oversight

History of Contract Awarded To Develop a Project Grant Information System

Published by the Government Accountability Office on 1977-04-08.

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

                                   DOCUMENT ABs5b3
  01141 - [a105tt0]
 History of Contaict Awarded to
 Information system. B-185845; Develop a Project Grant
 April 18, 1977. 30 pp.          t0d-77-47. April 8, 1977. Released
                           6 appendices (11 p.).
 Report to Sen.   illias Prozire; by Robert F.
 comptroller eneral.                              eller, Acting

 Issue Area:    ducation, rainig, and Employment
     Federal Procurement of Goods and             Programs (1100);
 Contact: HSusaM e3ourceS DiV.        Servtices  1900).
 Budget Function:     ducation,
 organizato Concerned: ff ceanpower, and Sccial Services (5001.
                                of ducation;           ockwell
     International Corp.
Congqessional Relevanc,j: Sn.
authority:                       William ProXmi,.
              (86 Stat. 1279; Brookslu
     Adainistrative Srvices ct of ins          P4ral Property and
    41 C.F.l. 1. 41 Cc..e.             194S      I.1 92-562, sec. 902)
                               . 1 .S.C. 2S2(:) (10).
          The Office of ducation awarded
to orth American RockellU                     a sole source contract
International Corporation) inCorporation    (now    Rockwell
computerized management          1969 for deelpmat of a
                          information syste.
Findings/Concluaons
                            LThe
                             sole    source    ontract
 the system be operational in                           stipulated      that
                                  9
 cost-plus-fixd--fee of t378,174. onths at a total
 months to complete and th3 costs Instead, the contract took *6
 Despite the amount and funas           amounted to about 3 illion.
function as intended and          expend4,     the system did ot
contractor completed all the      contract ws terminated
                           the work it was to have accosplished.   before the
After abandoning the use of the
contractor, the Of'.ice cf£ dcation   syntem ev*loped by the
sophisticated system of its owun           dveloped a less
met the same needs. he ctract        at     cost of about S20 t00 that
inadequate                             reviow
            and agezcy officials did not procedures were
continuation of contract modifications.         adequately justify the
officials in several instances                  Office of ducation
                                    did
Procurement Regulations and circumvented not  comply   with Federal
procedures in administer.ng this                 Office internal
                                       contract. (lAuBor/SC)
t-i


                                                                            !
              4at,    Io      excc'Pt ent the basis of specifi   appfrOva
                           %ie6ltu1                t       -

      RP3ttOPF THE
      COMPTROLLR GENERAL
      OF THE UNITED STA TES



      History Of Contract Awarded
      To Develop A Project Grant
      Information System
      Office of Education
      Department o Health, Education, and Welfare

      An Office of Education contract        for the
                                   :
      development of a computer d management
      information system increased in cost from
      $378,000 to over $2 million and in duration
      from     months to 44 months. Because of
      poor management of the contract and poor
      contractor performance, the systen did not
      function as iiitcrnded. Ultimately, the OVtir.e
      abandoned its use.




         Mr"-n47                                               APRIL 8, 1977
               COMPTRouL,     G'NIuAL oP TH    UNIp SrATUS
                             WAmINGTON. D.Q.   U



B-185845




The Honorable William Proxmire
United States Senate

Dear Senator Proxmire:

     As you requested on Januery 30, 1976, we
an Office of Education, Department of Health, have reviewed
                                              Eucation, and
Welfare contract awarded in 1969 to North American
                                                   Rockwell
Corporation (now Rockwell InteLnational Corporation).
                                                       The
contract was for the development of a computerized
grant information system.                          project

     We have obtained comments on our report from the
ment and the contractor and have incorporated         Depart-
                                              their comments
into our report.


                                     Sincerely yours,




                            ACTING Comptroller General
                                   of the nited States
  REPORT OF THE                        HISTORY OF CONTRACT AWARDED
  COMPTAOLLER GENERAL OF               TO DEVELOP A PROJECT GRANT
  THE UNITED STATES                    INFORMATION SYSTEM
                                       Office of Education
                                       Department of Health,
                                         Education, and Welfare

          DIG EST

          The Office of Education awarded a sole-
          source contract to Ncrth American Rockwell
          Corporation (now Rockwell International)
          in October 1969 to develop a computerized
          information system to enable the agency to
          better keep track of its grant awards.
          The original contract stipulated that the
          system be opeLational by July 1970 at a total
          cost-plus-fixed-fee of $378,147. But the con-
          tract was extended through June 1973 and the
          price increased to about $2.2 million.
          According to the HEW Audit Agency, the Office
          of Education incurred an diitional $842,00O
          in costs for the syate, increasing the total
          cost to more than $3 million. (See p. 26.)
          Despite the amount of time and funds expended,
          the system did not function as intended.
         The contract was terminated before the con-
         tractor completed all the work it was o have
         accomplished. In March 1974 the Office of
         Education abandoned its use of the system
         developed by the contractor. Later it devel-
         oped a less sophisticated system of its own
         at a cost of about $20,000 that met the same
         needs that were to be met by a simplified
         version of North American's system. (See
         pp. 13 and 23.)
         WHY DID THE CONTRACT GROW?

         It grew because of poor Office of Education
         management and poor contractor performance.
         The Office did not take strong action to make
         certain that the contractor would complete
         work on time and within the contract price.
         Frzquent changes in responsibility for the

ClY    Upon beremovl,
      sh.
       should         the report
                noted hereon.      i                    HRD-77-47
contract within the Office also hindered its
capability to manage the contract.
Several officials expressed reservaticns about
the system before the contract was awarded
(see pp. 4 and 5), and he development of the
system was plagued with problems almost from
the beginning. However, the Office approved
16 modifications which increased the contract
amount to about $2.2 illion and the contract
period to 44 months.   (See ch. 3.)
The Office of Education was not satisfied
with the contractor's progreas during the
original contract period but approved    con-
tractor proposal in June .1970 to continue
work when the contractor agreed to hare the
cost of the additional effort. (See p. 7.)
Office of Education officials recommended
approval of successive contractor proposals
to continue work to preserve the continuity
of the project in hopes of its successful
completion. (See pp. IO, 12, 13, and 14.)
However, the Office o Education ultimately
abandoned its effots to make the system
successful. (See p. 22.)
WHAT WAS THE NATURE OF THE CONTRACT
REVIEW PROCEDURES?
The procedures were inadequate, and Office
of Education officials did not adequately
justify the continuation of contract modifi-
cations. The Office established a Sole Source
Board in February 1972 to review all proposed
sole-source actions greater than $25,000, in-
cluding contract modifications. Before the
Board was established, Office of Education
officials did not describe what led them to
believe that the contractor would complete
the work within the new constraints. The
Sole Source Board required more detailed
justifications for proposed sole-source
modifications.
An April 1973 Board decision not to award .
additional funds under the contr: ct was
overruled by a high-ranking Office of

                     ii
           Education official. b6!t in June 1973 the
           Office notified the contractor that no
           additional funds would be available for
           sole-source modifications on this con-
           tract. (See pp. 15 to 18.)
          WHAT WAS THE NATURE OF AN HEW AUDIT
          AGENCY uRVEw OF TE CNTRPCT7
          The EW Audit Agency reviewed the project
          to dtermine why the system failed to achieve
          its objectives.  It found that poor Office of
          Education management and poor contractor per-
          formance contributed to the system's failure.
          The Audit Agency prepared a draft report but
          did not issue a final report because of other
          opgoing studies.   (See p. 25.)
          WHAT WAS THE ROLE OF THE GENERAL COUNSEL
          OF HEW?
          Officials in HEW's Office of the General
          Ccunsel told GAO that the Office of the
          General Counsel did not play a legal role
          in this contract and was not asked by the
          Office to determine whether funds could be
          recouped.
          WHAT LAWS AND REGULATIONS MAY HAVE
          BE-EN VOATED?
          In GAO's opinion, Office of Education offi-
          cials in several instances did not comply
          with Federal Procurement Regulations and
          circumvented Office internal procedures in
          administering this contract.
          The contracting officer did not approve one
          contract modification until the period covered
          by the modification had expired. The conttc-
          tor thus was working without a duly executed
          contract. In two other instances, the Office
          of Education awarded the contractor additional
          funds by telegram pending negotiation of a
          formal modification within 6C days. In both
          instances, the formal modification was not
          approved within 60 days and the contractor was
          working without a duly executed contract.
          (See p. 19.)

