LOC!ME NT PRESPE

01112 - [ A0590828 ]

Administration of Repair Contraots Needs Improvement.PSAD-76-179. December 27, 1976. 2 pp.

Report to the Congress; by Elmer B. Staats, Cosptroller General.

Issue Area: Federal Procurement of Goods and Services:Reasonableness of Prices Under Negotiated Ccntracts andSubcontracts (904).

Contact: Procurement and Systems Acquisition Div.Budget Function: General Governeent: Other General Government

(806).Organiza tion Concerned: General Services Adminis -ration;

Mikelco, Inc.; idwest aintenance and Construction, Inc.;Quality Mfq., Inc., Eastaboga, AL; estern Lift Truck, Inc.

Congressional Relevance: Congress.

An examination of contracts for repair and overhaul ofGovernment property revealed the need for improvement. GSAawarded tine and materials" contracts, which call for specifiedrates for labor performed, amounting to $24.4 in fiscal year1975. Findings/Conclusions' Improper charges were found ineight contracts audited by GAO. Overhead labor charge= werei.mproperl added tc contract costs. Many contractors failed toshow h Governaent-furniskad material as used, and some billedGSA for materials not used on orders. GS uid not qestioncontract ceilinSs based on contractors' esxyipates, and failed tofollow up results of udits on iprocper illings. GSA was ingeneral agreemnnt with GAO findings and has initiated action tocolleci $464,000. Recommendations: The Administration of CSAshould: establish procedures to prevent overcharges on "time andmaterial" contracts, obtaining more staff if necessary, foilowupon matters uncovered in SA audit reports; and review contractsto determine needs for further audits. (H[V)

-ORT T THE CONGRESS° REPORT TC THIE CONGRESSt

BY THE COMJTROLLER GENERALs " <, OF THE UNIT'ED STATES

Administration Of Repair ContractsNeeds ImprovementGeneral Services Administration

In fiscal year 1975 various contractors repxr-ing equipment for the Government were paid$24.4 million that included substantial over-charges.

GAO audited eight contracts and in every casefound improper charges. As a result, actionhas been started by the General ServicesAdministration to collect $464,000, andfurther collections are expected. A series ofcorrective actions has been promised.

PSAD-76-'179 D L i. 2 (, 9 7 6

COMPTROLLER LONERAL OF THI UNITIE STTWSWA#IN' W sH, Ow. 10

B-146929

To the President of tne Senate and the3peaker of the House of Representatives

This report identifies ways to improve contracting forthe overhaul and repair of Governmnent property.

Our review was made pursuant to the Budget and Account-iig Act, 192] (31 U.S.C. 53), and the Accounting and Audit-irtg Act of 1950 (31 U.S.C G67 ).

We are sending copies of this report to the Director,Office of Management and Budget; the Secretary of Defense;chc Ad:nlnistrator of General Services; and the Secretariesof the wiavy and the Air For,-e.

tJWA4 d / Comptroller Generalof the United States

Con tentsPage

DIGEST

CHAPTER

I INTRODUCTIGO 1

2 CONTRACT OVERCHARGES--IMPROVED CONTRACTADMINISTRATION NEEDED 3

Labor overcharges 4Material overcharges 7Lack of competition 8Purchase from affiliates 8Improper material pricing provisions 9Inadequate control of Government-furnished material 9

Unauthorized Government-furnishedmaterial 10

GSA supervision 11Inadequate use of cost ceilings 11

3 INTERNAL AUDIT 12

4 CONCLUSIONS, RECOMMENDATIONS, AND AGENCYAWD CONTRACTOR COMENTS 14Conclusions 14Recommendations 14Agency comments 15Contractor comments 16

5 SCOPE OF REVIEiW 17

APPENDIX

I Names and locations of contractors coveredin our review 18

II August 5, 1976, letter from the Administra-tor of General Services 19

III Map of GSA regions 23

IV Principal officials responsible for adminis-tering activities discussed in this report 24

ABBREVATIONS

GAO General Accounting Office

GSA General Services Administratj.3n

COMPTROLLER GENERAS'.S ADMiNISTRATION OF REPAIRREPORT TO THE CONGRESS CONTRACTS NEEDS IMPROVEMENT

General Services Administration

D I G E S T

in contracting for repair and overhdul of1qu;pmant, Federal agencies frequently use"time and aterial" contracts. Under suchcontracts, the Government agrees to pay aspecified rate for each hour of direct laborperformed. The specified hourly rate in-cludes labor cost, overhend, and profit.Contractors are provided material by theGovernment or are to be reimbursed for ma-terial on the basis of costs incurred.

It is clear that under such contracts thecontractors do not have an incentive tohold labor hours to a minimum because eachhour charged to the contract dds to thecontractors' profit add recovery of verheadcharges.

There are more esirable types of contractsthan time and material contracts, but in somecircumstances there is no alternative tousing these contracts. In view of the un-desirable characteristics of these contracts,Government regulations emphasize that sur-veillance must be more stringent and exten-sive than on other types of contracts andthat a celling should be established on coststo be icurred on each job. GAO auditedeight of the time and material contracts per-formed by four contractors. (See app. I.)

