Corps of Engineers: Weak Contracting Practices

Published by the Government Accountability Office on 1990-09-07.

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


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                                              CORPS OF           -
                                              Weak Contracting




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GAO                    Oeneral Accounting Offlce
                       Washin@tm, D.C. 20548

                       National Security and
                       Intemational AfYaire Division


                       September 7,199O

                       The Honorable Alfred A. McCandless
                       House of Representatives

                       Dear Mr. McCandless:

                       As you requested, we reviewed the U.S. Army Corps of Engineers’ con-
                       tract for upgrading electrical systems at Clear Air Force Station (AFS),
                       Alaska, to determine whether the Corps acted properly in restricting the
                       purchase of certain electrical equipment to items manufactured by the
                       General Electric Company (GE).

                       The Corps’ restriction of electrical equipment to items manufactured by
Results in Brief       GEwas not properly justified. Contrary to Federal Acquisition Regula-
                       tions (FM), the Corps’ Alaska District specified GEequipment without
                       ensuring that it was the only equipment that would meet the govern-
                       ment’s needs. At least one other manufacturer’s electrical equipment
                       may have met the government’s needs, and at an estimated savings of

                       FARrequirements were not met primarily    because three key management
                       controls did not function properly:

                   l The District contracting officer, although responsible for doing so, did
                     not ensure that FARrequirements were followed during the presolicita-
                     tion phase, when major decisions were made.
                   l The North Pacific Division’s subsequent review of the justification for
                     restrictive specifications did not include a verification that the District
                     complied with FAR.
                   . The District competition advocate did not challenge decisions to restrict
                     specifications to a single manufacturer’s equipment on competitive con-
                     struction contracts.

                       The wording of a Corps regulation controlling the use of restrictive spec-
                       ifications may have contributed to the noncompliance. The regulation
                       did not identify specific FARrequirements that must be met. However,
                       District and Division officials relied on this regulation to justify using
                       restrictive specifications.

                       According to Corps officials, the three management control weaknesses
                       reflected common practices at the Alaska District and the North Pacific

                       Page   1                                   GAO/NSIAD90-268CorpsofEngineers

             Division. Therefore, the possibility of similar problems extends to other
             competitively awarded contracts with restrictive specifications. We dis-
             cussed with Corps officials three other contracts of this type adminis-
             tered by the Alaska District and determined that the management
             control weaknesses identified in the Clear Al% contract were present in
             these as well. To ensure that restrictive specifications are properly justi-
             fied, the Corps needs to correct these management control weaknesses.

             After we completed our audit work, the District Commander established
             an internal policy addressing these management control weaknesses. We
             believe that the District’s contracting practices will be strengthened if
             the policy is fully implemented.

             Clear AFSis one of three sites that together constitute the nation’s bal-
Background   listic missile early warning system. The system’s mission is to warn of a
             missile attack on North America and to provide accurate satellite detec-
             tion and tracking data. Operation of Clear AFS is the responsibility of the
             Air Force Space Command (SPACECOM).

             Clear    AFS   receives its electrical power from an on-site power plant, and
                    considers a reliable power supply to be critical. When the plant
             was built in the early 1960s GE electrical equipment was used almost
             exclusively. Since the initial construction, GE has performed equipment
             overhauls on Clear AFSelectrical equipment.

             U.S. Army Facilities Engineering Support Agency surveys identified
             deficiencies in power reliability at the Clear AI% power plant and recom-
             mended additions and alterations to electrical systems. The Corps’
             Alaska District is responsible for managing the contract for the improve-
             ments at Clear AFS. The Alaska District, part of the North Pacific Divi-
             sion, provided the contracting officer and technical contract support1
             Because of its historic use of GE equipment at the power plant and its
             reliance on GE for maintenance, SPACEHIMrequested that selected elec-
             trical equipment needed for upgrading the power plant be manufactured
             only by GE.

