oversight

Problems in the Administration and Use of Project Orders by the Navy

Published by the Government Accountability Office on 1971-04-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Problems In The Adminis
And Use Of Project Or
The Navy 8-17ro49




        .
BY THE COMPTROLLER    GENERAL
OF THE UNITED  STATES
                                 COMPTROLLER      GENERAL        OF    THE      UNITED       STATES
                                                WASHINGTON.       D.C.       20548




     B-111049

     Dear     Mr.    Chairman:

               In your letter         of October        7, 1970, you asked us to perform                     a review
     of certain      intradepartmental              financial      transactions        within      the Department
     of Defense.          Your     concern      was directed          primarily       to the use of project
     orders      to incur      obligations       against       appropriations         which       are subject      to
     authorizing        legislation.         Specifically,        you (1) questioned            the legality      of
     obligations       generated         by project        orders     when they involve             an intraser-
     vice transaction            and (2) expressed            concern       that unliquidated         obligations
     generated       by project         orders     result      in the freezing        of funds that other-
     wise would        be available         for reprogram.min             g to support        other    important
     requirements.             The results       of our review            are set forth       in this report.

              As   agreed    with       your office,     we (1) limited     our review        to the De-
     partment       of the Navy         and (2) discussed      the report      with officials       of the
     Office     of the Assistant          Secretary     of Defense      (Comptroller)        and the De-
     partment       of the Navy.          Their     comments     are included         in the report    where
     appropriate.

                Also,    in accordance       with an agreement           with your office,         we are
     distributing         copies    of this report      to the Secretary       of Defense        and the
     Secretary         of the Navy.        We plan to make no further            distribution         of this
     report       unless     copies    are specifically       requested,     and then we shall make
     distribution         only after     your agreement         has been obtained           or public     an-
     nouncement           has been made by you concerning                 the contents        of the report.

                                                                         Sincerely            yours,




                                                                         Comptroller                  General
                                                                         of the United                States

     The Honorable        John        C. Stennis
61   Cha lrman,      Committee           on Armed           Services                 5 sfl
     United   States    Senate




                            50Tf-i    ANNIVERSARY             1921-      1971
I
I            COMPTROLLER
                       GEXERAL'S
                               REPORT                           PROBLEMS
                                                                       IN THEADMINISTRATIONAND
I            TO THB.COMMITTEE
                           Ofl                                     ,FF;ROJECT
                                                                            ORDERSBY THE NAVY 1
I            ARMEDSERVICES
I
I            UiUTEDSTATESSENATE
I
I
I
             DIGEST
             ------
I
I
 I           WHYTHEREVIEWWASMADE
    I
    I                  The Chairman of the Senate Committee on Armed Services asked the General
    I                  Accounting Office (GAO) in October 1970 to review the Department of De- /
    I                 L ense practice of obligating       funds    to finance
                                                                         _b.._-." project
    I                                                                    -*-.---'i.-ssY-.s     ~~~**-**~L
                                                                                     --IF~~~*y~~~~swsqg.g>&%
                                                                                                      ;'&"
                    f
                                                           --.- >&+p*;-l<d
                            ,;;-FL=c-~L-~.~.~..~~~.~~~,~,~.~~~~~~~~~~~~~~.-.~
    I
    I                  It was agreed that the review would be limited                 to the Navy.
    I

                         Project orders. a~~,~onsLde~red ~ana'l-ogous--~o~~ooAlme~ci.~~~~~t~ract~~~however,
                         bo~r%%$~?reFederal            Government activities.       When the order is ac-
                         cepted by the performing activity,       an obligation     is established  against
                         the appropriation     of the sponsoring activity,      just as it would be if a
                         contract had been made with a commercial firm.            An example of this pro-
                         cess is shown on page 8, where the Naval Ship Systems Command(the
                         sponsorin   activity)    placed a project order with the Mare Island Naval
                         Shipyard 9the performing activity)       for overhaul and conversion of a
                         submarine.

                         The Committee Chairman

                         d-questioned   the legality    of obligations   generated by project    orders
                             between two activities    in one military   service and
                     d      --expressed concern that unliquidated   obligations generated by proj-
                               ect orders freeze funds that otherwise would be available  for other
                               requirements.   (See app. I.)

        I
        I    FIAK'IA'GS
                      AND COiK'LUSIOiVS
        I
        I
        I                Naval activities   have used project   orders for many years,    under statu-
        I                tory authority.    (See p. 4.)
        I
        I
        I                About $10.8 million   obligated on 10 project orders as of June 30, 1970,
         I               did not appear to be needed for completion of the projects.     The obli-
        I
        I                gated funds were not recouped by the sponsoring activities   on a timely
        I                basis.   GAO reviewed a total of 70 project orders having unexpended
        I                balances of $96 million    at four naval activities. (See p. 7.)
        I
        I
        I
        I
                         GAO reviewed 40 other project orders that were completed in fiscal year
        I                1970 and had no outstanding balances.  Six of those had obligated funds
        I
        I                in excess of needs for varying periods of time.   (See p. 7.1
        I
        I                                                                     /pF(iL   23,1.9 7 ‘.
         I   Tear   Sheet
        I
         I                                                  1
                                                                                                    I

    Sponsoring activities  were not withdrawing excess obligated funds                              i
    even when they were aware of the excesses.   For example, on the sub-:              I           )
    marine project order (see p. 8), Mare Island told the Ship Systems                              I
    Commandthat about $9 million   was available for withdrawal; yet
    7 months went by before the Ship Systems Commandbegan to deobligate
    funds.

