oversight

Contract Management: DOD Begins New Effort to Improve Reporting of Contract Service Costs

Published by the Government Accountability Office on 1999-10-13.

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

                  United States General Accounting Office

GAO               Report to Congressional Committees




October 1999
                  CONTRACT
                  MANAGEMENT

                  DOD Begins New
                  Effort to Improve
                  Reporting of Contract
                  Service Costs




GAO/NSIAD-00-29
Contents



Letter                                                                                3


Appendixes   Appendix I:    Contract Services                                        14
             Appendix II:   Exemptions to Reporting Advisory and Assistance
               Services                                                              17
             Appendix III: GAO Contacts and Staff Acknowledgments                    19


Table        Table 1: DOD’s Realignment of Costs From the Miscellaneous
               Services Category                                                      7


Figure       Figure 1: DOD’s Reported Contract Services in Fiscal Year 1998           5




             Abbreviations

             DOD       Department of Defense




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Page 2   GAO/NSIAD-00-29 Contract Management
United States General Accounting Office                                                           National Security and
Washington, D.C. 20548                                                                     International Affairs Division



                                    B-282596                                                                                     Leter




                                    October 13, 1999

                                    Congressional Committees

                                    Although the Department of Defense (DOD) is increasing its reliance on
                                    contractor support, long-standing concerns exist regarding the accuracy
                                    and reliability of its accounting for the costs of contract services,
                                    particularly advisory and assistance services.1 Congress has expressed its
                                    concern that without accurate and reliable data in this area, appropriate
                                    oversight may be hampered. In May 1998, we reported that the Army had
                                    erroneously included costs for some advisory and assistance services in the
                                    miscellaneous service budget category and that the miscellaneous category
                                    comprised a large portion of total contract services−$47 billion out of
                                    $96 billion in fiscal year 1996.2 In fiscal year 1998, reported contract service
                                    costs totaled about $90 billion. In 1998, Congress imposed a statutory limit
                                    on the percentage of total contract service costs that may be reported in
                                    the miscellaneous category.3 This limit was set at 30 percent of total
                                    contract service costs in fiscal year 2000 and at 15 percent in 2001 and
                                    thereafter. Additionally, Congress required (1) DOD to review and report
                                    annually on its proposed budget submission to ensure that contract
                                    services meeting the definition of advisory and assistance services are
                                    properly classified and (2) that we review DOD’s report. Our objective for
                                    this report was to determine the actions taken by DOD to improve the
                                    accuracy of its reporting of costs for contract services.



Results in Brief                    DOD has taken a number of steps intended to improve the accuracy of
                                    costs reported for contract services but recognizes more needs to be done.


                                    1
                                     Contract services are services, for example, provided by contractors to assist program
                                    offices in a variety of ways and to maintain equipment and facilities. There are eight
                                    categories of contract services, including (1) advisory and assistance services, which
                                    include services to support policy development, decision-making, or program management;
                                    (2) research and development services; and (3) miscellaneous services—a broad category of
                                    services that do not fit within one of the other categories. See appendix I for definitions of
                                    all eight categories.
                                    2
                                     DOD Consulting Services: Erroneous Accounting and Reporting of Costs
                                    (GAO/NSIAD-98-136, May 18, 1998).
                                    3
                                        Strom Thurmond National Defense Authorization Act for Fiscal Year 1999, section 911.




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             In an effort to achieve greater accuracy and consistency in reporting costs
             Department-wide, in November 1998 it provided guidance to the military
             services and Defense agencies on identifying and reporting contract service
             costs. This guidance included specific examples of the types of services
             that DOD had determined were being erroneously included in the
             miscellaneous service category, along with direction on the correct
             category in which to report those services. For example, it stated that
             environmental restoration and pollution prevention costs were not to be
             reported in the miscellaneous category but rather in the land and structure
             category. Following this guidance, DOD reported that the military services
             and Defense agencies realigned about $30 billion of the fiscal year 1998
             costs that had been incorrectly reported in the miscellaneous service
             category to other categories they determined were more appropriate.