             ‘From fiscal years 1987 to 1989, the Alaska District awarded an average of about 70 contracts per

             Page 2                                                     GAO/NSIAD-30-W       Corps of Engineers
                        The GE electrical equipment needed to upgrade the power plant included
                        four static exciters and three electro-hydraulic control systems.2 The
                        Alaska District issued an invitation for bid for a construction contract,
                        received eight bids, and awarded a contract to the qualified low bidder
                        in September 1989. The contractor was to obtain GE static exciters,
                        install the equipment, and make other related improvements at the
                        power plant. The final contract, totaling $3.3 million, excludes the
                        electro-hydraulic control systems due to funding constraints, according
                        to the project manager. The cost of the GE static exciters-about
                        $1.4 million-represented    41 percent of the total contract cost.

                        The District’s actions to require the purchase of GE equipment were not
Alaska District         in accordance with FARrequirements. Contrary to FAR,the District did
Improperly Restricted   not determine if other manufacturers’ equipment would meet the gov-
Electrical Equipment    ernment’s minimum needs.
to a Single             FAR 10.004(b)(2) requires that contract specifications not be restricted to
Manufacturer            one manufacturer unless (1) the features unique to this manufacturer’s
                        products are considered essential and (2) other manufacturers’ similar
                        products would not satisfy agency needs. To identify products that
                        could meet the minimum requirements and to ensure that the govern-
                        ment’s needs are met in a cost-effective manner, FAR 11.004(b) requires
                        federal agencies to conduct market research and analysis. According to
                        FAR 11.004(c), market research and analysis involves developing infor-
                        mation on the availability of suitable products and the support capabili-
                        ties of potential suppliers.

                        The District issued specifications restricted to GE equipment without
                        performing market research and analysis to evaluate other manufac-
                        turers’ products. The District did not question SPACECOM’S preference for
                        GE equipment, but accepted its view that GE electrical equipment was
                        needed to be compatible with existing equipment and thus to assure reli-
                        ability of the Clear AI% power plant.

                        If the District had conducted market research, as required by FAR
                        11.004, it would have identified various brands of exciters operating
                        with a variety of generators. For example, the contractor obtained infor-
                        mation from another manufacturer of static exciters that identified

                        ‘According to the Division’s supervisory electrical engineer, the static exciters, electronic units that
                        provide field current and voltage regulation to generators, were needed to replace less efficient rotary
                        exciters. The new control systems, designed to adjust the amount of steam to maintain a constant
                        turbine speed, were to replace the old control systems.

                        Page 3                                                       GAO/NSLAIMO-263 Corps of Engineem

                  12 domestic federal and nonfederal power plants where INXkGE static
                  exciters were being used. We identified two other federal power plants
                  in Alaska using non-GE exciters. At least four of these plants used non-GE
                  exciters with GE generators and were operational before the Clear AFS
                  contract was awarded.

                  Even without market research and analysis, District and SPACFXOM offi-
                  cials were aware that other manufacturers existed for the static
                  exciters. The District’s electrical design section chief told us that the
                  existence of non-GE static exciters was well known to District design
                  engineers. SPACECOM project managers confirmed they were aware of
                  other manufacturers of static exciters. In addition, a SPACFKOM official at
                  Clear AF+S knew that non% exciters had been installed in a power plant
                  at Fort Richardson, Alaska. According to the Fort Richardson power
                  plant manager, these exciters were operational in 1987, or nearly
                  3 years before the Clear AFS contract was awarded.

                  If the District had allowed for competition among static exciter manu-
Alternative       facturers, it might have saved over $600,000-about         18 percent of the
Equipment Might   contract’s total cost of $3.3 million. Initially the contractor proposed
Have Saved Over   non-GE exciters, noting that the language in the invitation for bid estab-
                  lished GE as the standard of quality but did not prevent the use of non-
$600,000          GE exciters. Although District engineers determined that the proposed
                  exciters met or exceeded contract technical requirements, SPACECOM
                  informed the District that non-GE exciters were unacceptable because GE
                  equipment was needed for continued reliability.