    In some cases sponsoring activities       issued project orders that were
    not specific    on the work to be done. As a result,      cost estimates used
    as a basis for obligating     funds were overstated and substantial     funds
    were restricted    needlessly for long periods.      The law requires speci-
    ficity   before obligation   of funds; therefore,    GAO believes that the
    validity   of those obligations    as originally  recorded may be questionable.             I
                                                                                                I
     (See pp. 12 to 14).                                                                        I
                                                                                                I
                                                                                                l
    Established controls for timely recoupment of obligations   were not al-                    I
    ways used. GAO found, however, that the Naval Audit Services had iden-                      I

    tified   some instances in which funds could be released for other purposes.                i
     (See p. 15).
                                                                                                I
    GAO's ability    to review unexpended project order balances at the Phila-
                                                                                                I
    delphia Naval Shipyard, the Naval Electronics      Laboratory Center, and               I
    the Naval Research Laboratory was hampered by the accounting systems                    i
    used. Costs were accumulated under locally       established   job orders,              I
                                                                                            I
    rather than under project orders, and project order funds became commin-                I
    gled.    That situation   could affect the performing activity's    ability to
    identify   excess funds for the purpose of recoupment.       (See pp. 10 and 11).           i

     In addition to using project orders, naval activities          use work requests
     to obtain goods and services from other naval activities.           Funds are
     obligated at the time work requests are accepted.          Work requests, used         I
     for goods and services not eligible       for procurement under project orders,        [
     may involve procurement by contract from commercial sources.           Funds           I
     obligated under project orders are available        until the project is com-          I
                                                                                            I
     pleted; under work requests the funds are available         for only the period        I
     set by the appropriating    legislation.      GAO believes that the use of work        I
                                                                                            I
     requests for outside contracting       may result in the freezing of funds for         I
     a significant   period before the funds are actually       needed, Another pos-        I
  hsible     adverse effect could be the distortion      of unobligated balances re-        I
                                                                                            I
     ported to the Congress.     {See pp. 18 and 19).                                       I
                                                                                            I


MATTERS FOR CONS?DERATIONBY THE COMMITTEE
                                                                                            I
    The Committee may wish to consider      having the Secretary   of the Navy

       --direct  sponsoring activities to put greater     emphasis on ensuring
          that unneeded funds are promptly identified     by performing activi-
          ties and recouped and

       --require   stricter  adherence to instructions   and control   procedures
          on project orders.
                         Contents
                                                           Page

DIGEST                                                       1

CHAPTER

  1        INTRODUCTION
               Definition  and purpose of project
                 orders
               Definition  and purpose of work requests
               Extensive use of project  orders and
                 work requests by the Navy

  2        NEED FOR MORE TIMELY RECOUPMENTOF EXCESS
           OBLIGATIONS                                       6
               Excess project     order balances not
                 promptly recouped by sponsoring
                 activities                                  8
               Lack of specificity     in project orders    12

  3        GREATERADHERENCETO CONTROLSFOR IDENTIFY-
           ING EXCESSOBLIGATIONS REQUIRED                   15
               Existing   controls  not used in all in-
                  stances                                   15
               Internal   audits identify   substantial
                  unneeded balances                         17

  4        USE OF WORKREQUESTS                              18

   5       MATTERSFOR CONSIDERATION BY THE COMMITTEE        20

   6       SCOPEOF REVIEW                                   21

APPENDIX

   I       Letter of October 7, 1970, from the Chair-
             man, Committee on Armed Services,  United
              States Senate, to the Comptroller General     25
 COMPTROLLER
           GENERAL'S
                   REPORT                      PROBLEMSIN THE ADMINISTRATION AND
 TO THE COMMITTEE
                ON                             USE OF PROJECTORDERSBY THE NAVY
'ARMED'SERVICES                                B-171049
 UNITEDSTATESSENATE

DIGEST
------

WHYTHEREVIEWWASMADE
    The Chairman of the Senate Committee on Armed Services asked the General
    Accounting Office {GAO) in October 1970 to review the Department of De-
    fense practice of obligating funds to finance project orders.

    It was agreed that      the review would be limited     to the Navy.

    Project orders are considered analogous to commercial contracts;           however,
    both parties are Federal Government activities.           When the order is ac-
    cepted by the performing activity,      an obligation     is established  against
    the appropriation     of the sponsoring activity,     just as it would be if a
    contract had been made with a commercial firm.           An example of this pro-
    cess is shown on page 8, where the Naval Ship Systems Command (the
    sponsorin   activity)    placed a project order with the Mare Island Naval
    Shipyard 9 the performing activity)     for overhaul and conversion of a
    submarine.

    The Committee Chairman

         --questioned  the legality    of obligations   generated by project   orders
            between two activities    in one military   service and

         --expressed concern that unliquidated   obligations generated by proj-
            ect orders freeze funds that otherwise would be available  for other
            requirements.   (See app. I.)


FINDINGSAND CONCLUSIONS
    Naval activities      have used project    orders for many years,   under statu-
    tory authority.       (See p. 4.)