             Despite these efforts, DOD officials stated that they could not ensure the
             accuracy of the classification of contract service costs reported for
             advisory and assistance services because of inconsistencies in reporting by
             the military services. In its 1999 report to Congress, the Department also
             expressed concern about the difficulty in distinguishing between advisory
             and assistance services and other contract service costs and recommended
             revising the way contract service costs are reported. DOD recommended
             that they identify what the contract service supports rather than identifying
             the type of service provided such as advisory and assistance services.
             DOD’s recommendation, as presented in its report, would represent a
             major change in how contract service costs are reported. The change may
             not provide the visibility Congress desires over contract services, if all
             contract service costs are classified according to what they support rather
             than the type of service provided. DOD, however, has not provided specific
             details regarding this recommendation, and according to officials in the
             Office of the Secretary of Defense, the Department does not expect to
             provide such details until the spring or summer of 2000.



Background   DOD reports actual and estimated future costs4 for contract services using
             the object class structure provided in Office of Management and Budget
             Circular A-11. This structure identifies costs for each government account


             4
              The Office of Management and Budget’s Circular A-11 refers to “obligations”, both planned
             and actual obligations, which are the amounts of orders placed, contracts awarded, services
             received, and similar actions requiring payments. For simplicity, we have used the term
             “costs” throughout the remainder of this report.




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according to the nature of the goods or services purchased. Contract
services are reported in the object class 25 series—other contractual
services—under one of several categories. Figure 1 shows DOD’s reported
costs for contract services, which totaled $90.5 billion in fiscal year 1998.
See appendix I for a description of the categories for contract services.



Figure 1: DOD’s Reported Contract Services in Fiscal Year 1998




a
 This covers four contract service categories: operation and maintenance of facilities, operation and
maintenance of equipment, medical care, and subsistence and support of persons.
b
    Purchases from other government agencies.
c
 This covers miscellaneous services (also called other services), which include services that do not fit
within one of the other remaining contract service categories.
Source: Federal budget, fiscal year 2000/2001 and DOD’s June 1999 report to Congress.


There are three categories of advisory and assistance services:
(1) management and professional support services; (2) studies, analyses,
and evaluations; and (3) engineering and technical services. In addition to
requiring DOD to report on the accuracy of advisory and assistance service
costs and limiting the amounts reported under miscellaneous services, the
Strom Thurmond National Defense Authorization Act for Fiscal Year 1999
provided specific definitions for these three categories. The act also
provided a list of services that are exempt from classification as advisory



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                         B-282596




                         and assistance services such as certain systems engineering and technical
                         services. The exemptions are summarized in appendix II.



Steps Taken to           DOD has taken steps to improve reporting of contract service costs but has
                         also acknowledged that further efforts are required. In its June 1999 report,
Improve Accounting       Report to Congress on Improved Accounting for Defense Contract
for Contract Services;   Services, DOD stated that it had reviewed the costs reported for
                         miscellaneous services to determine whether they had been properly
but Further Efforts      classified. Specifically, DOD and service officials stated that they had
Needed                   reviewed miscellaneous service costs for fiscal year 1998 and found that
                         costs for certain types of services such as environmental restoration had
                         been reported inconsistently or had been erroneously included in the
                         miscellaneous services category. To correct reporting errors and provide
                         greater consistency throughout the Department in reporting contract
                         service costs, the DOD Comptroller issued guidance in November 1998 that
                         provided specific directions as to the proper category in which these
                         services should be reported. The guidance required the military services to
                         realign certain costs from the miscellaneous service category to other
                         categories.

                         Officials from the DOD Comptroller’s office stated that they provided the
                         guidance on realigning the miscellaneous category to DOD and military
                         service components and relied on the components to make the necessary
                         adjustments. The Comptroller’s office did not attempt to verify the
                         adjustments. DOD and service officials responsible for providing the data
                         told us that the realignment of the miscellaneous costs was made under
                         tight time constraints, sometimes with limited data. In some instances, the
                         realignment was based on telephone calls to program offices and on quick
                         analyses, while in others cases, budget officials and analysts were left to
                         estimate, without program office input, which costs should go in other
                         categories. Officials in the military services acknowledged that their
                         methodology was not the best but added that it was the best they could do
                         under the time constraints stipulated for the review. We did not
                         independently assess the accuracy of the adjustments. However, some
                         DOD and service officials told us that they could not ensure the accuracy of
                         the revised accounting for contract services.

