period.  In
response, Caltech withdrew the questioned amount from NASA contract
charges, stating that it did this so that the government would not be
at a disadvantage while JPL evaluates the questioned costs.  As of
September 1994, none of the costs have been resubmitted to NASA. 
Subsequently, NASA requested an audit of food and beverage costs for
fiscal years 1989, 1990, and 1993.  This report is expected to be
completed by January 1995. 


   NASA OVERSIGHT RESOURCES
------------------------------------------------------------ Letter :5

The flexibility in the JPL contract places increased importance on
oversight by the NASA Management Office.  Improved coordination of
audit resources could complement that oversight. 

JPL's multiple roles--NASA center, a division of a university, a
contractor, and an FFRDC--subject it to oversight by a variety of
audit organizations.  Two of these maintain offices at JPL--the NASA
Office of the Inspector General and DCAA.  Under authority of the
Inspector General Act, NASA's Inspector General is responsible for
providing an effective audit program to review NASA activities.  DCAA
conducts contract audits of JPL and other NASA contractors, as
requested by NASA.  As shown in table 1, operational audit oversight
is provided by these two audit entities, as well as Caltech's
internal audit organization, on an ongoing basis. 



                           Table 1
           
                 JPL Audit Oversight Profile

                                         Caltech
               Inspector                internal
               General\a        DCAA       audit       Total
------------  ----------  ----------  ----------  ==========
Number of              6           7           5          18
 auditors
Fiscal year     $549,700    $568,000    $537,200  $1,654,900
 1993 budget
Fiscal year            5          30           4          39
 1993
 reports
------------------------------------------------------------
\a The Office of the Inspector General responsibility also includes
NASA activities in southern California, Hawaii, and Arizona, although
most of its effort are at JPL. 

Other audit groups are also engaged at JPL periodically or are
peripherally involved with JPL through their Caltech affiliation.  We
perform periodic audits, usually in response to requests from
congressional committees.  Other organizations, such as the Small
Business Administration and the Army Corp of Engineers, conduct
special reviews.  Further, a public accounting firm annually audits
Caltech's financial statement and DCAA is the cognizant audit agency
for Caltech's campus activities. 

Recently, NASA has taken a more active role in coordinating audit
efforts.  Coordination between the Inspector General staff and DCAA
had previously been limited.\6 Over the last year, the NASA
Management Office has increased its role in coordinating audit
efforts by sponsoring meetings between the Inspector General and DCAA
staffs to reduce duplication and request that its needs be
incorporated into their audit plans.  That office also arranged for
Caltech's internal audit staff to participate in audit coordination
meetings with the Inspector General and DCAA in October 1994. 


--------------------
\6 However, DCAA officials told us that, consistent with their
agency's policy, they have provided their audit plan to other
organizations. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

The scope of this review was limited to following up on those issues
addressed in our July 1993 and April 1994 reports. 

To analyze how NASA handled contractual and oversight concerns, we
compared its current contract with Caltech to the previous one and to
NASA's Request for Proposal for the current contract.  We also
reviewed the contract's negotiation files, applicable FAR and NASA
FAR supplement provisions, award fee training materials, and JPL's
policies on meals and equipment. 

We collected and summarized cost information on dependent tuition
from JPL's financial accounting division and the JPL Director's
office.  We also reviewed selected compensation reports from 1993 and
1994. 

We interviewed NASA Management Office officials and staff, NASA
General Counsel personnel, and JPL officials responsible for meal
accounting and equipment policies.  We also held discussions with
DCAA representatives at JPL and Caltech, Inspector General officials
at JPL and NASA headquarters, and the Caltech Internal Audit
Director. 

We conducted our work from April 1994 to October 1994, in accordance
with generally accepted government auditing standards.  As requested,
we did not obtain agency comments on a draft of this report. 
However, we discussed the information in the report with both NASA
and JPL officials and considered their comments in preparing it. 


---------------------------------------------------------- Letter :6.1

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 of this report to other appropriate
congressional committees, the NASA Administrator, and Director of
OMB.  We will also provide copies to others

Please contact me on (202) 512-8412 if you or your staff have any
questions concerning this report.  The major contributors to this
report were Allan Roberts, Assistant Director; Frank Degnan,
Assistant Director; and Monica Kelly, Evaluator-in-Charge. 

Sincerely yours,

Donna M.  Heivilin, Director
Defense Management and NASA Issues