FINDINGS

The contract ceilings established ere gen-erally based on contractors' estimates, werenot questioned by General Services, and didnot serve their intended purpose. GeneralServices' management failed to follow up onthe results of internal audit reports deal-ing with improper billings. Appropriate cor-rective action at the time would have pre-vented many of the problems GAO found. (Seech. 3.)

u. Upon .rmovl. tho report i PSAD-76-179icwr A drshould be notd hereon.

GAO found that labor totaling $124,000performed by employees ot directly engagedin performance of repair orders was chargedto contracts with the General Services Admin-istration, even though such costs were cov-ered by overhead charges and the contractsspecifically stated only direct labor was anallowable charge. For example:

-- Mikelco Incorporated charged $2..907 for in-direct labor on one repair order, 11 per-cent of total labor charged. The chargewas supported with time cards for a book-keeper, a purchasing agent, and two clerks.

-- Midwest Maintenance and Construction, In-corporated. charged $688 on a repair order.but the time cards were for employees notengaged in direct performance o the work.Charges for indirect labor were 13 percentof total labor charged. (See p. 6.)

Contract billings to General Services con-tained charges for labor which was not ac-tually worked or which was devoted to otherthan contract work. For example:

--Mikelco charged 4,758 labor hours, $28,837for employees at a plant in one State tofive repair orders being worked at a plantin another State. (See p. 6.)

--Quality Manufacturing. Incorporated, billedthe Government for 92 hours including 41hours which were erroneously charged afterthe work was completed. (See p. 6.)

A number of contractors located in region 7ordered and received about $2.2 million ofGovernment-furnished materials during 1974and 1975. These contractors were responsiblefor keeping accountable records of Government-fu;nished material in their possession. Insome cases, GAO could not determine from thecontractors' records how the material was ac-tually used. The following conditions foundat Mikelco, Inc., illustrate this condition:

--360 paint brushes were charged to an itemthat was not painted.

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-- 10 boxes of nails were charged to a job onwhich no carpentry had beers done.

-- A8 gallons of red paint and 40 gallons ofblack paint were charged to an item whichwas painted yellow.

-- 150 sheets (4,800 square feet) of plywoodwere charged to a job which required onlya small amount of lumber. (See p. 10.)

Contractors sometimes billed General Servicesfor materials which were not used on the re-pair orders billed. For example:

.- Mikelco charged two repair orders with 760gallons of gasoline, most of which was usedf r other purposes incl .. in se in companyvehicles.

-- Midwest charged materials used to remodelits plant as direct materials to orders forthe repair of Government equipment. (Seep. 7.)

GAO did not determine the total overchargesbut referred the matter to General Servicesfor detailed review and collection.

CONTRACTOR COMMENTS

The contractors were given the opportunity tocomment on GAO's findings when the work ateach location was concluded. Mikelco did notprovide comments. The other three agreedwith some of GAO's findings and disagreedwith others. For example, Midwest believesthe definition of indirect labor contained inits contracts with General Services is opento various interpretations. Its commentswere considered during report preparation.

AGENCY COMMENTS AND ACTION

General Services stated that it was in gen-eral agreement with GAO's report and thatactions were being taken to correct the de-ficiencies. (See app. II.)

General Services also advised GAO that, onthe basis of partial audits, actions have

iiiIAtIi

been started to collect $464,000 inidentified overcharges and further collec-t'ons are expected.

RECOMMENDATIONS

GAO recommends that the Administrator of Gen-eral Services establish procedures adequateto assure that the Government is not over-charged on time and material contracts. GAOrecognizes that this may require an increasein staff, and, if people are not available,General Services should consider requestingassistance from the Defense Contract Admin-istration Services and the Defense ContractAudit Agei.ny.

GAO recommends also that procedures be estab-lished to followup with appropriate actionon matters uncovered in General Services in-ternal audit reports. Furthermore, GeneralServices should review all of its remainingtime and material contracts to determinewhether detailed audits and recovery ofimproper billings are needed.

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CHAPTER 1

INTRODUCTION

It. fiscal years i974 and 1975, Federal agencies paidabout $42.5 and $57 r.illion, respectively. fr the rehatil-itation of various types of equipment under contractsawarded and adminibtezed by the General Services Administra-tion (GSA). Each of 10 GSA regional offices (see app. III)award these contracts. and the Federal agencies locatedwithin those GSA regions are generally required to use thecontracts in obtaining repairs.

Repair services for certain property sch as air-craft support equipment. construction equipment, andmaterial-handling equipment, are obtained y awarding "timeand materi. s" contracts. These contracts, which call forpayment of specified rate for each hour of lauor performed,make up about 40 percent of the rehabilitation program. Re-pair orders placed under such contracts increased from$18.3 million in fiscal year 1974 to $24.4 million in fiscalyear 1975.