                         After this effort, DOD reported that it had reduced the costs included in the
                         miscellaneous service category, which in prior years accounted for about
                         50 percent of total contract services. Specifically, in fiscal year 1998, it
                         reported that miscellaneous services, as realigned, were about 17 percent



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of total reported costs for contract services. DOD anticipates costs in the
miscellaneous service category will comprise about 15 and 14 percent of
total reported costs for contract services in 1999 and 2000, respectively.
The 14-percent amount is below the 30-percent limit Congress stipulated
for fiscal year 2000.

DOD further reported that amounts for the miscellaneous service category
in the fiscal year 2000/2001 budget decreased significantly below the
amount in the miscellaneous service category in the fiscal year 1999
President’s budget. As shown in table 1, DOD reported a decrease in the
miscellaneous service category of about $30 billion for fiscal year 1998 and
about $33 billion for fiscal year 1999. It stated that this decrease was offset
by increases in other object classes it deemed more appropriately describe
the costs involved. Most of the adjustments were made within the contract
service object class; however, some costs were realigned to other object
classes.



Table 1: DOD’s Realignment of Costs From the Miscellaneous Services Category

Dollars in millions
                                                           Fiscal year    Fiscal year
Categories                                                       1998           1999
Miscellaneous services (total decrease)                       -30,075         -33,456
Increase in contract services object class
    Advisory and assistance services                          + 1,141         + 1,009
    Purchases from government accounts                         +3,903          +3,276
    Operations and maintenance of facilities                   +4,383          +3,799
    Research and development contracts                        +10,565          +9,702
    Medical care                                               +1,553          +2,573
    Operations and maintenance of equipment                    +4,972          +5,927
    Subsistence/support of persons                               +150           +151
Increase in object classes outside contract services           +3,409         +7,017
Total increase in other contract services
categories and other object classes                           +30,076        +33,454a


a
    Amounts do not total due to rounding.
Source: DOD’s June 1999 report to Congress.


Despite these efforts, DOD and military service officials recognize that the
Department’s reporting will continue to contain some errors and



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inconsistencies. DOD acknowledged this in its June 1999 report to
Congress, stating that its review “demonstrated that the current system for
reporting these costs had been and will probably continue to be
unsuccessful—due to difficulty in identifying and valuing the service
provided by contractors.” DOD officials stated that they could not ensure
the accuracy of the accounting for contract service costs, particularly
advisory and assistance service costs, because of inconsistencies in
reporting by the military services. For example, some service officials used
the exemptions for advisory and assistance service categories stipulated in
the Strom Thurmond National Defense Authorization Act for Fiscal Year
1999, while others did not. We were told that although the statutory
changes to the definition of advisory and assistance services and the
exemptions were passed in September 1998, many budget numbers had
already been submitted using the existing Office of Management and
Budget definitions and exemptions. While many of the statutory
exemptions are also contained in the Office of Management and Budget’s
Circular, there are some differences that could lead to changes in the way
certain types of contract services (such as automated data processing) will
be reported in the future. DOD officials stated that they were working to
provide consistent guidance in this area. Regarding the accuracy of
reported advisory and assistance service costs, DOD Comptroller officials
stated that time did not allow for a complete budgetary analysis or review
of contract service costs to ensure reliability. 5

Our work identified instances in which some contract service costs were
not properly reported in the June 1999 report to Congress. For example, the
Defense Logistics Agency reported $18.6 million in advisory and assistance
services under miscellaneous services for fiscal year 1998 because its
guidance erroneously stated that these costs should be reported under the
miscellaneous category. In another instance, an official from the Defense
Threat Reduction Agency told us that the agency had not reported some
contract service costs in fiscal year 1998 due to a misinterpretation of the
guidance. We were told that these errors would be corrected in the future.




5
  In addition, in our most recent audit of the federal government’s 1998 consolidated
financial statements, we reported that DOD’s financial management systems do not capture
the full cost of its activities and programs. Specifically, we reported that DOD is unable to
provide actual data on the costs associated with functions. Department of Defense: Status of
Financial Management Weaknesses and Actions Needed to Correct Continuing Challenges
(GAO/T-AIMD/NSIAD-99-171, May 4, 1999).