                  Subsequently, the contractor submitted a value engineering change pro-
                  posal” to use non-GE exciters, as provided by FAR 48.1. The savings esti-
                  mate in the proposal was over $600,000. After District engineers and
                  project management officials reviewed the proposal, the District denied
                  it on the basis that SPACECOM required GE exciters.

                  ‘]Value engineering is a method by which a contractor is encouraged to suggest methods for per-
                  forming more economically. It attempts to eliminate, without impairing essential functions, anything
                  that increases acquisition, operation, or support costs. If a value engineering change proposal is
                  accepted, the contractor and the government share in any resulting savings.

                  Page 4                                                      GAO/NSIAD-90-263 Corps of Engineem

                          The District’s noncompliance with FARoccurred primarily because three
Corps Management          key management controls did not work properly. First, the contracting
Controls Did Not          officer did not ensure that FARrequirements were followed during the
Ensure Compliance         presolicitation phase of the contract, when major decisions were made.
                          Second, North Pacific Division officials who reviewed the District’s
With FAR                  request to restrict specifications to one manufacturer did not determine
                          if the District had met relevant FARrequirements. Third, the District
                          competition advocate did not challenge decisions to restrict specifica-
                          tions to equipment produced by one manufacturer on a competitive con-
                          struction contract. The wording of the Corps’ regulation controlling the
                          use of restrictive specifications may have contributed to the noncompli-
                          ance because the regulation did not identify specific FARrequirements
                          that must be met.

Contracting Officer Did   The contracting officer did not ensure that the decision to use restrictive
Not Ensure Compliance     specifications complied with FAR.Contracting officers, who have
                          authority to obligate government funds, are responsible for ensuring
With FAR                  that federal laws and regulations are followed in the procurement pro-
                          cess. Army procedures call for close cooperation between the con-
                          tracting officer and others involved in procurement.

                           Army procedures specifically require contracting officers to advise pro-
                          ject managers on how to promote competition. The project manager nor-
                          mally manages technical and business aspects of a procurement,
                          including presolicitation activities such as identifying requirements and
                          developing specifications. The contracting officer must advise the pro-
                          ject manager on rules, regulations, and acquisition strategy to help
                           ensure that decisions affecting the contract are proper.

                          On the Clear AITS contract, the Alaska District contracting officer said he
                          relied on’the project manager, an engineering division official, to manage
                          the contract’s presolicitation phase and coordinate with the contracting
                          staff. The project manager said he made the decision to use restrictive
                          specifications without consulting or receiving advice from the con-
                          tracting staff. The project manager believed he had to specify GEequip-
                          ment because SPACECOM     wanted GEequipment, and the Corps placed
                          significant emphasis on providing customers what they wanted. In addi-
                          tion, the project manager said that neither the contracting officer nor
                          contracting staff advised him on FARrequirements related to full and
                          open competition and the steps necessary to justify the use of restrictive
                          specifications. We confirmed that the District contracting staff were not

                          Page 5                                       GAO/NSIAD90-268 Corps of Engineers

                              involved in the decision to issue specifications that restricted equipment
                              to GE.

                              A Corps regulation may have contributed to the District’s noncompli-
                              ance with FAR.The project manager and other District officials believed
                              they had met all relevant requirements to justify using GE equipment by
                              complying with Corps Engineering Regulation 1110-345-100. This regu-
                              lation required the District to obtain authorization from the Division to
                              restrict specifications to one manufacturer by submitting a “completely
                              logical” justification. However, the regulation did not identify specific
                              FAR requirements that must be met to justify restrictive specifications.

                              The District Commander told us that customers such as SPACECOM    fre-
                              quently encourage the District to satisfy procurement preferences that
                              may not always be consistent with FARrequirements. However, he said
                              that while maintaining customer relations is important to the District,
                              FARrequirements must also be met.

Competition Waiver            The North Pacific Division’s review of the competition waiver request
Procedure Did Not Iderltify   for this contract did not reveal the noncompliance with FAR.District and
                              Division officials relied on Corps Engineering Regulation 1110-345-100
Noncompliance                 to justify using restrictive specifications. According to this regulation,
                              the Division is required to review justifications for specifying a material,
                              system, or process to the exclusion of other sources, leading to a deci-
                              sion to restrict competition. Division engineers must authorize or disap-
                              prove such competition waiver requests by determining that a
                              completely logical justification exists for the specification and reporting
                              to Corps Headquarters all facts regarding the authorization of a compe-
                              tition waiver.