Federal agencies aving work done under time and mate-rial contracts include the Department of the Air Force; theAir National Guard: the Department of the Navy; the Depart-ment of the Army; Agency for International Development; theForest Service. Soil Conservation Service, the Deparcment ofAqriculture: and the Bureau of Indian Affairs. Bur-au ofLand Management, and bireau of Reclamation, Department of theInterior; in addition to units of GSA.

Recent Air Force use of GSA time and material contractsis a major reason the rehabilitation program has been ex-panding. Currently, repair of Air Forc- equipment makes upabcut 85 percent of the orders placed under the contracts.

The Defense Contract Administration Services generallyprovides contract administration for the military services.However. GSA also provided contract administration for equip-ment owned by the San Antonio and Warner Robins Air LogisticsC 'ters, including placing orders with the contractor, pro-viding end item inspection and acceptance, and certifyingcontractor billings for payment. In othet cases, agenciesusing these contracts perri these functions for themselves.

Federal procurement regulations specify tat time a]imaterial contracts be used only when the extent or durationof work cannot be initially estimated and when it has beendetermined that no other type of contract is suitable. Thereguxitirans also specify that a ceiling price (maximum

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allcwaole amount to be charged) be established for timc andm'.eriai and that effective cost control be required throughcoiirtant Government surveillance of the contractors' opera-Lions .

Theie limitations were established because time nd ma-terial contracts contain a built-in incentive for contractorsto incur co:ts. This is because payment, under these con-tracts are based upon the number of direct labor hours usedat specified hourly rate. Since the rate includes provi-sior for overhead and profit as well as Jabor costw, eachadditional hour charged to the contract adds to the con-tractor'i profit and recovery of overhead.

The time and material contracts awarded by GSA regionsgenerally require contractors to submit a cost estimat oneach repair order, which, when approved by the Government;becomes the cost ceiling. The amount actua.y charged foreach Lepair order is to be based upon (1) tre number of di-rect labor hours used ultiplied by the specifieJ hourlyrate and (2) the actual ct of direct meaterials used or apercent of catalog price. Allowable contract charges shouldnot exceed the cost ceiling, should not include separatechaqrges for indirect labor or indirect materials that aeproviled for in the hourly rate, and must be supported bydetailed and accurate accounting records.

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CHAPTER 2

CONTRACT OVERCHARGES--IMPROVED

CONTRACT ADMINISTRATION NEEDED

On all eight time and material contracts we audited.the contractors (see app. I) billed the Government for un-authorized and usupported labor and material charges. Theimproper charges went unchecked because GSA did not takecorrective action, although ich charges had been made knownto GSA in its internal audit reports since 1973.

We informed GSA of our findings and recommended de-tailed reviews by GSA to determine and recover the totalovercharges to the Government. GSA has told us that, on thebasis of partial audits, actions have been started to col-lect $464,000 in identified overcharges, and further collec-tions are expected. An example of the questionable billingsfollows. The aircraft engine test equipment (see p. 5)was being repaired by Mikelco Incorporated at Bandera, Texas,at the time of our review. Charges accumulated on this re-pair order included $12,456 for labor and $18.521 for mate-rials. Materials included $11,565 for contractor-acquiredproperty and $6,956 f Government-furnished material. Wequestioned the propriety of many individual charges. and asa result Mikelco at Bandera deleted charges of $7.090 forlabor and $6,668 for material. While our audit was still inprocess, the contractor submitted a partial billing thatstill contained improper charges. Nevertheless, it ws cer-tified as accurate by GSA without examining supporting docu-mentation.

AP. description of the charges on this order and the rea-sons why they were not proper are presented blow.

Description of chare Reason chargs was not poper

Labor:Regular labor ($5,950) Supporting time cards showed

this labor was actually ex-pended o work at a plant inanother State.

Regular and overtime These charges were for indirectlabor ($1,096) labor and not allowable as di-

rect charges to the contract.

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Description of charge Reason charge was not proper

Material:Gasoline--520 gallons No gasoline or diesel fuel wasDiesel fuel---57 gal- used in repairing the engineIons, Engine parts and test equipment. At least 130material gallons of gasoline were used

in a pickup truck and a car andimproperly charged to the con-tract.

Welding (subcontract The charge was for repair of anwork) 1/ oil pan which was not part of

the test equipment.

Adapters--4 each 1/ The charge was for the purchaseof four 6-volt batteries. How-ever, batteries for the testequipment were provided by theGovernment.

Adapters ./ The charge was for the purchaseof a tool and was not an author-ized charge.

Brackets--4 each The brackets were actually slid-Packing--6 rolls ing glass windows and the pack-Lumber (2" by 12")-- ing was felt. These building ma-336 board feet terials had not been used on theLumber (2" by 4")-- test equipment.432 board feet

Various types and The repaired equipment was notcolors of paint total- painted.ing over 150 gallons,all of which were pro-vided by the Govern-ment

l/Charges included in the billing certified by GSA while ouraudit was in progress.

Also, we found improper charges on all of the contractsreviewed, as listed below.