    About $10.8 million     obligated on 10 project orders as of June 30, 1970,
    did not appear to be needed for completion of the projects.       The obli-
    gated funds were not recouped by the sponsoring activities     on a timely
    basis.   GAO reviewed a total of 70 project orders having unexpended
    ba‘lances of $96 mil‘lion at four naval activities.    (See p. 7.)

    GAO reviewed 40 other project orders that were completed in fiscal            year
    1970 and had no outstanding balances.   Six of those had obligated           funds
    in excess of needs for varying periods of time.    (See p. 7.)
    Sponsoring activities  were not withdrawing excess obligated funds
    even when they were aware of the excesses.   For example, on the .sub- .
    marine project order (see p. 81, Mare Island told the Ship Systems
    Commandthat about $9 million   was available for withdrawal; yet
    7 months went by before the Ship Systems Commandbegan to deobligate
    funds.

    In some cases sponsoring activities       issued project orders that were
    not specific    on the work to be done. As a result,      cost estimates used
    as a basis for obligating     funds were overstated and substantial     funds
    were restricted    needlessly for long periods.      The law requires speci-
    ficity   before obligation   of funds; therefore,    GAO believes that the
    validity   of those obligations    as originally  recorded may be questionable.
    (See pp. 12 to 14).

    Established controls for timely recoupment of obligations   were not al-
    ways used. GAO found, however, that the Naval Audit Services had iden-
    tified   some instances in which funds could be released for other purposes.
     (See p. 15).

     GAO's ability    to review unexpended project order balances at the Phila-
     delphia Naval Shipyard, the Naval Electronics      Laboratory Center, and
     the Naval Research Laboratory was hampered by the accounting systems
     used. Costs were accumulated under locally       established   job orders,
     rather than under project orders, and project order funds became commin-
     gled.    That situation   could affect the performing activity's    ability to
     identify   excess funds for the purpose of recoupment.       (See pp. 10 and 11).

    In addition to using project orders, naval activities       use work requests
    to obtain goods and services from other naval activities.        Funds are
    obligated at the time work requests are accepted,       Work requests, used
    for goods and services not eligible     for procurement under project orders3
    may involve procurement by contract from commercial sources.        Funds
    obligated under project orders are available      until the project is com-
    pleted; under work requests the funds are available      for only the period
    set by the appropriating  legislation.     GAO believes that the use of work
    requests for outside contracting     may result in the freezing of funds for
    a significant period before the funds are actually      needed, Another pos-
    sible adverse effect could be the distortion      of unobligated balances re-
    ported to the Congress.   {See pp. 18 and 19).

MATTERS FOR COiVSi-DERATION
                          BY THE COIWITTEE

     The Committee may wish to consider      having the Secretary   of the Navy

       --direct  sponsoring activities to put greater     emphasis on ensuring
          that unneeded funds are promptly identified     by performing activi-
          ties and recouped and

       --require   stricter  adherence to instructions   and control   procedures
          on project orders.
                                CHAPTER1

                               INTRODUCTION

       At the request of the Chairman of the Committee on Armed
Services,    United States Senate, and in accordance with sub-
sequent agreements with his office,             the General Accounting
Office has reviewed the Department of the Navy's practice                 of
obligating    funds, which are subject to authorizing            legisla-
tion, to finance project        orders.      The Chairman (1) questioned
the legality     of obligations     generated by project      orders when
they involve an intraservice          transaction     and (2) expressed
concern that unliquidated        obligations       generated by project
orders result      in the freezing      of funds that otherwise would
be available     for reprogramming       to support other important
requirements.

DEFINITION AND PURPOSEOF PROJECT ORDERS

        A Department of Defense (DOD) directive             defines a proj-
ect order as a specific,         definite,     and certain     order for
goods or services placed and accepted by separately                    managed
and financed Government establishments.                Project orders are
issued, among other things,          for the production,         alteration,
or maintenance of ships, aircraft,             vehicles,    missiles,      other
weapons, and other military          and operating       supplies and equip-
ment.     Project   orders are issued also for research,                develop-
ment, test,      and evaluation    work.      In general,     our review of
the statute      covering project      orders,   including     related      leg-
islative    history     and administrative      decisions,      clearly     in-
dicates that project        orders are analogous to commercial con-
tracts.

       The Government activity       that issues the project       order
is designated     the sponsoring activity,          and the one that ac-
cepts and carries       out the project      order is designated the
performing   activity.        When a project     order is accepted by
the performing      activity,    an obligation      is established
against the appropriation         upon the records of the sponsor-
ing activity    in the same manner as orders or contracts
placed with a commercial establishment.

      The practice    by various activities within  the Navy of
using project    orders has existed for many years.    Authority
                                       3
for the use of project  orders is contained    in the act of      ,
July 1, 1922, embodied in section 23 of Title 41, United
States Code, pertaining  to intra-agency   project   orders which
states:

      "All orders or contracts       for work or material        or
      for the manufacture     of material      pertaining     to ap-
      proved projects    heretofore     or hereafter      placed
      WithGovernment-ownedestablishments             shall be con-
      sidered as obligations       in the same manner as pro-
      vided for similar    orders or contracts         placed with
      commercial manufacturers       or private     contractors,
      and the appropriations       shall remain available        for
      the payment of the obligations         so created as in
      the case of contracts      or orders with commercial
      manufacturers   or private     contractors.        (June 5,
      1920, ch. 240, 41 Stat. 975; July 1, 1922, ch. 259,
      42 Stat.,   812; June 2, 1937, ch. 293, 50 Stat,
      245)."