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DOD Recommends          DOD has recommended changing the reporting structure for contract
                        services by revising the object class categories found in Office of
Change to Improve       Management and Budget Circular A-11. In its June 1999 report to Congress,
Reporting of Contract   DOD recommended that the object class structure be revised to identify
                        what a specific contract service supports (for example, weapon systems)
Service Costs           rather than identifying what the service is (such as advisory and assistance
                        services’ analyses or evaluations). DOD’s report stated that this type of
                        information would provide more accurate and useful data. According to
                        DOD and service officials, this information could provide greater visibility
                        on what the contract service was for and where the impact of a funding cut
                        would occur.

                        While we agree that it would be beneficial to know how much the
                        government spends to support specific programs and functions, DOD’s
                        recommendation, as presented in its report, would represent a major
                        change in how contract service costs are reported. The change may not
                        provide the visibility Congress desires over contract services if all contract
                        service costs are classified according to what they support rather than by
                        the type of service provided. DOD has offered to work with the various
                        interested congressional committees and the Office of Management and
                        Budget on this effort with the objective of improving the relevance of the
                        data for both Congress and the executive branch. DOD, however, has not
                        provided specifics regarding its recommendation and, according to
                        officials from the Office of the Secretary of Defense, is not expected to do
                        so until the spring or summer of 2000.



Agency Comments         We provided a draft of this report to DOD for formal review and comment.
                        In its oral reply, DOD said that it had no substantive comments. It, however,
                        provided one technical comment about how we characterized costs
                        reported by the Defense Threat Reduction Agency. We have incorporated
                        DOD’s suggestion in this report.



Scope and               We performed our work at the Office of the Secretary of Defense
                        Comptroller’s office and at the offices of DOD and service components that
Methodology             use advisory and assistance services and miscellaneous services. These
                        include the Air Force’s Air Force Material Command and Aeronautical
                        Systems Center; the Navy’s Naval Sea Systems Command, Naval Air
                        Systems Command, Space and Naval Warfare Systems Command, Office of
                        Naval Research, and U.S. Pacific and Atlantic Fleets; the Army’s Office of



                        Page 9                                     GAO/NSIAD-00-29 Contract Management
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the Assistant Secretary of the Army for Acquisition, Logistics, and
Technology, and Communications and Electronics Command; and the
Defense Information Systems Agency, the National Imagery and Mapping
Agency, the Defense Logistics Agency, the Joint Staff, and the Defense
Threat Reduction Agency.

To identify actions taken to improve reporting for contract service costs,
we interviewed officials from the above activities responsible for managing
and reporting on contract services. Among other things, we obtained
information regarding the methodology used to develop the June 1999
report, titled Report to Congress on Improved Accounting for Defense
Contract Services, including DOD directives and the services’ instructions
for identifying, tracking, and reporting advisory and assistance services
costs and costs reported for other or miscellaneous services. We also
(1) identified differences between current and prior years’ methodology to
identify advisory and assistance services; (2) compared data in DOD’s
Budget Reporting System with data in the advisory and assistance services’
budget exhibit to Congress to determine whether such costs were properly
reported in the June 1999 report to Congress; (3) obtained views from the
Office of Management and Budget, DOD, and service components
regarding reporting requirements and the recommendation included in the
June 1999 report to Congress; and (4) obtained service headquarters and
field views on the process by which the budget data for contract services
was developed, including how costs were realigned from the miscellaneous
service category.

We conducted our work from April 1999 through September 1999 in
accordance with generally accepted government auditing standards.




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B-282596




We are sending copies of this report to the Honorable William S. Cohen,
Secretary of Defense; Lieutenant General Henry T. Glisson, Director,
Defense Logistics Agency; the Honorable Louis Caldera, Secretary of the
Army; the Honorable Richard Danzig, Secretary of the Navy; and the
Honorable F. Whitten Peters, Secretary of the Air Force. We will also make
copies available to others on request.

GAO contacts and major contributors to this report are listed in appendix
III.