LABOR OVERCHARGES

1. Labor totaling $124,000 performed by employees notdirectly engaged in performance of repair orders was chargedto the GSA contracts. However, the contracts stated that

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only the labor of personnel directly engaged in performanceof the work was an allowable charge. For example:

--Mikelco at Bandera. charged $2,907 for indirect aboron one repair order, 11 percent of total labor charged.The charge was supported with time cards for a con-tract administrator, a supply manager, a bookkeeper,a purchasing agent, and two clerks.

-- On another repair order, Midwest Maintenance and Con-struction, Incorporated, of San Antonio- charged$688 for indirect labor, 13 percent of total laborcharges. The charge was supported by time cards fora production controller, two quality inspectors, twosupply workers, and a purchasing agent.

2. Contract billings contained charges for labor whichwas not actually worked or which was devoted to other thancontract work. For example:

-- Mikelco at Bandera charged 4,758 labor hours, $28,837,for employees at a plant in one State to five repairorCers being worked at a plant in another State. Onone repair order, the out-of-rtate labor charges began6 dys before the equipment was shipped to the con-tra.Lor for repair and continued for 4 days after theequipment was completed and accepted by the Govern-ment.

-- Quality Manufacturing. Incorporated, billed the Govern-ment for 92 hours including 41 hours which were erro-neously charged after the work was completed.

-- Mikelco at San Antonio, billed for about 150 laborhot 's reportedly incurred on one repair order over a9-month period, although the equipment involved wasat a subcontractor's plant during that period.

3. The Government authorizes contactors to use overtimein order to reduce repair times. However, use of overtimeon the GSA contracts resulted in increased costs without areduction in repair times. For example:

--Mikelc. at Bandera charged overtime at one and one-half times tile regular hourly rate during a 6-weekperiod. However, Mikelco charged no regular laborduring the ane time period and the repair orderscheduled to require 2 months was still incompleteafter 11 months.

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4. Contractors adjusted their labor records, to avoidlosses on repair orders when labor ceilings wre exceededand to increase charges on orders where the maximum numberof labor hours had not been reached. The following instancesfound at Quality Manufacturing are illustrative of the prac-tices we found.

-- Quality billed for 623 labor hours on one repair or-der, the exact amount of the labor ceiling. Althoughthe items had been in process for over 11 wee'{s, 63percent of the labor charges, 393 hours, were madeduring the last 2 weeks. Time cards supporting 64 ofthe 393 hours had initially been charged to other re-pair orders but were subsequently altered and chargedto the billed order.

--Quality Manufacturing reached the ceiling for laborcharges on another repair order on My 23, 1975.After that date, time cards for 73 ,urs charged tothe order were altered and charged o other jobs.

MATERIAL OVERCHARGES

1. Contractors billed for materials which were not usedon the repair orders billed. This includes materials whichwere not usable on the equipment repaired and materials whichwere not usable in the quantities charged. For example:

--Mikelco at San Antonio charged two repair orders with760 gallons of gasoline. Mikelco's representativeadmitted that most of the gasoline had not been usedon the repair orders charged, but rather, for otherpurposes, including use in company vehicles.

-- Midwest of Oklahoma City charged such materials aslocks, doors, hinges, and sheet metal used in remodel-ing its plant to orders for repair of Governmentequipment.

--Mikelco at Bandera purchased shop and office equip-ment for company use and billed contract jobs as di-rect materials. Electric wall clocks were describedon a billing document as gauges.

-- Midwest of Oklahoma City charg.d two drive shafts tuan item that required only one, and two electricalswitches were charged when only one was used.

2. ven though the contracts provided that materialcharges be based on actual cost, the contractors used esti-mated costs for billing purposes. For example:

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-- Mikelco at San Antonio billed packaging materialscosting $14,720 to contracts jobs at estimated costsof $22.456.

-- Midwest of San Antonio billed the Government esti-mated costs of $8,108 for repaiz parts which cost$2,348.

-- Mikelco at Abilene billed the Government $3,300 forthe manufacture of replacement parts. Mikelco:s rep-reser.ative said that the charges represented thelabor required to fabricate the parts, but he couldnot provide supporting time cards because the cJrdshad been used to support labor charges to other jobs.

-- Mikelco at Bandera charged $6,065 for quantities fseven different parts to a single job order. Mikelcostated the parts came from company stock but couldnot provide support for the costs charged.

In addition to noting the overcharges, we noted de-ficiencies in the contractors' purchasing and pricing prac-tices. These included failure to obtain competition, buy-ing from affiliates, and pricing material at retail pricesrather than cost. We also noted inadequate control overGovernment-furnished material. Examples are discussed be-low.

LACK OF COMPETITION

In GSA regions 7 and 4, where charges for materials arebased on contractors' costs, regulations require contractorsto procure materials at the most economical price reasonablyavailable. In reviewing six contracts performed by Midwest,Mikelco. and Quality Manufacturing, we found that competi-tive bia rom vendors were not routinely obtained or werenot documented. Accordingly, there was no assurance thatprices paid by the contractors and billed to the Governmentwere the best available. Mikelco at San Antonio, for ex-ample, continued to procure yellow paint from the same vendorwithout getting competitive bids, although the unit priceincreased from $6.95 to $10.95 a gallon.