       A review of the legislative       history   indicates    that the
purpose of this section of the act was to permit work under-
taken in shipyards and other naval establishments             to con-
tinue beyond the fiscal      year.    Prior to enactment of this
law, the Navy was not authorized         to undertake work in a
shipyard which could not be completed within            the fiscal
year in which work was begun, in contrast           to contracts      is-
sued to commercial establishments         wherein obligated       funds
remain available    throughout     the period of performance of
the contract.    The intent    of this section of the act was to
promote the efficient     conduct of Government work by placing
Government establishments      on the same basis as commercial
establishments   in relation    to the availability        of appropria-
tions for expenditure.


DEFINITION AND PURPOSEOF WORKREQUESTS

       In addition     to using project   orders,     the Navy uses work
requests to accomplish intradepartmental            work.    In contrast
to a project     order, a work request,     prior     to June 1969, was
usedgenerallyfor         in-house routine  maintenance and support
services.     Since that time its use has been expanded to al-
low procurement from commercial sources.              When a work re-
quest is accepted by the performing         activity,     an obligation

                                    4
'is established    against the appropriation     on the records of
 the sponsoring activity.       Section 601 of the Economy Act of
  1932 (31 U.S.C. 686) is the statutory      authority  for the use
 of intradepartmental     orders (work requests).

      The difference   between a project      order and a work re-
quest, simply stated,     is that funds obligated      under project
orders are available     until    the project  is completed whereas
funds under work requests are available          for only the period
set by the appropriating       legislation.

EXTENSIVE USE OF PROJECT ORDERS
AND WORKREQUESTSBY THE NAVY

       Within the Department of the Navy, there are 95 indus-
trial   activities    that are financed primarily        by project     or-
ders and work requests.        At June 30, 1970, the unexpended
balances of Navy project       orders and work requests--the         un-
billed    part of the original     obligation    less work in process--
at these 95 activities      amounted to about $900 million          for
research,     development,  test and evaluation,        and procurement
appropriations.       The unexpended balances of project         orders
and work requests at the five activities            included in our re-
view amounted to about $206 million           as of June 30, 1970.

       Prior to the DOD Appropriation      Act of 1971, the appro-
priations    included in our review were no-year appropriations.
The act now places the following       time limitations   on the
availability     of appropriations  included in our review.

                                                                 Years

      Procurement      of Aircraft      and Missiles,    Navy      3

      Other   Procurement,      Navy                               3

      Shipbuilding      and Conversion,        Navy                5

      Research,      Development,      Test,   and Evaluation,
      Navy                                                         2

Because of these restrictions,  the proper administration    of
project orders and work requests has taken on greater     impor-
tance.
                               CRAPTER 2

    NEED FOR MORE TIMELY RECOUPMENTOF EXCESSOBLIGATIONS

      Navy instructions     require that obligated     funds that are
no longer needed for the purpose of the obligations            be
promptly withdrawn.       Such funds are referred    to in this re-
port as excess.      Further DOD and Navy instructions       require
that project    orders be specific,    definite,   and certain    con-
cerning both the work encompassed by the order and the terms
of the order itself.

       At four   industrial    fund activities, we examined unex-
pended project      order balances as of June 30, 1970, amounting
to about $96     million    and found that $10.8 million    did not
appear to be     needed for the purposes of the project        orders
and were not     recouped by sponsoring activities       on a timely
basis.

       We also found instances where the sponsoring activity
had issued project      orders that were not specific        with re-
spect to the work to be accomplished.           As a result,      cost
estimates,    which served as the basis for obligating            funds,
were overstated      and substantial    amounts of funds were re-
stricted   unnecessarily     for long periods.     Further,     since
these project     orders lacked the specificity      required      by law
for recording      an obligation,     we believe that the validity
of the obligations      as originally    recorded for such project
orders may be questionable.

      A summary indicating    the results  of our examination of
selected unexpended balances as of June 30, 1970, at the
performing  activities    is presented below.
                                         Unexpended                 Unexpended                 Unexpended
                                          balances                   balances                   balances
                                          reported                   reviewed                  questioned
       Performing                   Amount                     Amount                       Amount
         activity                 (millions)       Number    (millions)        Number   (millions)
                                                                                         --               -Number
 Philadelphia     Naval
   Shipyard    (note a)              s 44             66         $18            12        $ 0.1                 1
 Mare Island    Naval
   Shipyard                             83          131           53            16           9.9                5
 Naval Air Engineer-
   ing Center                           42          194           24            28             .8               4
 Naval Research
   Laboratory     (note a>              28          226             1           14
 Naval Electronics
   Laboratory     Center
    (note a)                           - 9          - 37         -              -                           -
      Total                          $206          =654          $96            2          $10.8
                                                                                            -               =LO
  Bve experienced   difficulty        in determining        the validity      of unexpended balances
   for many project     orders.       This situation        restricted     the scope of our review          and
   is discussed   more fully        on page 18.




       In addition, we reviewed 40 selected project orders
which, at June 30, 1970, had no unexpended balances and were
completed during fiscal    year 1970. We found six project
orders at Mare Island that had excess funds for varying
periods.