ITr ifh                       iii
  The Office of Education hould have
  greater emphasis on criteria outlinedplaced
  eral Procurement Regulations requiring in Fed-
  sideration of past contractor performancecon-
  determining contract fees, including         in
  contract modifications, (See4 pp. 19 those on
                                        and 20.;
 The proposal which the Offic of Education
  accepted was handled as an unsolicited
 posal, although it was actually a        pro-
 effort to earlier contract work. As ollow-on
                                        such, it
 did not meet Office of Education criteria
 an unsolicited proposal. (See p. 20.)        for

 The contract was awarded on a sole-source
 basis. Contrary to an Office directive,
 Office of Education  officials did not inform
 the contracting officer of other sources
 sidered for the proposed sole-source         on-
 procurement.   (See p. 21.)
In arch 1973 the Office of Education
vented internal procedures             circum-
                           by coimitting
$32,000 to the contractor without Sole Source
Board approval. (See p. 21.)
HEW AND CON,.RACTOR COMENTS
 HEW stated that the concept of the
 sound but too large for its state ofsystem was
at the time i was undertaken. Further, the art
stated that the project was a case study EW
systems failure but that lessons were      of a
which are being applied to avoid similarlearned
situations. (See p. 28.)
The contractor disagreed that its performance
was poor and felt it should be judged
of difficulties it had in dealing with in light
Office of Education. (See p. 29.)        the




                     iv
                        C o n   en t
                                                          Page
                                                            i
DIGEST

CHAPTER
                                                            2
           INTRODUCTION
              Scope of review
                                                            4
   2       AWARD OF T     CONTRACT

           GROWTH OF THE CONTRACT
               Early problems in achieving contract             7
                 objectives                                 9
               First major contract change                  9
               Second major coxtract change                11
               Third major contract change                 13
               Fourth major contract change                14
               Fifth major contract change                 15
               Final major contract changes                18
               0E refusal to award additional funds
           OS ADNINISTRATION OF THE CONTRACT                19
   4                                                        19
               Aoplicable laws and regulations
               Noncompliance with Federal procurement
                 Regulations                                19
                                                            20
               Noncompliance with OB directives             21
               Frequent changes in OE administration
                                               project
               Independent evaluations of the               22
                 grant information system

       5    ROLES OF THE HEw AUDIT AGENCY, THE DEFENSE
                                                 OFFICE
                                             HEW
              CONTRACT AUDIT AGENCY, AND THE                    25
              OF THE GENERAL COUNSEL
                                                                25
                HEW Audit Agency                                27
                Defense Contract Audit Agency
                                                                27
                HEW Office of the General Counsel
       6    AGENCY AND CONTRACTOR COMMENTS AND GAO              28
              EVALUATION                                        28
                HEWI                    ,orporation             29
                Rockwell Internation
                                                            Page
APPENDIX
      J    January 30, 1976, letter from the Honorable
             William Poxmire                                 31
     T.I   Major povisions of contcact modifications         33
 III       Estimated contract cost plus fixed fee            34
     IV    February 25, 1977, letter from the Assist-
             ant Secretary, Comptrolle, HEW                  35
      V    February 25, 1977, letter from Director-
             Contracts, Rockwell Internati.nal Corpora-
             tion                                            39
     VI    Principal HEN officials responsible for
             administering activities discussed in this
             report                                          41

                           ABBREVIATIONS

GAO        General Accounting Office
HEW        Department of    ealth, Education, and Welfare
OE         Office of Education
PGIS       project grant information system
                          CHAPTER 1
                        INTRODUCTION
     In January 1976 Senator William Proxmire requested that
we review a contract between the Office of Eucation (OE),
Department of Health, Education, and Welfare (HEW), and North
American Rockwell Corporation for a computer system known as
the project grant information system.  (See app. I.;
     The purpose of the system was to consolidate management
information on about 40 OB programs to enable O to better
monitor itt, discretionary grants. It was to provide both
current and historical information from when a proposal
(grant application) was received through the term of the
grant.   hen the contract to develop this system was awarded,
OE did not have an ON-wi6e management information system tc
monitor grants it awarded.   Individual bureaus within OE had
their own computerized or manual management systems. The
project grant information system was an attempt to consolidate
information on discretionary grants awarded by all OE activ-
ities to make the grant-awarding process more visible at all
management levels.
     The system was to provide information to help management
(1) plan and select new projects, (2) award and control
grants, (3) administer programs and individual projects, (4)
control and forecast program budgets, and (5) obtain informa-
tion on educational trends. The system was to generate
numerous reports, some on a regular basis but most only on
request. Reports to be generated included:
     -Educational intellignce reports showing programs
       authorized and current proposals.
     -Financial reports showing information on budgets and
       committed and obligated progr a funds.
     -Reports showing the status of proposals and projects
       by stage of processing.
    -- Letters notifying applicants of approval or disap-
       proval of their proposals.
     The contract for the system was actually between OE and
a subsidiary of North American Rockwell Corporation--North
American Rockwell Information Systems Company--and was
awarded on a sole-source bauis in October 1969. The


                              1
sole-source award was made because North American Rockwell
Corporation had successfully designed two other computer
systems for OE under a prior contract.
     Under the original contract terms, the project grant
information system was to be operational by July 1970 and
the total price--cost-pius-fixed-fee--was about $378,000.
However, the contract period was extended through June 1973
and the price increased to about $2.2 million. The HEW Audit
Agency estimated that OE incurred an additional $842,000 cost,
making the total cost of the system over $3 million.
     Despite the additional time and funds expended, the
system did not function as intended. Therefore, although the
contractor had not completed all the planned work, O termi-
nated the work in June 1973. OE later developed a lers
sophisticated system, on its own and at less cost, to meet
the same needs that were to be met by a simplified version
of the project grant information system.
     Senator Proxmire asked- us to determine:
     -- Why the contract grew from 9 months and $378,000 to
        about 4 years and over $2 million.
     -- The nature of OE's internal review of each of the
        major contract modifications.
     -- The nature of the HEW Audit Agency's review of the
        contr=:t, its findings, and why the review was
        terminated.
     -- The role, if any, of BEW's   lecdl staff in this case.

     -- What laws and regulations, if any, were broken by
        individuals involved in this situation.
SCOPE OF REVIEW

     Our review included an analysis of the contract award
and each of the contract modifications. We also reviewed
events preceding the award which had an impact on contract
results. We reviewed OE's contract file and documents ob-
tained from persons with whom we discussed the contract.
     We interviewed OE officials; contractor personnel} and
HEW General Counsel, HEW Audit Agency, and Defense Contract
Audit Agency officials. We contacted the Defense Contract


                               2
Audit Agency because that agency was responsible for
reviewing the contractor's payment vouchers and certifying
that the charges were correct.
     In addition, we reviewed an HEW Audit Agency draft
report and the related workpapers on an audit of the contract
and a report on a review of the contract by the House
Committee on Approptiations staff.




                             3
                          CHAPTER 2

                    AWARD OF THE CONTRACT

     Under a contract awarded in 1966 North American Rockwell
Corporation developed two computerized information systems
for the Office of Education.  The experience and knowledge
gained in developing these two systems was a key factor in
the Office of Education's decision to award the October
1969 contract to the Corporation's subsidiary on a sole-
source basis.
     The purpose of the first system the Corporation devel-
oped under the 1966 contract was to compile results of educa-
tional research done under OE grants. The second system was
to provide information needed to monitor grants awarded by
OE's Bureau of Research.
     In April 1969 the Corporation submitted an unsolicited"
proposal to develop--by August 31, 1969--a conceptual design
for an epanded version of the second system and a plan to
implement the system. The expanded version, which became
known as the project grant information system, was to provide
OE-wide information similar to that provided on Bureau of
Research grants by the earlier system. In ay 1969 OE
authorized the Corporation to begin the work on the design
and plan with $47,000 provided under a modification to the
1966 contract.
     The Corporation submitted a conceptual design and an
implementation plan for the project grant information system
on September 5, 1969. It informed OE that certain elements
of the first system developed under the 1966 contract coulid
be adapted to meet the requirements of the project grant.
information system. Four days later, on September 9, the
Corporation submitted an unsolicited" cost-plus-fixed-fee
proposal to implement the system. In the proposal the Cor-
poration notified OE that as of October 1, 1969, its newly
formed subsidiary--North American Rockwell Information Systems
Company--would be doing the work on the system. The Corpora-
tion submitted a proposal on October 10, 1969, to revise some
of the milestones in the September 5, 1969, implementation
plan. OE contract documents show that exhibit B to the
September 9 proposal was a statement of work to be done. We
were unable to obtain a copy of the statement of work from
OE or the contractor.
     At least eight OE employees, including data processing
personnel, reviewed the contractor's conceptual design.
In September 1969 five of the eight reviewers expressed
reservations about the proposed system.

                              4
     Some specific concernswere (1) whether a totally
automated system, such:as the project grant information
system, was needed or was cost-effective, (2) whether the
system would meet OE needs, and (3) whether using the Bureau
of Research system as a basis for developing the new system
distorted the information and functional requirements to be
met by the new system. Several officials who reviewed the
conceptual design also expressed concern about the amount of
data preparation and system maintenance that OE perconnel
would have to perform in operating the system.
     In addition to the reservations about the system itself,
some OE officials were concerned about the qualifications of
the contractor personnel who would be assigned to the con-
tract. The officials were aware that the contractor personnel
who had designed the system under the earlier contract would
not be assigned to implement the system and some expressed
concern about the qualifications of the contractor personnel
who would replace he design team. One OE official in an
October 15, 1969, memorandum questioned whether the contrac-
tor would be capable of continued high-quality performance.
He said that the newly assigned personnel were nt completely
cognizant of all the intricate ramifications concerning the
proposal. Despite these reservations, he recommended that
OE award the implementation contract to the Corporation.
     On October 21, 1969, OE's Deputy Assistant Commissioner
for Administration (Management Information), who was assigned
overall responsibility for administering the proposed con-
tract, recommended that the Corporation be awarded the con-
tract to implement the new system. In a memorandum to OE's
Contracts and Grants Division, he gave the following reasons:
     1.   The Corporation designed and implemented the system
          for OE's Bureau of Research and was knowledgeable
          about OE's needs to expand that system.
     2. The contractor could adapt part of the first system
        developed under the 1966 contract to the new system.
     3. The contractor had knowledgeable personnel with
        which to meet a critical schedule.
     4.   It would require about 2 months to get another con-
          tractor and it would take any other contractor
          approximately 2 months longer to complete the work.