PURCHASES FROM AFFILIATES

Midwesc purchased materials from affiliated 1/ supplycompanies at. prices far in excess of those available

1/The president and the omptroller of Midwest were presidentand secretary-treesurer, respectively, of the supplycompany.

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elsewhere. During the same period, the Air Force purchasedidentical parts from the original manufacturer at consider-ably lower prices, as shown below.

Midwest purchases Air Force purchasesQuantity Unit cost Quantity Unit cost

Support 45 $369 17 $221Seal 45 60 45 37Seal 45 62 32 37Cartridgeassembly 45 313 37 124

Shaft 45 208 44 57Oil slinger 10 77 53 12Sleeve 10 59 63 13

We did not determine where Midwest's affiliated supplycompany cbtained the parts or how much they actually cost.From the table above, however, it appears likely that theaffiliate added a sizable price markup when transferring theparts to Midwest. Based on Federal procurement regulations,a markup of this nature generally is not an allowable con-tract charge. Transfer prices at other than costs are per-mitted in certain circumstances if they are found to be rea-sonable. In the case shown, however, the contractor's trans-fer prices appear unreasonable and should have been ques-tioned by GSA.

IMPROPER MATERIAL PRICING PROVISIONS

The contracts in region 9 violated Federal procurementregulations by allowing contractors to bill materials basedon retail prices rather thin actual costs. As a result,Western Lift Truck, Incorporated, billed certain items at anaverage of 67 percent above cost and other items at 95 per-cent above cost. A carburetor, for example, was purchasedfor $46 and billed to the Government at $105. For materialssuch as lubricants, manufacturers' pLice lists were notavailable, and Western arbitrarily set the prices to becharged to the Government. Using th's procedure, Westernbilled $22.50 per ten gallons for hydraulic oil purchasedfor $8.20.

INADEQUATE CONTROL OF GOVERNMENT-FURNISHED MATERIAL

The Air Force's Air Logistics Center provided selectedmaterials at no cost to several contractors, as provided bythe contracts. A number of contractors located in region 7ordered and received about $2.2 million in Government-furnished material durirg fiscal years 1974 and 1975.

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These contractors were responsible for establishingadequate property control procedures and for maintainingaccountable records for the Government-furnished materialin their possession. GSA, however, did not provide adequatesurveillance to assure that the contractors carried outtheir responsibilities. In some cases receipts and issuesof Government-furnished material were not recorded onstock records. In other cases, Government-furnished mate-rial received was recorded on inventory records and latershown as issued to specific repair orders but was not usedon the repair orders charged. We could not determine fromthe available contractor records how tne material was ac-tually used, and there was no assurance it was used for au-thorized purposes. The following conditions found at Mikelcoillustrate this condition.

--360 paint brushes were charged to an item that was notpainted.

--10 boxes of nails were charged to a job on which nocarpentry work had been done.

--48 gallons of red paint and 40 gallons of black paintwere charged to an end item that was painted yellow.

--150 sheets (4,800 square feet) of plywood were chargedto a ob which required only a small amount of lumber.

UNAUTFORIZED GOVERNMENT-FURNISHED MATERIAL

Contractor material requisitions are received at theSan Antonio Air Logistics Center where they are either filledfrom inventories at that location or passed on to other Gov-ernment supply sources to fill. Individual requisitions arenot normally reviewed by Air Force personnel to determineif the types and quantities of materials ordered are proper,based on the equipment being repaired ad he contract defini-tion of direct materials. In the abser-e of an effectivereview by the Air Force, contractors reqisitioned and wereprovided unauthorized items, such as office supplies, light-ing equipment, and hand tools. Mikelco at San Antonio, forexample, had requisitioned fluorescent desk iaitips for usein office and shop areas although it was only authorized torequisition material to be used directly i equipment re-pairs. The need for improvement in the control of Government-furnished material has been brought to th2 Air Force's atten-tion in an earlier GAO report (PSAD-76-78, Mar. 8, 1976).We have no further recommendations on this matter at thistime.

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GSA SUPERVISION

In the 17-State area covered by GSA regions 4, 7, and 9,there were about 33 time and material contracts. Inplantsurveillance of these contracts by GSA representatives con-sisted primarily of periodic visits to inspect and acceptrepaired items. Contractor accounting, parts purchasing,and property control procedures were not adequately eval-uated, and contractor billing documents were not auditedprior to payment. In Some cases, GSA made limited reviewsof the billing documents it certified as accurate for theSan Antonio and Warner Robins Air Logistics Centers, but thereviews were ineffective in detecting improper charges.Billing documents for other ordering agencies, such as theAgency for International Development and McClellan Air ForceBase, received even less attention and were not audited byGSA or the ordering agencies.