David E. Cooper
Associate Director
Defense Acquisitions Issues




Page 11                                  GAO/NSIAD-00-29 Contract Management
                           B-282596




Congressional Committees   The Honorable John W. Warner
                           Chairman
                           The Honorable Carl Levin
                           Ranking Minority Member
                           Committee on Armed Services
                           United States Senate

                           The Honorable Ted Stevens
                           Chairman
                           The Honorable Daniel K. Inouye
                           Ranking Minority Member
                           Subcommittee on Defense
                           Committee on Appropriations
                           United States Senate

                           The Honorable Jerry Lewis
                           Chairman
                           The Honorable John P. Murtha
                           Ranking Minority Member
                           Subcommittee on Defense
                           Committee on Appropriations
                           House of Representatives

                           The Honorable Floyd D. Spence
                           Chairman
                           The Honorable Ike Skelton
                           Ranking Minority Member
                           Committee on Armed Services
                           House of Representatives




                           Page 12                          GAO/NSIAD-00-29 Contract Management
Page 13   GAO/NSIAD-00-29 Contract Management
Appendix I

Contract Services                                                                                         Appendx
                                                                                                                Ii




               Obligations for goods and services purchased by the Department of
               Defense (DOD) are reported using the object class structure specified in
               Office of Management and Budget Circular A-11. There are five major
               groupings of object classes in the circular: (1) personal services and
               benefits, (2) contractual services and supplies, (3) acquisition of assets, (4)
               grants and fixed charges, and
               (5) other. Defense contract services, as defined in the 1999 Defense
               Authorization Act,1 are a subset of the contractual services and supplies
               category. Specifically, contract services are those contracts included in the
               other contractual services object class—object class 25. There are eight
               categories included under contract services. A brief summary of each
               follows.

               • Advisory and assistance services—object class 25.1. Services acquired
                 by contract from nongovernmental sources to provide management and
                 professional support; studies, analyses, and evaluations; or engineering
                 and technical services.
               • Other services (often called miscellaneous services)—object class 25.2.
                 Services not otherwise classified as either advisory and assistance
                 services or any of the other service categories included under contract
                 services—object class 25.
               • Purchases of goods and services from government accounts—object
                 class 25.3. Purchases from other government agencies or accounts that
                 are not otherwise classified. Includes rental payments to agencies other
                 than the General Services Administration and interagency agreements
                 for contractual services. Excludes, among other things, advisory and
                 assistance services obtained through interagency contracts.
               • Operation and maintenance of facilities—object class 25.4. Includes the
                 operation and maintenance of facilities, when done by contract.
               • Research and development contracts—object class 25.5. Includes
                 contractor services for conducting basic and applied research and
                 development. Excludes research and development reported as advisory
                 and assistance services or operation and maintenance of research and
                 development facilities.
               • Medical care—object class 25.6. Payments to contractors for medical
                 care.
               • Operation and maintenance of equipment—object class 25.7. Contractor
                 services for operation, maintenance, repair, and storage of equipment,
                 when done by contract. Includes storage and care of vehicles, storage of


               1
                   Strom Thurmond National Defense Authorization Act for Fiscal Year 1999, section 911.




               Page 14                                             GAO/NSIAD-00-29 Contract Management
Appendix I
Contract Services




  household goods, and operation and maintenance of information
  technology systems.
• Subsistence and support of persons—object class 25.8. Contractual
  services with the public or another federal government agency for
  board, lodging, and care of persons, including prisoners.

The Office of Management and Budget defined advisory and assistance
services as follows:

“Obligations for advisory and assistance services acquired by contract from non-
governmental sources to support or improve organization policy development, decision-
making, management, and administration; support program and/or project management and
administration; provide management and support services for R&D [research and
development] activities; provide engineering and technical support services; or improve the
effectiveness of management processes or procedures. Such services may take the form of
information, advice, opinions, alternatives, analyses, evaluations, recommendations,
training, and technical support. Also includes inter-agency agreements for advisory and
assistance services.