                               5
     The official said in the memorandum that representatives
of OE's bureaus thoroughly reviewed the conceptual design and
that all agreed the proposed system fulfilled O
                                                  requirements.
     On October 24, 1969, O awarded
American Rockwell Information Systems the contract to North
                                       Company.




                             6
                         CHAPTER 3

                  GROWTH OF THE CONTRACT

     The project grant information system was not completed
within the time and cost constraints of the original con-
tract--to be operational by July 1970 and to cost about
$378,000. Sixteen modifications extended the contract period
from July 1970 to June 1973 and increased the total price to
about $2.2 million. The provisions of each modification are
described briefly in appendix II.
EARLY PROBLEMS IN ACHIEVING
CONTRACT OBJECTIVES

     The Office of Education continued to award additional
funds even though deficiencies in contractor performance
became evident early. in the contract period and the contrac-
tor was behind schedule. According to OE officials, coni act
modifications were awarded to the original contractor to
maintain project continuity.
     Changes in contractor personnel hindered early progress.
Personnel who were designing the system resigned before the
design was approved by OE and new "key personnel" were
assigned to complete the design and implement the system.
The new key personnel were replaced by a third project team
in Decembe, 1969, about 2 months after the contract was
awarded. According to the OE official who was project
officer until February 1970, the contractor's second and
third teams lacked the expertise to perform the tasks out-
lined in the contract. The project officer said the
contractor, lacking the expertise to do the work as origi-
nally agreed, wanted to make some changes to the system.
He also said he could foresee cost overruns by the time he
left the project.

     The contractor also had difficulties in delivering
products which met with OE approval. Originally the con-
tractor proposed to complete an OE-approved system design by
mid-April 1970. To meet that deadline the contractor pro-
posed to begin delivering design documents for review in
November 1969. As of the end of April 1970, not all the
required design documents had been submitted and those that
had been submitted were judged unsatisfactory by OE.

      In May 1970 the Office of Education rejected a con-
 tractor request for an additional $158,000--$93,000 to


                               7
cover a cost overrun and $65,000 for additional work. OE
told the contractor that the entire amount was a cost overrun
because the work for which the $65,000 was requested was
within the scope of the original contract. OE added that the
contractor could demonstrate a commitment to the successful
completion of the system by sharing the cost of additional
effort and by providing reasonable management support.
     The contractor notified OE that it would not share the
cost of additional effort required to complete the system.
Therefore, on June 12, 1970, the official responsible for
administering the contract sent the contractor a telegram
outlining OL's problems. Specifically
     --OE had awarded funds under an earlier contract for
       identifying the system objectives and providing an
       implementation plan,
     -- the contractor assigned the contract to an executive
        unfamiliar with OE practices, and
     -- the contractor changed management and continuously
        changed technical personnel and did not provide
        enough experienced personnel or onsite support.
The official further said in the telegram that the lack of
technical ad managrial continuity was not what OE had ex-
pected when it awardtd the contract on a sole-source basis.
The official added that the contractor's actions were a mis-
application of expensive personnel ad that OE had approved
the management changes only because of the contractor's
assurance of increased support for the system. The official
requested a meeting with the contractor to develop a plan
to meet contract requirements, consider contractor financial
responsibility, and negotiate additional funding if justified.
     The telegram was sent, according to the official, to
force the contractor to meet its obligations and he did not
intend to cancel the contract. He said the system was still
needed, and he believed that the contractor, because of its
experience, should continue working on the system.
     In response to the Tune 12, 1970, telegram, the con-
tractor agreed to assume some financial responsibility to
meet contract requirements. The contractor notified OE
it would transfer management of the contract from its
California office to. its Virginia office and assign



                              8
overall contract responsibility to an executive who had
helped develop two ystems for OE under the 1966 contract.

FIRST MAJOR CONTRACT CHANGE
     As a result of agreements reached with OE, the con-
tractor submitted a proposal on June 30, 1970, entitled
"Project Grant Information System Implementation for the
Office of Education." The contractor proposed to complete
the system design by mid-August 1970 and to implement the
system by February 28, 1971. It requested an additional
$80,000, or half of the estimated additional $160,000
needed to perform the work.

     OE's contracting officer notified the contractor on
June 30, 1970--the date of the proposal--that it had been
awarded the requested $80,000. The funds were to cover
costs only and did not include any fixed fee. This change
increased the contract price from $378,000 to $458,000 and
extended the contract period from 9 months to 16 months
through February 1971.

Approval of proposal

     We could find no evidence in OE's contract file that
officials involved in the project had reviewed the contrac-
tor's proposal before the contracting officer's award of the
additional $80,000. A memorandum in the file dated August
11, 1970, showed only that the project officer had accepted
the proposal. The contracting officer approved the formal
contract modification on September 1, 1970.
SECOND MAJOR CONTRACT CHANGE

     OE approved the system's design in September 1970. The
contractor's effort then shifted to system implementation
which was to be completed by February 28, 1971. By January
1971, however, implementation had begun in only two of OE's
eight bureaus, and the contractor proposed a 16-month ex-
tension to June 30, 1972, at an additional cost of $702,000.
This proposal was entitled Project Grant Information System
Implementation, Support, and Control.'  The contractor pro-
posed to complete system implementation and to incorporate
into the system the information requirements of OE's
Contracts and Grants Division--including statistics and
reports on all contracts and grants uder OE jurisdiction.




                               9
      In addition, the cor ractor's expanded
 assisting OE in controlling system           role in
 increase in contractor effort from  Aperations was a majoi
                                    that anticipated in the
 June 30, 1970, change to the original
                                       contract.
      OE was to establish (1) a central control
 insure standard system operation               group to
                                  and (2) control groups    dt4h-
 in each bureau to provide input data
                                      for the
 and contractor personnel would be assigned   system.   OF
                                            to both the
 central control group and the bureau
                                      control groups.
 tractor personnel would provide assistance             Con-
 formal training to OE bureau personnel     and limited  in-
                                        in data preparation
 and system operation.
      The contractor also proposed to assign
personnel to the central control group        contractor
                                         to prepare proposal
or project descriptive data--that is,
and projects according to common, fixedto code the proposals
was to develop common definitions for     categories. It also
common procedures for assigning this   these  categories and
                                      descriptive data to all
proposals and projects. Ninety-four
months of proposed contractor effort of the total 330 taff-
                                      outlined in this pro-
posal was for preparing this descriptive
contractor had not anticipated             data--a task the
                                in its June 30, 1970,  proposal.
 Internal review and approval of proposal

      The OE project officer told us that
 two bureaus where system implementation    OE personnel in the
 preparing this descriptive data but       was begun had been
                                      that
 technical and difficult for these persons  this  task was too
 pertise in automatic data processing.       who  lacked  ex-
 sonnel coding proposals and projects    Having   bureau per-
                                       caused too many errors
and inconsistencies in data preparation.
agreed that it would be more efficient       Therefore, OE
                                         for
sonnel to perform this task at the central contractor pr-
                                              control group.
      On February 22, 1971, officials in
Management Information recommended that   OE's Office of
officer approve this proposal. They       the contracting
of centralizing system operations and mentioned    the advantages
system implementation might depend      said  that  successful
                                    on establishing a central
group to monitor day-to-day operations.
     The officials based their recommendation
tractor's experience in developing             on the con-
                                   the system, including
initial implementation in two bureaus.
                                        They said any other
contractor would need substantial orientation,
                                                which would

                              10
seriously delay the installation and increase the cost of
this much needed system. However, they did not tell the
contracting officer why the contractor had been unable to
complete the work described in the previous proposal on time
nor why they expected the contractor to be able to complete
the work outlined within the time and cost constraints
proposed.
     The contracting officer approved two contract modifi-
cations for the work outlined in this proposal. However,
instead of the .~;oposed $702,000 increase and 16-month ex-
tension, the contract price was increased by $360,000 (see
modifications 5 and 7 in app. II) and the contract period
was extended by 9 months, through November 1971. Two
additional modifications totaling about $65,000 for other
proposed work were awarded.   (See modifications 4 and 6 in
app. II.) These four modifications increased the total
contract price to $883,000 and extended the contract period
to 25 months.
THIRS MAJOR COITRACT CHANGE

     On Noverber 29, 1971, the contractor submitted a pro-
posal to continue work for an additional    months at an
additional cost of $954,000.
     The contractor proposed improvements for more efficient
and simplified system operation. However, almost two-thirds
of the total amount of this cost-plus-fixed-fee proposal--
$630,000 of the $954,000--was for the contractor to continue
performing ongoing tasks. When this proposal was submitted,
five bureaus had begun using the system and the contractor
had added the information requirements of the Contracts and
Grants Division.
     In this proposal, entitled Project Grant Information
System Support and Major System Improvements," the contractor
stated that system implementation was being hindered by (1)
difficulties in getting all bureaus to fully accept and use
the system, (2) system production problems, including key-
punching problems, lost jobs, and software errors, and (3)
system changes and improvements occurring before they could
be implemented. Several OE officials we contacted agreed
that the first two problems did hinder system implementation.
     The contractor proposed that an on-line computer system
be installed--a system which would allow users to enter data
directly into the system and would reduce delays in data


                              11
entry and editing. An OE official told us that the on-line
system was never installed. He said the volume of data to
be provided was not sufficient to justify installing such a
sophisticated system.
     The contracto: also proposed to perform a study to
determine current system requirements in an attempt to sim-
plify the system. OE officials told us they had found the
system as previously proposed too complex. It required too
much data preparation and input and provided reports OE
management did not use.