Wc discussed the lack of onsite contract surveillancewith GSA and questioned it as to the feasibility of increasedstaffing. GSA officials advised us they were seeking addi-tional personnel authorizations but could not predict the out-come.

INADEQUATE USE OF COST CEILINGS

Cost ceilings on the GSP contracts we reviewed were gen-erally established by the ordering agency's approval of laborand material estimates contractors submitted on individual re-pair orders, In many cases, the estimates were approvedwithout adequate evaluation.

Air Force personnel who approved contractor estimatesdid not know the condition of the equipment to be repairedor which components required repair or replacement. Con3e-quently, they could not accurately estimate labor and mate-rial required. In general, the Air Force accepted contrac-tor estimates which did not exceed predetermined dollarlimits. The dollar limits were based on percentages ofequipment replacement costs or nationwide average costs torepair like items during the preceding year. Neither methodconsiders the actual condition of the equipment to be re-paired.

We noted several instances in which overstated costceilings on Air Force orders permitted contractors to chargefor unneeded labor hours. We also found contractor billingsfor labor were usually equal to or varied only slightly fromthe ceilings established for work orders. In our opinion,the ceilings on Air Force work orders were not properlyestablished and did not provide an effective control overrepair costs.

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CHAPTER 3

INTERNAL AUDIT

The need for improved cntract surveillance hadpreviously been brought to the attention of GSA contract ad-ministrators. In each region we visited, a GSA Office ofAudits had reported many of the same deficiencies found dur-ing our review. Reporting the deficiencies, however, didnot bring about any real or permanent improvements in con-tract administration or contractor performance.

In 1973 the Office of A i-ts reviewed two contractorsin region 7 and reported

--discrepancies in charges for labor and material,

--inadequate control of and accounting for Government-furnished nlaterial, and

-- inadequate competition in procuring materials chargedto the contracts.

Each of the above conditions still existed at the time of ourrev .ew.

In May 1974 the Office of Audits reviewed a region 4contractor and reported discrepancies in charges for bothlabor and material. Fourteen months later the Office ofAudits reviewed the same contractor and found that condi-tions identified in the prior review still existed. Theyreported that (1) time cards were altered, (2) the Govern-ment was charged for labor hours not actually paid to em-ployees, and 3) discounts on parts purchases were notpassed on to the Government. Seven months prior to thesecond audit, the contractor had been awarded a new contractwithout a preaward survey to determine if conditions iden-tified in the first audit had been corrected. The GSA con-tracting officer had certified that the contractor was a re-sponsible bidder, based on its having successfully performedunder previous contracts.

Following ,:i audit of a region 9 contractor in January1974, the Office of Audits reported that the contractor'saccounting system and controls were such that the basiscould not be determined for $9,436 of $21,249 in materialcosts billed to the Government. The auditors further con-cluded that in some cases the contractor billed on the basisof estimates rather than actual material usage.

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In our review we found that region 9 contractors werestill not required to aintain accounting systems adequateto support contract charges for either labor or material.The contractor we reviewed, Western Lift Truck, dd nothave time cards to support some labor charges, and some ofthe time cards provided were so incomplete w could not de-termine whether the labor hours were expended on Governmentor commercial work. Furthermore, the contractor's materialcontrol and accounting procedures were inadequate to supportthe types, quantities, and in some cases the unit prices ofparts charged to the Government.

Although Federal procurement regulations indicate chatadequate cost accounting systems are essential for cost-reimbursable-type contracts, GSA region 9 did not normallyevaluate contractors' accounting systems when performingpreaward surveys. Western was assumed to have an adequateaccounting system since it had been in the equipment repairbusiness for several years.

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CHAPTER 4

CONCLUSIONS, RECOMMENDATiONS, AND

AGENCY AND CONTRACTOR COMMENTS

CONCLUSIONS

Time and material contracts provide contractors anincentive to incur unnecessary costs because hourly laborrates include labor, overhead, and profit. Consequently,each hour charged to the contract adds to the contractor'sprofit and to his recovery of overhead. Similarly, whencontractors or their affiliates are permitted to profit di-rectly from materials charged to the contract, there is anincentive to incur unnecessary material costs. Alth-lgnthere are more desirable types of contracts, in some circum-stances, there is no alternative to using time and materialscontracts.

In view of the undesirable characteristics of thesecontracts, Government regulations emphasize that surveil-lance must be more stringent and extensive than on othertypes of contracts and that a ceiling should be establishedon costs to be incurred on each job performed.

On the CSA contracts we reviewed, the ceilings weregenerally based on contractors' estimates that wereaccepted by the Air Force and not questioned by GSA. As aresult, the ceilings did not serve their intended purpose.GSA surveillance was also inadequate.

Furthermore, GSA management failed to follow up on theresults of initial audit reports dealing with this matter.We believe that appropriate corrective action on the reportswould have prevented many of the problems discussed in thisreport.

RECOMMENDATIONS

We recommend that the Administrator of General Servicesestablish adequate procedures to assure that the Governmentis not overcharged on time and material contracts. We recog-nize that this may require an increase in staff resources,and, if they are not available, GSA should consider request--ing assistance from the Defense Contrac' AdministrationServices and the Defense Contract Audit a ncy.