                                                            7
EXCESS PROJECT ORDER BALMKES
NOT PROMPTLYRECOUPEDBY
SPONSORINGACTIVITIES

      Sponsoring activities  were not withdrawing  excess funds
in all cases, even though they were aware of the excess.
Following  are three examples of the situations   we found.

      Excess funds for conversion  and
      overhaul of submarine not withdrawn

     More than 7 months elapsed after the Ship Systems Com-
mand had been informed by the performing    activity  that about
$9 million   was available for withdrawal  before action was
taken to begin the process of deobligating     some portion of
those funds.

       In October 1968 a project    order was issued to Mare Is-
land for overhaul and conversion       of a fleet    ballistic mis-
sile submarine.     Two more related    project   orders were subse-
quently issued.     A total  of $40 million     was obligated  for
this work.     In June 1970, when 80 percent of the work was
complete, Mare Island submitted a status report to the Ship
Systems Command showing that the estimated         cost had de-
creased to about $31 million.

       We were told by Navy representatives       that the $9 mil-
lion was not being recouped because (1) there was a lack of
confidence    in the accuracy of the estimate       submitted by .
Mare Island and (2) some funds should be kept available           for
deficiencies    in the submarine that may be discovered        at a
later date.     A representative     of the sponsoring activity
acknowledged in February 1971 that, because of the large
amount of funds involved,        some part of the $9 million    should
have been withdrawn.       In March 1971 we were informed that
about $7.5 million     was in the process of being deobligated.

      Funds not withdrawn after
      planned work was delayed

        As a result  of inaction on the part of the sponsoring
activity    to recoup funds after a change in planned work,
about $550,000 unnecessarily     remained in an obligated  status
for over 2 years.      In December 1968 the Ship Systems Command

                                  8
. issued a project     order amendment to Mare Island for the
  restoration    of a dry dock.    About a month after the issuance
  of the order, the Ship Systems Command decided to delay the
  restoration    work because of a higher priority    project.   AL-
  though the funds under the project      order became available
  for withdrawal,     no action was taken to withdraw them, We
  were informed by a representative      of the Ship Systems Com-
  mand that the funds were known to be available       but were
  kept in an obligated      status to accomplish this work at a
  later date and that the Ship Systems Command was considering
  restoration    of the dry dock.

       Excess funds not withdrawn after
       performing  activity  furnished a
       revised cost estimate

       About $100,000 was restricted unnecessarily   for at
 least 6 months because the sponsor failed   to recoup funds
 that became available  when a lower estimate was submitted.

        The Ship Systems Command issued to the I?hiladelphia
  Naval Shipyard on May 27, 1970, a project          order for $250,000
  to correct   certain  deficiencies    on a destroyer.      About a
  month later,   the shipyard reduced its estimate to $150,000,
  The Ship Systems Command, however, did not withdraw any funds
  from this project    order,     Ship Systems Command representa-
  tives told us that their engineering         estimate to perform the
. work remained at $250,000 notwithstanding          the estimate of
  $150,000 by the shipyard.        Consequently,    no action was taken
  to recoup funds.

        When the shipyard completed the work on this project
 order in September 1970, it had incurred          costs of about
 $140,000.     Notification   of completion,    however, was not made
 to the Ship Systems Command. Shipyard representatives             told
 us they had experienced      a problem in their accounting       sys-
 tem in October 1970 and that this resulted          in the suspen-
 sion of final     billing  on completed projects.       They stated
 that the shipyard was in the process of making a review to
 ensure that all applicable       charges to customers are made
 prior to the release of funds and closing of the project             or-
 der.    We believe that,    although this may have contributed         to
 retention   of these funds, sufficient      Jnformation    was avail-
 able in August 1970 to allow the Ship Systems Command to
significantly  reduce this obligation.      In March 1971 Ship.                 ,
Systems Command representatives     informed us that excess
funds were being withdrawn.

Ability    to review unexpended project
order balances hampered by type of
accounting    systems employed

      Our ability,       in the time available,          to review unex-
pended project      order balances at the Philadelphia              Naval
Shipyard,    the Naval Electronics          Laboratory     Center, and the
Naval Research Laboratory          was hampered because accounting
systems at these activities           had accumulated costs under job
orders established         by the performing      activity     rather than
under project      orders.      Thus project     order funds are commin-
gled, and incurred costs are assigned on an arbitrary                   basis
to individual      project    orders.     It appeared that this situa-
tion would have an effect          on the capability        of the perform-
ing activity    to adequately        review the status of project         or-
ders for the purpose of recouping excess funds.

      Under this system, segments of work on several project
orders may be assigned under one or more job orders.       The
costs for the work performed are accumulated under the job
order, and costs applicable     to a specific project order lose
their  identity.   The costs incurred under a job order are
assigned to the project    order having the earliest  expira-
tion date, and billings    are made to the sponsor accordingly.

        As a result   of this situation,     only about $800,000 of
unexpended project      order balances were included in our re-
view at the Naval Research Laboratory.           At the Naval Elec-
tronics    Laboratory   Center, we selected project     orders show-
 ing balances of about $6 million        for review; however, we
were unable to evaluate the validity          of those balances.    At
the Philadelphia      Naval Shipyard, we selected for possible
review 20 project      orders having balances of about $39 mil-
lion but were able to adequately review only 12 having bal-
ances of about $18 million.