Internal review and approval of proposal

     In   January 2, 1972, 'memorandu      the contracting
officer, OE's Deputy Assistant C'otmL     tr for Adminis-
tration, who was responsible for administering the contract,
recommended that this proposal be approved. He said that the
proposal described the remaining work necessary to success-
fully implement he system. He also sid that using this
contractor's experience to insure the continuity of this
project was in the Government's best interest.

     The Deputy requested that OE fund the remaining work
in phases starting with $300,000 for December 1, 1971,
chrough March 31, 1972. On January 28, 1972, the contracting
officer notified the contractor by telegram that it had been
awarded an additional $300,000.

     On February 7, 1972, OE established a Sole Source Board
to review all proposed sole-source contract actions, including
contract modifications, greater than $25,000 before fund com-
mitment. Decisions of the Board were to be binding on the
Contracts and Grants Division but could be appealed by any OE
official to OE's Deputy Commissioner for Planning, Evaluation
and Management.

      On March 8, 1972, the Board reviewed and approved the
additional $954,000 and the time extension through December
1972. The Board's files did not contain any documents on its
discussion of the proposal but did contain the January 25,
1972, memorandum by the OE official administering the contract
recommending approval. The official contract modification
for $300,000 t cover wo:'' through March 31, 1972, was not
signed by the contracting officer until April 3, 1972. The
total contract price was now $i,183,000, and the contract
period was now 29 months.




                            12
     In May 1972 OE approved a contract modification which
provided an additional $200,000 for the contractor to continue
work through July 15, 1972. The work to be done was included
in the November 29, 1971, proposal, and the $200,000 was
included in the $954,000 approved by the Sole Source Board
on March 8, 1972. Therefore, no further justification for
the award was given to the contracting officer. The contrac-
ting officer approved the additional funding and time on
May 9, 1972. This increased the contract price to $1,383,000
and extended the total contract period to 33 months.
FOURTH MAJOR CONTRACT CHANGE

     On May 2, 1972, the contractor proposed to develop a
new, streamlined project grant information system. The
contractor proposed to delete unused portions of the system,
revise some existing forms, nd add some reports to the out-
put. In addition to making the system more simple, these
changes were supposed to provide more timely and current
reporting. According to OE, the simplified system did not
include the grant-tracking system in the original system and
became basically a computerized system to provide listings of
contracts and grants awarded.
Internal review and approval of proposal

     OE estimated that the proposed improvements would cost
$160,000. On June 20, 1972, the Acting Assistant Commissioner
for Administration recommended that OE issue a contract modi-
fication to allow the contractor to make the improvements
because they were necessary for successful system operation.
He added that it was in the Government's best interest
because the modification would allow continuity of the proj-
ect and capitalize on thQ contractor's experience.  The
official recommended that $160,000 of the $954,000 approved
by the Sole Source Board on March 8, 1972, be used to fund
the additional work. This left a balance of $294,000 which
the official recommended be provided so that the contractor
could continue work previously approved through December
1972.   /
     A contracting official told us that he Sole Source
Board did not have to approve the May 1972 contractor pro-
posal because the proposal did not increase the funding
beyond the previously approved $954,000.


I/The $954,000 was awarded in three phases, under contract
  modifications 8, 10, and 11, as described in app. II on
  p. 33.


                               13
    ·On June 28, 1972, the contracting officer signed the
modification to provide the $160,000 and the $294,000, or
$454,000, and to extend the contract period through December
1972. This increased the contract price to $1,837,000 and
extended the contract period from 33 to 38 months.
FIFTH MAJOR CONTRACT CHANGE

     In early 1972 overall responsibility for administering
this contract was transferred from the Office of Management
Information to the Contracts and Grants Division. On
December 11, 1972, the OE project officer (now i the
Contracts and Grants Division) requested that the Sole Source
Board approve a proposal solicited from the contractor. The
project officer said that the proposal was for work necessary
to improve and operate the project grant information system
and that the system would probably collapse if OS tried to
secure a new contractor to complete the system.

      On December 12, 1972, the contractor--at OE's request--
submitted a cost-plus-fixed-fee proposal for $249,000 and an
extension of the contract period through June 30, 1973.
About $60,000 of the $249,000 was to allow the contractor
to continue work that was to have been completed by December
31, 1972i.
     As outlined in this proposal, the new version of the
system first proposed in May 1972 was to be operational by
January 15, 1973, if sufficient computer time was available.
The contractor said that its participation in the project
grant information system would be reduced during the proposed
contract period and that future system operation would have
a different emphasis.
Internal review and approval of proposal

     On December 11, 1972, the Sole Source Board approved
the procurement, but not without reservations. Official
minutes of the hearing revealed that one mesder objected to
the continuation. He said the system should have been
completed and operational on January 1, 1973. in accordance
with the Board's March 8, 1972, decision to extend this
contract through December 31, 1972. However, according to
Board minutes, after a discussion of the advantages and
disadvantages of the proposed continuation, the Board voted
unanimously to approve the continuation, provided that no
further funds be spent on this system with this contractor.



                              14
     After the Board approved the proposal, the contracting
officer on December 19, 1972, signed the official contract
modification to award the contractor the $249,000 and to
extend the contract period to June 30, 1973. This modifi-
cation increased the total contract price to $2,086,000
and the contract period to 44 months.

FINAL MAJOR CONTRACT CHANGES

     On January 17, 1973, the contractor notified OE that
the $249,000 awarded in December 1972 would last only through
March 10, 1973, rather than June 30, as planned. The con-
tractor stated that it would cease work on March 10, 1973,
unless the Government provided additional funds.  Instead
of approving the request for additional funds, OE issued a
contract modification effective February 12, 1973, termi-
nating the contractor's responsibility for preparing and
reviewing input data and providing bureau support. The
contracting officer said in the modification, which he signed
on February 22, 1973, that all costs of doing these tasks
would be borne by OE after ebruary 11, 1973.
     The contractor, however, continued to perform the
terminated tasks and in a telegram dated March 12, 1973,
requested an additional $32,000 for providing bureau support
from February 12, 1973, through March 31, 1973. The funds
were requested for work which was to have been done within
the $249,000 awarded in December 1972. The contracting
officer signed the request for the additional $32,000 n
March 30, 1973. He did so after an OE official had told
him on March 15 that OE would be unable to do the work that
had been reassigned from the contractor until April 2, 1973.

     The Sole Source Board did not review the request for
$32,000 even though it was supposed to approve all contract
actions in amounts greater than $25,000.

      On March 21, 1973, the contractor, at OE's request,
submitted a budgetary and planning estimate for an
additional $46,200 to continue performing required contract
tasks through June 30, 1973, and an additional $12,000 to
$15,000 in contingency funds. The Acting Director of OE's
Automatic Data Processing Division, who was appointed proj-
ect coordinator, prepared the required information for the
Sole Source Board hearing held on April 2, 1973. de re-
quested that the Board approve an additional $65,000 to
cover projected cost overruns from April 2 through June 30,
1973.


                               15
      In his memorandum, the project coordinator made the
 following points.
     1. Weaknesses in contractor performance and OE over-
        sight contributed to the contractor's failure to
        complete the work within the established cost
        constraints.
          a.   The contractor's previous project manager was
               inexperienced and did not use professional
               system development practices nor employ project
               control techniques.
          b.   The contractor did not submit progress reports,
               nor did OE periodically review the contractor's
               performance.
     2. OE was instituting a standard that would require
        technical reviews after each phase of system
        development.
          a.   OE was tracking the contractor's progress
               weekly.
          b. The contractor would be required to submit a
             detailed project plan and monthly progress
             reports, delineating actual versus planned
             progress and cost.
     3.   The contractor had demonstrated commitment to the
          project by assigning a new manager.
     The project coordinator told the Board that an OE com-
mittee established in January 1973 to review project per-
formance had determined, after considering several alterna-
tives, that continuing the cost reimbursement contract repre-
sented the lowest cost to the Government. This committee
had also considered (1) entering into a fixed-price contract
with the present contractor and (2) terminating the contrac-
tor's system development activities, with OE assuming
responsibility for completing the work. The committee in-
cluded officials from the Office of the Commissioner, the
Contracts and Grants Division, the Automatic Data Processing
Division, and the Systems Planning and Control Division.
     The Sole Source Board denied the request for the
additional $65,000. Its decision was appealed to the Acting
Deputy Commissioner for Planning, valuation and Management

                              16
on April 9, 1973, and the project coordinator prepared a
memorandum justifying the appeal.  He included the informa-
tion presented to the Board earlier and the following addi-
tional information.
     1.   Temporary Department of Health, Education, and
          Welfare regulations on hiring delayed OE from
          assuming the data preparation and bureau support
          it had agreed to assume.   The contractor should be
          provided $32,000  for this work.