We recommend also that fllowup procedures be insti-tuted to insure that appropriate action is taken on GSAinternal audit reports. Furthermore, in addition to the

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reviews started at our request. GSA should review itsremai-nng time and material contracts t, determine whetherdetailed audits and recovery of imprope: bliiiys are appro-priate.

AGENCY COMMENTS

GSA stated in its formal comments (see app. II) thatit was in general agreement with our report and that thefollowing corrective actions were being implemented:

--Contractors will be required to (1) maintain a writ-ten procuremc.it system to insure that parts are pur-chased competitively, (2) reconcile labor hours withpayroll records at iadst uarterly, (3) maintain timecards in ink, and (4) document the use of intercom-pany labor. Additionally, instructions have beenfurnished to the regions on the administration oftime and material contracts and controllingGcvernment-furnished material.

-- Every consideration is bing given toward improvingsurveillance of contractor operations. These con-siderations include assistance from the Defense Con-tract Administration Services and using inspectioncapability from other program areas. Furthermore,attempts are being made to determine if present pro-cedure could be adapted to permit nother method ofcontracting. When applicable, the benefits of nego-tiatir these contracts will be evaluated.

-- Upon request, GSA's O.fice of Audits will conductpreaward reviews of contractors' acounting systemsand post audits of the actual billings under timeand material contracts. Deficiencies in the con-tractors' accounting systems will be reported tothe contracting officers, The accounting systemscan be resurveyed, upon request, in accordance withestablished followup procedures.

--Selected audits are being made commensurate with thepresent funding situation. In addition, attempts aremade to reprogram funds in order to contract out alarger part of the contract audit workload.

--GSA regional offices have been notified of the find-ings of this report and requested to review theirtime and material contracts for heavy equipment re-pair. If any improprieties are revealed, a detailedinternal audit will be requested. A covering monthlyreport has been established to monitor regional prog-ress in the conduct of their reviews.

15

We believe the above corrective actions, if effectivelyimplemented, should provide assurance that the Governmentwill not be overcharged. GSA should, however, review all ofits time and material contracts instead of limiting its re-view to heavy equipment contracts.

CONTRACTOR COMMENTS

The contractors were also given an opportunity to com-ment on our findings when the work at each location con-cluded. Mikelco did not provide comments. The other threeagreed with our findings in some instances and disagreedwith others. For example, Midwest believes he definitionof indirect labor contained in its contracts with GSA isopen to various interpretations. Their comments were con-sideied during report preparation.

CHAPTER 5

SCOPE OF REVIEW

We reviewed GSA contract administration procedures andaudited selected time and material contracts in regions 4(Atlanta), 7 (Fort Worth), and 9 (San Francisco). In re-gion 7, where the cobt of time and"material contract orderswas over 50 percent of the national total, we audited thefive largest contracts, three performed by Mikelco and twoby iddrest. In regions 4 and 9, we audited one contract per-formed by Quality Manufacturing and two contracts performedby Western Lift Truck, respectively. Our audits onsistedof evaluating contractors' operating procedures w ich affectcontract costs and of examining supporting documentation for'%eselected bil.ling documents.

We also discussed various aspects of contract adminis-tration with officials of the following agencies which usedthe timf and material contracte.

San Antonio Air togistice CenterSan Antonio, Texas

Warner Robins AL Logistics CenterWarner Robins, Georgia

McClellan Air Force BaseSacramento, California

Agency fo: International Development.New Cumnerland Army Depot, Pennsylvania

Mare Island Naval ShipyardVallejo, California

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APPENDIX I APPENDIX I

NAMES AND LOCATIONS OF

CONTRACTORS COVERED IN OUR REVIEW

Midwest Maintenance and Constructions IncorporatedOklahoma City, OklahomaSan Antonio, Texas

Mikelco IncorporatedAbilene, TexasBandera, TexzsSan Antonio, Texas

Quality Manufacturing, IncorporatedEastaboqa, Alabama

Western Lift Truck, IncorporatedSacramento, CaliforniaSacramento and Hayward, California

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APPENDIX II APPENDIX I

UNITED STATES OF AMRICA

GENERAL SERVICES ADMINISTRATIONWASHINGTON, O , O

August 5, 1976

Honorable Elmer B. StaatsComptroller General of the United StatesGeneral Accounting OfficeWashington, DC 20548

Dear Mr. Staats:

Thank you for your letter of May 26, 1976, transmitting a copy of thedraft report to the Congress entitled "Repair Program for GovernmentProperty -- Effective Surveillance Needed. "

This report is a consolidation of regional GAO audits concerning thecontractor operating procedures of eight time and material contractsfor heavy equipment repair issued and administered by our regionaloffices at Atlanta, Fort Worth, and San Francisco. The thrust of thereport is that GSA is not providing adequate contract administrationand contractor surveillance as required by the Federal ProcurementRegulations for time and material contracts. As a result, some con-tractors were overcharging the CGrc': nment for labor and materials.we are in general agreement with this report subject to the commentsbelow.