      The employment of the system described above could re-
sult in the freezing  of funds.   An extensive  audit, however,
of each transaction  applicable  to the project  orders in-
volved would have to be made in order to definitely     conclude

                                     IO
.this.      We will consider this aspect in our regularly    sched-
  uled reviews of accounting     systems at industrial   fund ac-
  tivities.




                                  11
LACK OF SPECIFICITY          IN PROJECT ORDERS

       DOD instructions      require   that project    orders be spe-
cific,   definite,    and certain     concerning both the work en-
compassed by the order and the terms of the order itself.
In the absence of a specific          description    of the work to be
accomplished,      an accurate cost estimate        cannot be made and
the performing      activity    cannot begin the work in an expedi-
tious manner.

        We identified      several project      orders that lacked spec-
ificity    concerning      the work to be accomplished which re-
sulted in significant           delays and cancellations.         We also
found that inadequate descriptions              of the work required         on
certain    project     orders resulted       in excessive cost estimates
that unnecessarily         restricted     substantial     amounts of funds
for long periods of time.             Further,   we believe that, since
these project       orders lacked specificity,          the validity      of
the obligations        as originally      recorded for such project
orders may be questionable.             31 U.S.C. 200, which deals
with documentary evidence needed for obligations,                    states
that:

          I'*** no amount shall be recorded as an obligation
          of the Government of the United States unless it
          is supported by documentary evidence of--

                (1) a binding agreement in writing           between
               the parties      thereto,   including    Government
               agencies,    in a manner and form and for a
               purpose authorized        by law, executed before
               the expiration       of the period of availabil-
               ity for obligation        of the appropriation      or
               fund concerned for specific           goods to be
               delivered    ***.I'     (Underscoring    supplied.)

Two examples       follow.

      Correction       of submarine    deficiencies

          In June 1964 funds were provided under three project
orders      issued by the Ship Systems Command to Mare Island to
correct       deficiencies in three submarines.   The need for cor-
recting       deficiencies in these three submarines was related

                                        12
-to thecatastrophicloss        of the submarine "Thresher."             We
 were informed by a are        Island official      that the project
  orders did not contain specific       instructions       on the work
  that was required,      even though approximately        $14 million
 was initially     obligated.     Ship Systems Command records
  showed that, by April 1965, the obligated            funds had in-
  creased to about $24.5 million       and that, by November 1968,
  $14.7 million   had been deobligated       as the plans to accom-
  plish the task became definitive,          The final     cost of the
  three project    orders was about $9.8 million.           Representa-
  tives of the sponsoring activity        stated that about $10 mil-
  lion of the funds deobligated       were subsequently        transferred
  to other shipyards to perform work that could not be accom-
  plished at tire Island.

        We were informed by a Mare Island representative            that
 in mid-1966, or about 2 years after the project             orders were
 originally    issued, instructions     were finally    received at
 Mare Island which clearly       set forth the work to be accom-
 plished.    After the main body of instructions         was received,
 frequent   changes and new instructions       resulted    in substan-
 tial reductions     in the project    orders.

       At the Ship Systems Command, officials       informed us that
 the delay in forwarding   instructions     to Mare Island was
 caused by the uncertainty    involved   in determining    causes of
 the "Thresher"  disaster.    As deficiencies    were identified,
 studies had to be made to develop design modifications.

       Alteration    kits

         In another instance,    about $600,000 obligated   for a
 project    order was restricted    unnecessarily  for about 2-l/2
 years, because instructions       necessary to perform the work
 were not sent to the performing       activity.

         In January 1968 the Naval Ordnance Systems Command
 amended an existing      project      order to provide for the manu-
 facture    of 2,000 alteration        kits by are   Island at an esti-
 mated cost of $600,000.          Initiation   of work was contingent
 upon receipt     from the Naval Underwater Systems Center of an
 ordnance alteration      text that would provide the necessary
 steps to perform the work.


                                     13
        We were told that in December 1969 the Underwater Sys-   '
terns Center informed the Ordnance Systems Command that it
was unable to provide the text until    August 1970.   No ac-
tion was taken to recoup funds at that time.     We were also
informed that in August 1970 the Underwater Systems Center
notified    the Ordnance Systems Command that the text would
not be ready for another year and that the funds were with-
drawn in September 1970.




                              14
                               CJ!l.APTER3

                GREATERADHERENCETO CONTROLSFOR

            IDENTIFYING EXCESS OBLIGATIONS REQUIRED

      To enable the sponsoring activity         to recoup excess obli-
gations on a timely basis,effective        controls    are necessary
so that excesses will be identified        and promptly brought to
the attention   of the appropriate    officials.       Controls  estab-
lished by the Navy, if followed,      should provide an effective
means of identifying    excess obligations;       however, we found
that these controls   frequently    were not used.

      Significant       amounts of unneeded funds have been recouped
by the Navy as a result         of special reviews by the Navy inter-
nal auditors      with the assistance     of the sponsoring activities.
Greater adherence to controls         established   for identifying     ex-
cess obligations        on a regular basis, however, should reduce
the requirement       for special reviews.      These matters are dis-
cussed below.

EXISTING CONTROLSNOT USED TN ALL INSTANCES

       Navy policy requires   that obligations      be continuously
reviewed to ensure their validity       and that they be canceled
when it has been determined that the funds are no longer re-
quired.    In order that this policy for project           orders may be
implemented,     the Navy has established    various      control pro-
cedures at both sponsoring and performing          activities.