     2.   The cost overrun of $46,200 should be paid because
          it was for the new, streamlined version of the
          system.
     3.   A new contractor could eventually complete the
          system only at a substantial increase in cost and
          time.
     4.   The proposed amendment for the cost overrun would
          not exceed $46,200.
     5.   Continuation of the cost reimbursement contract
          was the only feasible way to successfully complete
          the project.
The revised submission was for $78,200 rather than the
$65,000 presented to the Sole Source Board. The $78,200
consisted of the $32,000 which had already been committed
for bureau support in March 1973 and $46,200 for the
additional cost overrun.
     On April 11, 1973--before a decision on the appeal was
made--the project coordinator requested that the contracting
officer issue a modification for $46,200.
     On April 19, 1973, the Acting Deputy Commissioner for
Planning, Evaluation and Management overruled the Sole
Source Board's April 2, 1973, decision to deny the additional
funds. He authorized a con'.ract modification awarding the
contractor $78,200.
     On April 23, 1973, the contracting officer signed the
modification for $78,200. This was the last contract
modification which awarded the contractor additional funds.
The contract totals were now $2,164,000 and 44 months.



                               17
 OE REFUSAL TO AWARD ADDITIONAL FUNDS
      On May 23, 1973, the contractor notified
 had suffered delays because of computer         OE that it
Data Management Center, and on May        downtime  at the HEW
quested an additional $5,629 because31 the contractor re-
                                       of the delays.
      On June 6, 1973, the contracting officer
contractor that no                               notified the
                    additional funds were available
further sole-source contract modifications.           for
contractor that the "causes for the            Be  told the
failure to receive its money's worth Office of Education's
                                      on this contract go
deeper than a few days of computer
                                    downtime"
cause of the downtime" was the contractor       that only be-
to complete system  documentation.           able to attempt
                                     kidded that OS was con-
cerned that such documentation had
schedule throughout the life of the been absent or behind
                                     contract.




                            18
                          CHAPTER 4

              O   ADMINISTRATION OF THE CONTRACT


APPLICABLE LAWS AND REGULATIONS
     The laws and regulations applicable to the administra-
tion of this contract are the Federal Property and Adminis-
trative Services Act of 1949 and its implementing regulations
set forth in chapters 1 and 3 of title 41 of the Code of
Federal Reguiat~ins, referred to as the Federal and HEW Pro-
curement Regulations, respectively. Noncompliance with some
regulations and internal procedures, as well as judgmental
errors by OE officials administering the contract, contributed
to the contract's growth.
NONCOMPLIANCE WITH FEDERAL
PROCUREMENT REGULATIONS
     In several instances, we believe OE did not comply with
Federal Procurement Regulations in its contracting procedures.
The regulations (41 C.F.R. 1-1.208) state that all contracts
and contract modifications must be in writing. The contrac-
ting officer did not approve one contract modification until
the period covered had expired. The contractor thus was
working without a duly executed contract. The modification
covered work to be performed'from December 1, 1971, to March
31, 1972, but was not approved by the contracting officer
until April 3, 1972. In two other instances, OE awarded
the contractor additional funds by telegram pending
negotiation of!a definitive contract modification within
60 days. In both instances, the formal modification was
not signed within 60 days and the contractor was working
without a duly executed contract.
     The regulations (41 C.F.R. 1-3.808.2(g)) also state
that, in determining what constitutes a fair and reasonable
profit or fee, the contractor's past and present performance
should be evaluated in such areas as quality of product,
meeting of delivery schedules, and timely compliance with
contractual provisions. The regulations state that a poor
record in this regard should be considered in determining
the profit or fee. Because the available contract documents
did not always delineate the costs of individual tasks to be
performed in each proposal, we could not determine the amount
of funds awarded to cover cost overruns versus increases in
the contractor's scope of work nor whether the overruns were


                              19
the fault of OE or the contractor. However, we believe OE
failed to adequately consider past contractor performance in
awarding contract modifications including fees.
NONCOMPLIANCE WITH OE DIRECTIVES

     In addition to the Fede-al and HEW Procurement Regula-
tions, OE had internal directives related to procurement.
OE directives applicable to this contract outlined criteria
for determining what constitutes an unsolicited proposal
and requirements for a sole-source procurement.
Proposal
     The contract was awarded on a sole-source basis as a
result of an unsolicited" proposal submitted to OE on
September 9, 1969. An OE Contracts and Grants Administration
directive dated May 1, 1969, states in part:
     "An unsol' 'ited proposal * * * is a research or
     developme    *roposal made to the Government by
     an organization or an individual acting on its
     own behalf without prior formal or informal
     solicitation from a Federal procuring activity.
     The content of unsolicited proposals must be the
     product of original thinking by the organization
     or individual presenting them."

      although the September 9 proposal was characterized as
unsolicited, it was proposed as a follow-on effort to earlier
contract work. Discussions regarding the nature of the
proposal had transpired between OE and the contractor for
several weeks before September 9, 1969. The proposal was
regarded as phase II in the development of the system and
was intrnded to cover detailed design, total system develop-
ment, ystem implementation, and project management of the
design and implementation. Phase I, provided for under a
modification to an earlier contract, covered the requirements
analysis, conceptual design of the system, and the prepar-
ation of an implementation plan.




                             20
Award
     The contract was awarded under the authority of 41
U.S.C. 252(c)(10) which states that purchases and contracts
may be negotiated without formal advertising 'for property
or services for which it is impracticable to secure compe-
tition."
     An OE directive dated May 1, 1969, covers sole-source
procurement justifications. Item A in the directive states
that a sole-source recommendation shall be in writing and
shall be submitted concurrently with the procurement action
request as a separate document entitled 'Justification for
Sole Source Procurement." We were unable to locate such a
document in the contract file.

     However, a memorandum justifying the sole-source award
to the contractor did apparently accompany the procurement
action request. The memorandum contents did comply, for
the most part, with the requirements of the May 1 sole-source
directive. But item D of the directive states that each
justification shall reflect the degree of consideration
given to other sources in the particular field and the
reasons they lack the capability which the recommended source
evidences. Such information was not included in the
memorandum, nor could we locate it in the contract file.

Other

     In March 1973, OE circumvented nternal procedures by
committing $32,000 to the contractor without the required
Sole Source Board approval.
FREQUENT CNGES IN OE
ADMINISTRATION

     Responsibility for administering this contract was
assigned to five OE project officers and three organizational
entities during the contract period.

     The Office of Management Information had responsibility
for administering the contract from its inception through
early 1972, when the Contracts and Grants Division was as-
signed such responsibility. The Director of the Contracts
and Grants Division became concerned about the transfer of
the responsibility. In October 1972 he expressed concern
about befng responsible for the system in memorandums to
the Deputy Commissioner for Planning, Evaluation and


                            21
 Management who had assigned the contract to his Division.
 stated that his Division was not involved in developing       He
 system and that he had no control over OE bureaus         the
 responsible for initiating and entering data and allwhich were
                                                        correc-
 tions into the system. He said that placing operating
 responsibility for the system
 workable approach as long as hein had
                                    his Division was not a
                                       no such control over the
 bureau personnel. He added that later efforts to
 tractor personnel to enter data into the system wereuse con-
                                                        also
 ineffective.

      The Director of the Contracts and Grants Division
 aso concerned about the usefulness of the system        was
 October 2, 1972, informed th, Deputy Commissioner and  on
 Planning, Evalua-ion and Mana ement that:         for

     "* * * several key members of my staff have been
     attempting to convince you * * * that the probatil-
     ity of PGIS [project grant information system] ever
     working is so small that serious thought should be
     given to abandoning the system or severely reducing
     its scope of operation and high operating costs.
                                                       No
     one in OE receives anything of value from PGIS after
     more than a year of operation and six months of in-
     tense action to make the system work."
He also informed this official on October s1, 1972,
fundamental design problems inherent in the system that
associated with the use of the HEW Data Management and delays
                                                    Center's
computer system were the principal causes of the
                                                  system's
poor performance; these conditions existed in spite
continuing efforts by OE and contractor personnel    of
                                                   to make
the system work.