With regard to statements contained on pages 13 through 16 of thereport, the General Services Ad ninistration (1) provided a degree ofcontrol for government furnished material (GFM) in Region 9, butthe control was not commensurate with the volume in Regions 4 and 7;(2) responded to the corrective action recommended in the internalaudit reports of 1973 and 1974 by correcting contract provisions andadding three Quality Assurance Inspectors; (3 r , tinized contractorestimats for excessive charges; and (4) made visits over and abovethose required to inspect and accept end items; owever, they werenot of sufficient frequency to improve in-plant surveillance.

With respect to item (2) above regarding our response to internalaudit recommend tions, we believe that the actions taken were com-mensurate with the volume of business at that time.

GSA management did follow up on the results of internal audits. Asindicated above, there was response at both the Central Office and

Kce(p Fitcdont in oatr Ftupr I'ith '.S. Savings Bondi

19

APPENDIX II APPENDIX II

regional office levels with respect to changes in contract provisionsand additional personnel. It is agreed that many of the problems wouldnot have occurred if appropriate corrective action had been taken.However, it must ite stated that at the time corrective actions weretaken, they were commensurate with and adequate for the vo ume ofbusiness. For instance, the most rapid growth occurred in Region 7where volume under these contracts increased from $1.6 million intFY 973 to $12.4 mllion in FY 1975.

We believe that recent and current efforts to impie:nent the recom-mendations contained in this report, and thosc of the follow-on internalaudit reports, will serve to increase the benefits that will accrue to theGovernment through this maintenance andl repair program. In thisregard, we are reviewing the entire program with respect to resourcerequirements, concepts, and procedures.

We are pleased to provide you, as an enclosure tc this letter, curcomments on each specific recommendation.

Sincerely,

jcK Eckerd//lninistrator

Ky Enclosure

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APPENDIX II APPENDIX II

SSA commenti on GAO draft report tothe C(;agres. entitled "Repair Programfor Government Property -- Effective

Surveillance Needed"

Recommendation. That GSA establish adequato procedures to assurethat the Government is not overcharged.

Comment. Actions have been initiated to improve those areas identi-fled in the GAO report and recent GSA audit reports to ensure that theGovernment is not overcharged. These actions include changes incontract provisions that require the contractor to (1) maintain a writtenprocureinent system to ensure that parts are purchased competitively;(2) reconc,!e labor hours with payroll records at least quarterly; (3)rnaintain time ca-ds in ink; and (4) document the use of intercompanylabor. Additionally, instructions have been furnished to the regions onthe administration of time and material contracts and controlling GFM.

Recommendation. hat if GSA annot obtain additional esources,then it should request assistance from Defense Contract Administrationservice (DCAS? or Defense Contract Audit Agency (DCAA).

Conmment. We are presently exploring every possible aenue thfat willimprove the rate and quality of in-plant surveillance. Tese considera-tions include assistance from the Defense Contract AdministrationServices (DCAS) and GSA inspection capability in other program areas.Furthermore, we are attempting to ascertain if present procedurescould be adapted for another method of contracting. When applicable,we will also evalulte the benefits of negotiating these contracts.

Recommendation. That followuD procedures be nstituted to insureappropriate action taken on '3SA inter'ial audit reports.

Comment. Upon request, the Office of Audits conducts preawardreviews of contractors' accountng systems and post audits of theactual billings under the time ani materials contracts. Deficienciesin the contractors t accounting systems are reported to the contractingofficers. The accounting systems are resurveyed, upon request, inaccordance with established followup procedures.

Selective audits are being made commensurate with our presentfunding situation. We are attempting, however, to reprogram ourfunds to allow us to contract out a larger part of the contract auditworkload.

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APPENDIX II APPENDIX II

Recommendation. That GSA review other T & M contracts to deter-mine whether detailed audits are required.

Comment. We have alerted the GSA regional offices as to the findingsof this report and requested that they review their time and materialcontracts for heavy equipment repair. If any improprieties ae revealed,a detailed internal audit will be requested. A covering monthly reporthas been established to monitor regional progre 1 the onduct of theirreviews.

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APPENDIX III APPENDIX III

U'

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APPENDIX IV APPENDIX IV

PRINCIPAL OFFICIALS

RESPONSIBLE FOR ADMINISTERING

ACTIVITIES DISCUSSED IN THIS REPORT

Tenure of officeFrom To

CENERAL SERVICES ADMINISTRATION

ADMINISTRATOR OF GENERAL SERV:CES:Jack Eckerd Nov. 1975 PresentDwight A. Ink (acting) Oct. 1975 Nov. 1975Arthur F. Sampson June 1972 Oct. 1975

DEPARTMENT OF DEFENSE

SECRETARY OF DEFENSE:Donald H. Rumsfeld Nov. 1975 PresentJames R. Schlesinge- July 1973 Nov. 1975

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