       For sponsoring activities,     Navy regulations        require    a
continuous   program by each major sponsoring         activity     to val-
idate all unexpended obligations,       including     those represented
by project   orders.    In addition,   sponsoring     activities      are
required   to review obligations     in the research,       development,
test and evaluation,      and major procurement appropriations
annually and to report the results        to the Comptroller         of the
Navy. These reviews, however, are limited           to obligations         re-
lated to appropriations      that have been in existence          for at
least 3 years.



                                      15
       To assist in the continuous review of reported     obliga-               .
tions,   certain control  procedures have been prescribed     at
the performing   activity   level to aid in identifying   funds
which may be available    for withdrawal.

        1. Performing   activities,   when requested by the sponsor,
prepare status reports        showing costs incurred    and estimated
cost of completion.       Our review indicates     that the effective-
ness of this control      is limited   because certain    sponsors
have not requested such reports.          Also, in some cases, upon
receipt    of a report showing that funds are available         for
withdrawal,     sponsors have not initiated     action on a timely
basis to withdraw the funds.

        2. Performing  activities      are to periodically      review
project    orders to identify      those which have been inactive         for
2 consecutive     months and to report reasons for the inactivity
to the sponsoring activity.           Our review showed that none of
the five performing     activities      included in our review had
complied with this requirement.            Navy representatives      have
stated that two of the reasons for not complying are

      --the research work at the performing              activity    does not
         justify a review of project orders             and

      --the accounting      system does not lend         itself     to such a
         review.

We were informed at one activity     that       it     planned to comply
with the regulation after installation               of an automated ac-
counting system was completed.

         3. Performing   activities,      upon completion     of work, are
required     to prepare a final      bill which shows any funds avail-
able for withdrawal.         We noted that,       although the submission
of final     reports   at the completion       of work were an effective
procedure to identify        unneeded funds, two performing          activi-
ties were unable to submit these bills               on a timely basis be-
cause of deficiencies         in their    accounting    system.   For exam-
ple, during 1969 and 1970 the Naval Air Engineering                Center
changed its computer system.             According to the Deputy Comp-
troller,     numerous problems were encountered and many still
exist with respect to accounting            records.     He stated that he
did not place complete reliance            on the accuracy of the

                                      16
. accdunting records and that, consequently,  he had been re-
  luctant   to render final billings and to make refunds to cus-
  tomers.

 INTERNAL AUDITS IDENTIFY
 SUBSTANTIAL UNNEEDEDBALANCES

       For the past several years, Navy internal             auditors   in
 close cooperation      with sponsoring activities         have expended
 considerable    effort    to review the validity      of unexpended
 balances reported      in the major appropriations.           As a result
 of these reviews,      significant    amounts of funds have been re-
 couped and have been made available           for other purposes.         In
 regard to project      orders and work requests,        the internal      au-
 dit reports   indicated      that over $10 million      of excess funds
 had been recouped from audits performed in 1968 and 1969.
 In these reports,      Navy auditors    attributed    invalid    unexpended
 balances to:

       --failure     on the part   of the performing  activities         to
          submit   final reports    on a timely basis and

       --failure    of the sponsoring activity    to take       timely
          follow-up   action on inactive   accounts.




                                      17
                                CHAPTER 4

                        USE OF WORKREQUESTS

       A work request     is an intradepartmental          order, accord-
ing to Navy regulations,        for goods or services which are
ineligible     to be procured under a project           order.     Whena
work request is accepted by the performing               activity,    an ob-
ligation     is established   against the appropriation            on the
records of the sponsoring activity.             Until    June 1969, Navy
instructions     appeared to limit     the use of work requests to
orders among activities       for routine     services,       such as train-
ing, laundry,     communications,     and utilities.          In June 1969,
however, Navy instructions         expanded the use of work requests
to include procurement for centrally            managed programs, pro-
vided that the determination         of material      requirements     not
be made by the sponsoring activity.

       The change apparently    authorizes        the use of work re-
quests to allow performing      activities        to procure from com-
mercial suppliers.      As a result,      sponsoring activities      may
record obligations     on their   records long before contracts
are formalized.     A Navy officiaP       told us that the use of
work requests    to allow performing        activities    to use outside
procurements was common practice.            Further,   at the Naval Air
Engineering   Center, we noted that, of the 26 orders in our
sample, nine were substantially         for outside procurement and
amounted to $11.9 million,      or 46 percent of the total         funds
authorized   on the 26 orders.

      The use of work requests for outside contracting          may
result  in the freezing   of funds for a significant       period be-
fore the funds are actually     needed.     This could occur if
the performing   activity  is delayed in awarding contracts.
Another possible adverse effect     resulting    from this proce-
dure could be the distortion     of unobligated     balances re-
ported to the Congress.

       In one case we noted that a sponsoring activity     had
obligated    $400,000 for a work request for outside procure-
ment which had been issued to an industrial     fund activity.
The transaction     was recorded on June 30, 1969, as an obli-
gation on the records of the sponsoring activity.       In


                                     18
- September 1969, before the industrial        fund activity    awarded
  a contract,     the sponsoring activity    canceled the work re-
  quest so that the funds could be made available           for higher
  priority    work.   Although we did not examine the validity         of
  the work requested,      we believe that this case illustrates
  how funds could be reported        to the Congress as obligated,
  through the use of work requests,        even though a contract      has
  not been awarded.