     Later, on January 19, 1973, the Acting
Education, the official to whom the Director Commissioner  of
                                              of the Contracts
and Grants Division sent the above memorandum, assigned
all responsibility for developing and implementing        over-
                                                    an OE-
wide management system--including responsibility
                                                  for ana-
lyzing the capability of the project grant information
system--to two project managers reporting directly
                                                    to him.
INDEPENDENT EVALUATIONS OF THE
PROJECTGRANT INFORMATION SYSTEM

     After the contractor discontinued its work, OE continued
its efforts to make both the original and *streamlined'
versions of the project grant information system
                                                 successful.


                             22
     In June 1973, at the end of the contract period, the
simplified version of the system was incomplete.  OE con-
tracted with the KMS Technology Center to attempt to make
the system operational. The Center submitted weekly status
reports outlining deficiencies in the simplified system.

     Based on the Center's reports, an OE official on July
25, 1973, notified the project coordinator that the system
was "in terrible, terrible shape." He said that program
testing by North American Rockwell was in far worse shape
than had been reported.  He said the Center reported that,
if any testing of the new system had been performed, no one
had bothered to look at the results. He recommended that
OE (1) stop work on the simplified system and "write the
system off" as a bad experience, (2) shift the Center effort
to the original system to find ways to improve its efficiency
without major modification, and (3) start designing a new
grant processing system to an OE-prepared requirement
specification.

     In its final report, issued in August 1973, the Center
said that the computer programs which the contractor turned
over to them were in various stages of completion, ranging
from barely adequate to useless" and that much work would
be required to improve the programs so that overall system
testing could be done. The Center's effort was the end of
the simplified system.

      In August 1973 OE instructed Infodata Systems, Inc.--
a firm it already had under contract--to analyze the original
system in an attempt to improve its operation.   In its
September 1973 analysis, Infodata found serious deficiencies
in the original system and recommended that OE make a funda-
mental decision on the adequacy of the system to meet its
needs. OE discontinued its use of the original system in
March ]974 because it was unreliable and too costly to
operatf:.
     In November 1973 OE was planning to develop a system
on its own to meet some requirements not being met by the
project grunt information system. This system was implemented
in early 1974. The Director of the Grant and Procurement
Management Division told us in July 1976 that the system
developed by OE provides him with the same information that
the simplified version of the project grant information system
was supposed to provide. Furthermore, he said that the system
developed by OE provides more accurate information. Two OE
officials estimated the cost of OE's system; one estimated
$18,000, the other $20,000. Another official said that OE


                             23
incorporated only minor elements of the
information system design into its systemproject grant
                                           and did not in-
corporate any of the computer programing
tion aspects which he said represent most or computer opera-
developing a computer system.              of the work in




                           24
                             CHAPTER 5
                   ROLES OF THE HEW AUDIT AGENCY,
                 THE DEFENSE CONTRACT AUDIT   GENCY,
             AND THE HEW OFFICE OF THE GENERAL COUNSEL
HEW AUDIT AGENCY

     In September 1973 the HEW Audit Agency started a review
of the project grant information system. The audit included
a revi" of the Office of Education's contract file, finan-
cial data and correspondence relating to the contract, and
interviews with OE officials. The Agency prepared a draft
report on its findings but did not isu a final report.

     The Audit Agency was concerned primarily with OE's
administration of the project and why the system failed to
accomplish    ts goal.   Its audit did not include reviews of
     --OE's treatment of the proposal as unsolicited,
     -- the validity of awarding the contract on a sole-
        source basis, and
     -- the contractor's costs or vouchers submitted for
        payment under the contract.
     In its draft report the Agency concluded that the proj-
ect grant information system did not provide OE with the
information that it was supposed to provide. The Agency
attributed this primarily to the following problems which
it stated were evident during the entire contract period.

     -OE did not have a formal action plan to follow.
     -- The leadership in OE was changed frequently.
     -The responsibilities of OE and other HEW components
       were fragmented.
     --The contractor's performance was inadequate.
     The Agency also said in the draft that the problems
in implementinla the system should have been presented to
higher level 0: automatic data processing and systems experts
to obtain their opinions on whether to continue, expand, or
curtail the contract.

                               25
      The Agency estimated that, in addition to the total
 contract price of $2.2 million, OE incurred costs
 in developing the system.                         of $842,000

      It did not distribute the draft report outside
 Agency for comment and did not prepare a final      the
                                                report.  An
 official said that no report was issued because:

      --The Investigative Staff of the House Committee
                                                         on
        Appropriations included the project grant information
        system contract in a review
        tracts. The Committee staff itissued
                                        was doing of 0 con-
                                             a report in
        November 1973 about the same time the Agency com-
        pleted its audit. In its report, the Committee
        noted a number of deficiencies, some of which werestaff
        similar to deficiencies noted in the Agency report.
        The staff reported that (1) OE personnel assigned
        the project were continually rotated, (2) the con- to
        tractor failed to deliver a workable system, and
        (3) OE did not examine the original estimate very
        carefully.
      -- The problems identified with the project grant
                                                         infor-
         mation system were considered symptoms of problems
         with HEW management information systems in
         At the time the Agency completed the audit general.
                                                    of the
         project grant information system, it was beginning
         a broader scale audit of HEW management information
         systems in general.
      A final report dealing with HEW's management
mation systems was issued in January 1977. The     of infor-
                                                 report
not go into detail about the project grant information does
or other OE systems but acknowledges that a survey       system
system had been made. The report contains numerous  of  the
                                                     recom-
mendations for improving HEW's management of information
systems.

     According to an Audit Agency official, the Agency
not do sufficient audit work on the project             did
                                            grant informa-
tion system to determine whether OE had justification
recoupment of funds from Ncrth American Rockwell       for
He emphasized that OE accepted the contractor's   Corporation.
                                                 work in spite
of known problems and that it would have been
to have terminated funding on the contract at better  for OE
                                              an earlier
date than to attempt to recoup funds now.




                             26
DEFENSE CONTRACT AUDIT AGENCY
     We discussed this contract with the Defense
                                                  Contract
Audit Agency to determine the extent and status
on the contract. This Agency was responsible     of  its work
                                              for reviewing
the contractor's vouchers for provisional payment
                                                    under the
 contract. It must also issue a final report certifying
 whether the charges to OE were correct before the
 can be officially closed. An official told us in contract
 1976 that the contractor had not yet submitted its December
voucher for payment on the contract because final final
                                                    overhead
rates for fiscal year 1973 had not yet been negotiated.
For this reason, the Defense Contract Audit Agency
issued a finaJ report on the contract. The officialhad not
us there was o basis for the Agency to comment         told
                                                 on the
possibility of OE recouping funds under this contract.
said the Agency would have to do additional audit         He
issuing its final report on the contract. Based    work  before
                                                  on its
findings, if justified, it would make a recommendation
OE that it attempt to recoup funds. However, the         to
                                                   final
determination on recouping funds is OE's responsibility.
HEW OFFICE OF THE GENERAL COUNSEL
     We also contacted officials in HEW's Office of
                                                     the
General Counsel to determine if that Office had
in the contract for the project grant informationbeen involved
They told us that the Office of the General Counselsystem.
play a legal role in this contract and was not asked did not
to determine whether funds could be recouped.         by OE




                             27
                               CHAPTER 6
                   AGENCY AND CONTRACTOR COMMENTS

                          AND GAO EVALUATION
       In letters dated February 25,
  International Corporation           1977, HEW and Rockwell
  appendixes IV and V.)     commented  on this report. (See

  HEW
         According to HEW,
   history of the contract the   report accurately
                             but does not show thatpresents     the
   of the system was sound although                     the concept
   state of the art at the time.         probably too large for HEW's
   complexity of the job undertakenHEW stated that the size and
   prehended by OE.                     were not adequately com-

         We are not in a position
  whether the state of the art to make a value judgment as to
                                   in 1969 or what w      or was not
  comprehended by OE .s the
  We believe, however, that on  basic   cause of the system failure.
  shows that before the contractpages 4 and 5, the report clearly
  ees reviewed the proposal and was awarded several OE employ-
  practicality of the system        expressed reservations about
  personnel to implement the    and  the capability of contractor the
  tricate ramifications of theproposed system because of the in-.
                                   system.
        HEW commented that our
 by OE for $20,000 with the comparison of the system developed
 is an overstated comparison".  project grant information system
 the $20,000 system is as complex We do not mean to imply that
 information system was intended as the original project grant
 page 23, the Director                to be. However,
                          of
 Division told us that the the    Grant and Procurementas Management
                                                             stated on
                              $20,000 system provides the
 information that the simlified                                same
was supposed to provide.             version, described on page
                                                                    13,
       HEW further commented that
                                     the project grant information
system is a case study of a
were learned which are being    systems    failure but that lessons
                                 applied to prevent    similar situa-
tions from occurring. HEW
at both                        stated   that  changes are being made
ment and the   Department level and at OE
            management control  of computer tosystems.
                                                 improve the procure-