“Excludes information technology consulting services, which have large scale systems
acquisition and integration or large scale software development as their primary focus—
both of which are to be classified under object class 31.0 [for equipment]. Also excludes
personnel appointments and advisory committees, which are classified under object class
11.3 [for other than full-time permanent personnel]. Also excludes obligations for contracts
with the private sector for operation and maintenance of information technology and
telecommunication services, which are to be classified under object class 25.7 [for
operation and maintenance of equipment]; architectural and engineering services as defined
in the Federal Acquisition Regulation…; and research on theoretical mathematics and basic
medical, biological, physical, social, psychological, or other phenomena. Other contractual
services classified in object classes 25.2 through 25.8, and 26.0 are excluded.”

The definition further provided three categories of advisory and assistance
services. They were (1) management and professional support services;
(2) studies, analyses, and evaluations; and (3) engineering and technical
services. In September 1998, Congress provided a new, but similar
definition for each of these three categories of advisory and assistance
services.2 Further, the act provided that those services authorized to be
exempted from reporting in the advisory and assistance service category
would be those identified as exemptions in enclosure 3 of DOD Directive
4205.2 titled Acquiring and Managing Contract Advisory and Assistance
Services, dated February 10, 1992. While many of these exemptions parallel
those provided for in Office of Management and Budget Circular A-11,


2
    Strom Thurmond National Defense Authorization Act for Fiscal Year 1999, section 911.




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Appendix I
Contract Services




there are some differences. We were told that the Department was working
to provide consistent guidance in this area.




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Appendix II

Exemptions to Reporting Advisory and
Assistance Services                                                                                     Appendx
                                                                                                              Ii




              The 1999 Defense Authorization Act states that there are certain authorized
              exemptions to reporting advisory and assistance services.1 Specifically, the
              act states that

              “the term ‘authorized exemptions’ means those exemptions authorized (as of the date of the
              enactment of this section) under Department of Defense Directive 4205.2, captioned
              ‘Acquiring and Managing Contracted Advisory and Assistance Services (CAAS)’ and issued
              by the Under Secretary of Defense for Acquisition and Technology on February 10, 1992….”

              The exemptions referred to in that directive are:

              • activities that are reviewed and/or acquired through Office of
                Management and Budget Circular A-76;
              • architectural and engineering services for construction and
                construction management services procured in accordance with
                Federal Acquisition Regulation Part 36 [reference (e)];
              • day-to-day operation of facilities and housekeeping services and
                functions;
              • routine maintenance of systems, equipment, and software; routine
                administrative services; printing services; and direct advertising (media)
                services;
              • initial training services acquired as an integral part of the procurement
                of weapon systems, automated data processing systems, equipment or
                components, and training obtained for individual professional
                development;
              • basic operation and management contracts for government-owned,
                contractor-operated facilities;
              • clinical and medical services for direct health care;
              • automated data processing and/or telecommunication functions and
                related services controlled in accordance with the Federal Information
                Resources Management Regulation;
              • automated data processing and/or telecommunications functions and
                related services exempted from the Federal Information Resources
                Management Regulation;
              • services supporting the policy development, management, and
                administration of the Foreign Military Sales Program that are not paid
                for with funds appropriated by Congress;
              • services (for example, systems engineering and technical services)
                acquired by or for a program office to increase the design performance


              1
                  Section 911, the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999.




              Page 17                                            GAO/NSIAD-00-29 Contract Management
Appendix II
Exemptions to Reporting Advisory and
Assistance Services




  capabilities of existing or new systems or services that are integral to
  the logistics support and maintenance of a system or major component
  and/or end item of equipment essential to the operation of the systems
  before final government acceptance of a complete hardware system;
• research on theoretical mathematics and basic medical, biological,
  physical, social, psychological, or other phenomena;
• auctioneers, realty brokers, appraisers, and surveyors; and
• services procured with funds from the Defense Environmental
  Restoration Account.




Page 18                                  GAO/NSIAD-00-29 Contract Management
Appendix III

GAO Contacts and Staff Acknowledgments                                                           AppendxIi




GAO Contacts           David E. Cooper (202) 512-4841
                       Ralph Dawn (202) 512-4544



Acknowledgments        In addition to those named above, Marion A. Gatling, Roy Karadbil,
                       Stephanie J. May, Maria Storts, and William T. Woods made key
                       contributions to this report.




(707409)       Leter   Page 19                                 GAO/NSIAD-00-29 Contract Management
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