       Section 601 of the Economy Act of 1932 (31 U.S.C. 686)
is the statutory     authority    for the use of intradepartmental
orders (work requests),        and the Department of the Navy is
authorized    thereunder    to issue such orders for the purpose
of outside contracting.         Since no-year appropriated          funds
of the sponsoring activity        are available      until    expended,
the performing     activity    may obligate      such funds subsequent
to the end of the year.         Since the appropriations,          which
were included in our review, are now going to be available
for only definite      time periods,    the provisions        of 31 U.S.C.
686-l require that the performing           activity    either   obligate
the funds within     the period of availability           or return them
to the sponsoring activity.




                                   19
                          CHAPTER5

        MATTERSFOR CONSIDERATION
                               BY THE COMMITTEE
     The Committee may wish to consider having the Secretary
of the Navy
     --direct  sponsoring activities  to put greater emphasis
        on ensuring that unneeded funds are promptly identi-
        fied by performing activities  and recouped and
     --require stricter  adherence to instructions   and con-
        trol procedures on project orders.




                               20
                              CHAPTER 6

                           SCOPE OF REVIEW

      We examined

      m-70 unexpended project     order balances as of June 30,
        1970  l   Most of the balances were financed from appro-
        priations    passed by the Congress in fiscal  years 1968
        through 1970.

      m-40 project orders that were completed in fiscal year
        1970 and had no outstanding balances at June 30, 1970.

       We reviewed the Navy project        orders to determine whether
the amount of funds authorized          in the project    order was ac-
tually  needed to finance procurement and research,              develop-
ment, test,    and evaluation     programs cited in the project
order.    We  also evaluated     existing    Navy control    procedures
designed to disclose     project     order funding authorizations
that are no longer needed.          Our review of unexpended project
order balances was made at the following           performing     activi-
ties.

      Philadelphia    Naval Shipyard
      Philadelphia,    Pennsylvania

      Mare Island Naval Shipyard
      Vallejo,  California

      Naval Air Engineering   Center
      Philadelphia,  Pennsylvania

     Naval Research Laboratory
     Washington, D.C.

      Naval Electronics    Laboratory    Center
      San Diego, California

       At principal sponsoring activities     listed below, we re-
viewed the administration     of project  orders and evaluated
internal   controls for the recoupment of excess project      order
funding authority.

                                    21
      Office of Naval Research, Washington,   D.C.
      Naval Air Systems Command, Washington,   D.C.
      Naval Ordnance Systems Command, Washington,    D.C.
      Naval Ship Systems Command, Washington,   D.C.

      During our review, we examined pertinent         instructions     of
the Office of the Secretary of Defense and the Department of
the Navy regarding    the use of project      orders and work re-
quests and reviewed files      at the various performing        activi-
ties and sponsoring activities.       We also reviewed internal
audit reports    and discussed the results       of our review with
Navy representatives     at these activities.




                                   22
APPENDIX




   23
                                                                                           APPENDIXI




                                                      OoMMIrrEE   ON ARMED    SERVICES
                                                         WASHINGTON.   D.C.   20510

                                                         October 7, 1970


              Honorable Elmer B. Staats
              Comptroller General of the United          States
              General Accounting  Office
              Washington, D. C.

               Dear Mr. Staats:

                         This letter   is to request your office    to provide assistance    to the
               Committee in performing       a review of certain  intra-departmental    financial
               transactions     within   the Department of Defense.

                         The Department of Defense, and in particular       the Navy, has followed
               a policy of using project       orders as an intra-service     request whereby one
               activity     requests another activity    to perform certain     work or to procure
               certain    items either in-house or by contract      for the benefit    of the ordering
               activity.       Project orders are recorded as obligations       by the issuing activity
               immediately      upon receipt  of acknowledgement of acceptance by the receiving
               activity.

                         Use of project    oriiers as described above permits recording          of an
               obligation     on the books of the Government which in fact is not an obligation
               inthe     legal sense.     The performing     activity   may not perform the services
               or contract     for some period of time, if at all.            In an extreme situation,
               such an obligation       may remain on the books for a number of years when, in
               fact,    a legal obligation      has not been incurred by the Government.          The
               cumulative     effect  of such practice     is reflected     in inflated   and erroneous
               obligations     on the books of the Government, inflated            amounts of unliquidated
               obligations,      and thz freezing    of funds which otherwise would be available
               for reprogramming       to support other important       requirements.

                         I would appreciate     your makin, u a review of this matter,       with first
              priority      being given to the Department o f Navy, to determine          the extent to
              which this prectice         is being followed.        The investigation   should cover
              fiscal     years 1968, 1959, and 1970, and be addressed only to appropriations
              which are subject to authorizing          legislation.       If you find thet significant
              amounts of funds relete        to fiscal    years earlier      than 1968, as represented
              by unliquidated       balances on project      orders,   these years may be included or
             .FF$@         the subject of a subsequent investigation.
             _.        a
                 -=*     In order for this information        to be useful during consideration         of the
             'f$,scal!, year 1972 budget estimates,        request that your report,      including
             ~a'ppro~~i&e recommendations,




U.S.   GAO   Wash.,   D.C.