                                28
ROCKWELL INTERNATIONAL CORPORATION

     The contractor disagreed that its performance under the
contract was poor and stated that its performance should be
judged in light of initial contract requirements and the
difficulties in dealing with OE.
     We state in the report that both poor OE management and
poor contractor performance contributed to contract growth.
We could not evaluate the contractor's performance in light
of initial contract rquirements because we were unable to ob-
tain the original statement of work from OE or the contractor.
     The contractor commented that relocations of its place
of performance, made at OE's insistence, hindered its progress
on the system. However, it was not until the original con-
tract period had nearly expired that the contractor was asked
to relocate. As discussed on page 8, OE wanted the contractor
to relocate because of poor performance under the original
contract. We believe that the contractor's relocation can be
seen as corrective action necessitated by failure to deliver
an operational system during the original contract period and
should not be viewed as a problem that delayed the contractor.
     The contractor further commented that a basic problem
with the project grant information system was that it was a
'batch processing, system' and required constant updating to
be of any value. The contractor stated that it urged OE to
adopt an on-line system to resolve the problem.
     We recognize on pages 11 and 12 that the contractor
recommended an on-line system to improve the project grant
information system. However, the recommendation was made in
November 1971, 2 years after the contract award and after the
system had been installed in several bureaus. Also, an OE
data processing official stated an on-line system was not
justified.
     The contractor felt that our comparison of the $20,000
system developed by OE and the project grant information
system was misleading. Also, it stated that the report did
not indicate that the project grant information system data
base was an essential element in the development of the OE
system.
     As stated earlier we did not mean to imply that OE's
system is as sophisticated as the original project grant
information system; however, it did meet the objectives of
the simpliried version at a nominal cost.

                             29
     An OE official involved in developing the $20,000 system
told us that OE used only minor elements of the project grant
information system design in its system. He said OE did not
use any of the project grant information system computer pro-
graming or computer operation aspects which he said represent
most of the work in developing a computer system.
     The contractor c.jo stated that he was unable to locate
any current employees that we interviewed and suggested we
interview the former president of the subsidiary responsible
for the contract, who is still employed by the contractor.
     During our review we interviewed contractor personnel
who had been directly involved with the contract for a sub-
stantial period of time. When we contacted the former
president of the subsidiary responsible for the contract,
he said that he would not be the one to comment on our report
because his involvement with the contract was limited and
indirect.




                            30
APPENDIX I                                                               APPENDIX I


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                       MU   6                                       Dm
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by
 mlm,,a.                                       January 30, 1976



        The Honorable Elpmer B. Staats
        Comptroller General o the United Status
        General Accounting Office
        441 G Streets, NW
        Washington, D. C. 20548


        Dear Elmer:
              A number of disturbing facts surrounding an Office
        of Education contract to the North American Rockwell
        Corporation have come to my attention recently and
                                                           I
        am therefore requesting a full investigation of this
        matter by the General Accounting Office.
             The contract in question was awarded in 1969 on
       a sole source basis to the North American Rockwell
       Corporation for the design of a computer system which
       would have enabled the Office of Education to better
       the work of its contractors. The original contract check
       called for a nine-month w't. period at a cost of $378,000.
       The Office of Education and Rockwell agreed to 16
                                                          modi-
       fications of this contract, which result in the project
       taking 57 months at a cost of over $2 million.
             According to my information the
       by Rockwell was found to be useless andmaterial  developed
                                                 yet the HEW Audit
       terminated an investigation of the
       has been returned by the ccntracitr contract  and no money
                                           to the Office of
       Education.
             I am requesting the General Accounting Office
       determine the following:
             1. Why did this contract grow
       and $378,000 to almost five years andfrom nine months
                                              $2 million?
            2. What was the nature of he Office of Education's
      internal review of each of the major modifications
      contract?                                          of the



                                          31
APPENDIX I                                         APPENDIX I




 The 4:onorable Elmer B. Staats
 January 30, 1976
 Page Two

       3. What was the nature of the HEW Audit Unit's
 investigation; what did they find; and why was their
 investigation terminated?
       4. What role, if any, did the legal staff of the
 Office of Education have in this case?
       5. What, if any, regulations or laws were broken
 by individuals involved in this situation?
       I would appreciate receiving a report on this
 contract by May 1. Mr. Morton Schwartz of my staff will
 be available to answer any questions your staff may have
 concerning this request.




 WP: msi2




                              32
APPENDIX II                                                                   APPENDIX II

                         MAJOR PROVISIONS O     CONTRACT MODIFICATIONS

 Modification    Funds              Period
    number      approved          extended to                      Naor provisions

      1             -                 -              Modify certain contract clauses.     No
                                                     change in scope of work.

      2             -                 -              Designate new Office of Education
                                                     project officer.

      3          $80,000      February 28, 1971      Contractor to perform work outlined in
                                                     'PGIS Implementation for the Office of
                                                     Education,* dated June 30 and July 10,
                                                     1970. Designate new Office of Education
                                                     project officer.

      4         $   6,299     Not available          Contractor to review all major Office of
                                                     Education data processing systems relat-
                                                     ed to the project grant information
                                                     system, as outlined in its December 11,
                                                     1970, proposal.

      5         $160,337      June 30, 1971          Contractor to perform work outlined in
                                                     "PGIS Implementation, Support, and
                                                     Control," dated January 13, 1971, and
                                                     January 29, 1971.

      6         $ 58,500      Not available          Contractor to conduct a feasibility study
                                                     of using on-line computer terminals for
                                                     the project grant information system, as
                                                     outlined in its August 17, 1971, proposal.

      7         $200,000      November 30, 1971      Contractor to continue work in PGIS
                                                     Implamentation, Support, and Control."

      8         $300,000      March 31, 1972         Contractor to perform work outlined in
                                                     "PGIS System Support and Major System
                                                     Improvements," dated November 29, 1971.

      9             -         April 22, 1972         Contractor to continue work in PGIS
                                                     System Support and Major System
                                                     Improvements."

     10         $200,000      July 15, 1972          Contractor to continue work in "PGIS
                                                     System Support and Major System
                                                     Improvements."

     11         $454,192      December 31, 1972      Contractor to continue work in "IP3I
                                                     System Support and Major System
                                                     Improvements" and additional tasks out-
                                                     lined in its May 2, 1972, letter.
     12                       -                      Correct clerical error     in modification
                                                     011.
     13         $249,000      June 30, 1973          Contractor to perform work outlined in
                                                     December 12, 1972, proposal.
     14                       -                      Office of Education to assume all costs
                                                     directly for bureau support activities
                                                     and preparing and reviewing fiscal year
                                                     1973 input as of February 12, 1973.
     15         $ 78,200                  -          Increased contract amount by $78,200 to
                                                     allow for continuation of. work until
                                                     Office of Education personnel can perform
                                                     support functions for the project grant
                                                     information system.
     16             -                     -          Incorporated negotiated final overhead
                                                     rates for contractor's fiscal year 1970.


                                                33
APPENDIX III
                                                                APPENDIX III


             ESTIMATED CONTRACT COST PLUS
                                          FIXED FEE
                           Estimated                    Estimated cumulative
                             cost           Fixed fee   cost-plus-fixed-fee
Original
  contract             $    343,770         $ 34,377       $   378,147
Modification 3               80,000              -             458,147
                  4           5,726              573           464,446
                  5         145,761          14,576            624,783
               6             53,186           5,314            683,283
               7            181,818          18,182            883,283
               8            272,727          27,273        1,183,283
             10             181,818          18,182        1,383,283
             11            412,902           41,290        1,837,475
             13            226,364           22,636        2,086,475
             15             71,734            6j466        2,164,675
  Total               $1,975,806        $188,869




                                       34
APPENDIX IV                                                APPENDIX IV




  6 >       DEPARTMENT OF HEALTH, EDUCATION. AND WELFARE
                        OFICE OF THE SECRETARY
                          WAS4NGOTON. D.C. lmu




                        February 25,      1977



Mr. Gregory J. Ah rt
Director, Human Resources Division
United States General
  Accounting Office
Washington, D.C. 20548'

Dear Mr. Ahart:
The Secretary asked that I respond to your request for our
comments on your draft report entitled, "History of Contract
Awarded to Develop a Project Grant Information System." The
enclosed cosments represent the tentative position of the
Department and are subject to reevaluation when the final version
of this report is received.
We appreciate the opportunity to coment on this draft report
before its publication and transmittal to Congress.

                                   Sincerely yours,




                                  AsistanSecretary, Comptroller
Enclosure




                                     35
APPENDIX IV                                               APPENDIX IV



Conments of the Department of Health, Education, and Welfare on the
General Accounting Office Draft Audit Repcrt, "History of Contract
Awarded to Develop a Project Grant Information System"

The report is an accurate presentation of the events which occurred
during the period from 1969 to 1973 elated to the contract for the
Project Grant Information System (PGIS). What the report does not show,
however, is that the concept of PGIS was sound but probably too large
for HEW's state of the art at the time. This we feel was the basic
problem.
PGIS attempted to do too much at one time. As originally conceived, it
would not only monitor discretionary rants, but also provide abstract-
ing, indexing, and cross-referencing capabilities. These attributes
were (and are) desirable for such a system. Unfortunately, a similar
system did not exist in OE at the time. The size and complexity of the
job undertaken was not adequately comprehended. There was an attempt
made to design and put together a system that satisfied all sorts of
management purposes.
The report puts much emphasis on the grant lnfovmation system developed
later by OE at an estimated cost of $20,000 (versus PGIS's cost of
nearly $3million). But, the new system is barely a skeleton of the
original intent for PGIS; the innuendo left by the GAO report is that OE
for 1X% of the cost, successfully designed for itself what it paid a
contractor to fail to do. This is at best an overstated comparison.
PGIS is a case study of a systems failure, but one from which HEW has
drawn lessons which we are applying to prevent similar cases.
Changes have been made at the Department level. While our work in this
area is not specifically an outgrowth of PGIS; t does arise from general
factors which lead to conditions under which the istakes which surrounded
PGIS could happen inHEW.
     o First, we have already established an inventory of systems
within HEW. (This is the basis for any other initiatives we will be
taking in the area of management of systems. We have to know what is
there before we can begin to grapple with its nkinagement.) Funding for
a system may not proceed until the developing agency registers it in the
inventory.
     o Second, we are about to initiate a long-range planning process
for computerized systems which directly links these initiatives with
programmatic objectives and requires Justifications for all systems
resources on the basis of programmatic needs. This should help ensure
that the program managers, rather than the systems designers, take re-
sponsibility for systems resources.

                                 36
APPENDIX IV                                              APPENDIX IV


     o Third, we are working with a Departmental task force to define
a "life-cycle" approach to systems management which will assure that
each level of management will know what its responsibilities are in the
conceptualization, planning and budgeting, development, implementation,
and evaluation of systems. Our intent is to provide a model of manage-
ment control which permits decentralized decision making on systems, but
assures that systems efforts are under management control.
 The Office of Education has taken many steps in recent years to improve
 its performance in soliciting, evaluating, awarding and monitoring pro-
 curement activities. The following are examples of such improvements:
      o Organization - Since 1973, the grant and procurement management
 function in the Office of Education has been elevated to report directly
 to the Deputy Commissioner for Management and has been organized to more
 effectively administer agency procurement activities in accordance with
 Federal and Departmental policies and regulations.
      o Staffing - During the past three years the staffing of the Grant
 and Procurement Management Division in OE has been increased to provide
 needed support to the administration of procurement activities. A
 supplemental budget request which includes additional staffing in this
 area has been approved by the Office of Management and Budget and is
 currently awaiting action by Congress.
      o Recruitment and Training - Increased emphasis has been placed on
 recruiting highly qualified contracts officers inOE and on upgrading
 the skills of existing staff. Relevant training courses in Federal
 procurement procedures offered by the Civil Service Commission and other
 Federal and nor-Federal sources have been identified and made available
 to personnel responsible for OE procurement activities. During the past
 two years approximately 300 programs and procurement personnel have
 received such training.
     o Role of Contracting Officer - Because the Contracting Officer is
most knowledgeable about and directly responsible for procurement activi-
ties it is essential that this officer be fully involved in all facets
of the procurement planning and execution process. Procurement pro-
cedures in OE now call for the contracts officer to work directly with
program personnel in the development, award and administration of all
procurement actions. This process which was not fully in place during
the 1969 - 1973 period, assures compliance with existing procurement
policies and regulations from the earliest stages of the contracting
activity.




                                 37
APPENDIX IV                                              APPENDIX IV



     o Sole Source Review Procedure - As the report points out, Office
of Education procedures for sole source contracting were not formalized
until 1972, with the establishment of the Sole Source Board. Since that
time, officials at all levels and in all programs in the agency have
become more familiar with sole source procurement regulations and
policies and are now better aware of the proper use of sole source
contract authority.
     o Contracz Justification and Review - The process by which funds
are made avaifable for major contract activities has been strengthened
greatly in recent years. Because of an increased concern for effective
and efficient utilization of OE's financial resources, stronger and more
detailed justification is now required prior to allocation of funds for
initial contracts and for contract extensions or modifications. Strengthen-
ing of this process serves to identify potential mismanagement of resources
and to insure that desired results are achieved from investment of
contract funds.


The HEW Audit Agency report dealing with the Department's management of
its information systems--discussed on page 32 of the GAO draft report--
was released inJanuary 1977. The report contains numerous recommen-
dations for improving the management of the Department's information
systems.




                                38
APPENDIX V                                                        APPENDIX V




                   -2230     EmS
                               H,A,        Rockwell
              ES           m90wsnt
                              m            Intemetronal
                                                          February 25, 1977



Mr. Gregory J. Ahart, Director
Human Resources Division
General Accounting Office
Washington, D.C. 20548
     Re:     Letter B-185845 dated January 31, 1977
Dear Mr. Ahart:
     This is in response to the draft report transmitted
by subject letter on a contract between North American
Rockwell Information Systems Company and the Office of
Education, Department of Health, Education and Welfare, to
develop a computerized project grant information system.
     The contractor cannot agree with the general allegations
of poor performance on its part set forth in the report. Its
performance must be Judged in the light of the requirements
of the initial contract and the difficulties encountered ir
trying to work with different segments within the Office of
Education which had conflicting views about the objectives
of the program. Internal disagreements within the Govern-
ment over what the system was to accomplish are noted in the
report, as are the numerous shifts in Government management
of the program. These problems must be taken into considera-
tion in reaching any conclusions with respect to the
contractor's performance.
     About a year after work on the program commenced, the
place of performance was moved at the instance of the
Government from Anaheim to the contractor's offices in
Arlington, Virginia. Shortly thereafter, the Government
required another relocation from Arlington to the Office of
Education Building in Washington, D.C. These developments
naturally resulted in a disruption in program employment,
cost increases and schedule delays.
     Another basic problem with the PGIS system was that it
was a "batch processing system" and required constant
updating to be of any value. Most of the additional money
funded for the program was spent updating the programs so
                                      39
APPENDIX V                                            APPENDIX V



  the system would be of some value to the Office of Education.
  The contractor urged the Office of Education to adopt an
  "on-line" system. Such a system requires a standard input
  format. The Office of Management Information Computing Center
  of the Office of Education could not, however, agree on such
  a standard format to apply to the seven Bureaus. At the
  time of the proposal and awarding of the contract, the type
  of system to be used was not specified but had been left to
  subsequent determination.

      It is felt that the concluding paragraph of the report
 is misleading. It is stated that a system was developed by
 the Office of Education to provide the same information that
 the original system was to provide, but at a very low cost.
 This obviously is not the type of system Rockwell was asked
 to develop, nor is there any indication that the data base
 developed under the Rockwell contract was an essential element
 in the development of this low cost system. This leaves the
 reader with the impression that the highly mechanized and
 sophisticated system that was contracted for could in effect
 have been accomplished for $18,000 to $20,000. The
 contractor believes that such a conclusion is not supported
 by the facts and is grossly unfair.

      The draft report states on page 3 that current
 contractor personnel were interviewed by representatives
 of the GAO. We have been unable to find any current Rockwell
 employees who were interviewed. In any event, we believe
 before issuing its final report the GAO should interview
 the former President of NARISCO, S. L. Hasin. He is
 currently employed by Rockwell International Corporation
 at its Information Systems Center, 2201 Seal Beach Boulevard,
 Seal Beach, California 90740. His telephone number is
 Area Code 213/594-3057.

                                 Very truly yours,

                                 ROCKWELL INTERNATI    AL CORPORATION


                                 F. P. Zimmer
                                 Director - Contracts

 FPZ:kt




                            40
APPENDIX VI                                         APPENDIX VI


              PRINCIPAL HEW OFFICIALS RESPONSIBLE

                FOR ADMINISTERING ACTIVITIES

                  DISCUSSED IN THIS REPORT


                                         Tenure of office
                                        From            To
SECRETARY OF HEALTH, EDUCATION,
  AND WELFARE:
    Joseph A. Califano, Jr.          Jan.    1977   Present
    David Mathews                    Aug.    1975   Jan. 1977
    Caspar W. Weinberger             Feb.    1973   Aug. 1975
    Frank C. Carlucci (acting)       Jan.    1973   Feb. 1973
    Elliot L. Richardson             June    1970   Jan. 1973
    Robert . Finch                   Jan.    1969   June 1970
ASSISTANT SECRETARY FOR EDUCATION:
    Philip Austin (acting)           Jan.    1977   Present
    Virginia Y. Trotter              June    1974   Jan. 1977
    Charles B. Saunders, Jr.
      (acting)                       Nov.    1973   June   1974
    Sidney P. Marland, Jr.           Nov.    1972   Nov.   1973
COMMISSIONER OF EDUCATION-
    William F. Pierce (acting)       Jan.    1977   Present
    Edward Aguirre                   Oct.    1976   Jan. 1977
    William F. Pierce (acting)       Aug.    1976   Oct.  1976
    Terrel H. Bell                   June    1974   Aug. 1976
    John R. Ottina                   Aug.    1973   June 1974
    John R. Ottina (acting)          Nov.    1972   Aug. 1973
    Sidney P. Marland, Jr.           Dec.    1970   Nov. 1972
    Terrel H. Bell                   June    1970   Dec. 1970
    James E. Allen, Jr.              May     1969   June 1970




                             41