                              In a one-page waiver request, the chief of the Alaska District’s engi-
                              neering division sought authorization from the North Pacific Division to
                              require GE equipment on the contract. The request stated that the elec-
                              trical equipment was manufactured by GE
                                   .specifically for retrofit on the machines of the type at Clear. . . . Substitution
                                       .   .

                              or fabrication of these components might be possible but could not be allowed
                              without extensive study of the impacts on reliability. Attempts at substitution could
                              result in an actual decrease in reliability. . . .”

                              The North Pacific Division’s review of the waiver request did not iden-
                              tify inconsistencies with FAR requirements. For example, the Division’s

                              Page 6                                              GAO/NSIAD+O-266 Corps of Engineers
supervisory electrical engineer told us his review included reading the
waiver request, developing an understanding of the equipment and
requirements at Clear AFSby reviewing the design analysis (which
reflected using GE equipment), and checking the cost estimate to see if it
was reasonable. He also spoke with the District project manager to
clarify the language in the waiver request. He concluded that use of GE
equipment was logical and that considering other manufacturers’
exciters was not warranted. The Division’s engineering chief and the
procurement analyst involved in the waiver review process told us they
assumed that the District had conducted market research to identify
other manufacturers, as required by FAR.

The wording of Engineering Regulation 1110-345-100 may have contrib-
uted to problems with the review because it does not prescribe Division
review procedures. A “completely logical” justification for restricting
specifications to one manufacturer would include some assurance that
appropriate steps were taken to identify and evaluate alternative manu-
facturers, as required by FAR 11.004. The waiver request did not disclose
that market research was not done and that the District was aware of
other manufacturers’ products. The District’s request indicated that
non-GE equipment could not be allowed without extensive study and
could result in decreased reliability of the Clear AFSpower plant. How-
ever, according to the project manager, the District had not determined
whether non-ox equipment required any more study than the GEequip-
ment or whether reliability would be affected by using non+%

The Division procurement analyst and supervisory electrical engineer
said that they assumed the project was in compliance with FARbecause
the engineering regulation required only a logical justification and did
not discuss other FARrequirements that must be met. However, they also
said that if the waiver request had disclosed all pertinent facts, the Divi-
sion would not have approved the waiver until appropriate justification
was provided. They agreed that the Division needed to strengthen its
review of waiver requests to ensure that any use of restrictive specifica-
tions is properly justified.

Although Engineering Regulation 1110-346-100 required the Division to
report to Corps Headquarters when it authorized use of restrictive spec-
ifications, Division engineering and procurement officials told us that no
report was filed for the Clear APScontract. Those officials who reviewed
the waiver told us that not submitting the report was an oversight.

Page 7                                      GAO/NSIAD-90-263 Corps of Engineem

Competition Advocate Did         The Alaska District competition advocate did not review the District’s
Not Review Use of                practice of using restrictive specifications on certain competitive con-
                                 struction contracts. FAR6.5 states that competition advocates are
Restrictive Specifications       responsible for promoting full and open competition and challenging
                                 barriers to competition, including unnecessarily restrictive

                                 Competition advocates are designated by the head of their agencies and
                                 are responsible for reviewing contract actions and reporting (1) oppor-
                                 tunities and actions taken to achieve full and open competition in their
                                 agency and (2) any condition or action that has the effect of unnecessa-
                                 rily restricting competition.

                                 We found no evidence that the Alaska District competition advocate
                                 reviewed the proposed Clear AFS contract or any other competitive con-
                                 tract having restrictive specifications. The District’s Deputy Com-
                                 mander, who was the competition advocate during the presolicitation
                                 phase of the Clear AFScontract, told us that he could not recall whether
                                 he reviewed the Clear AFScontract or other contracts of this type. How-
                                 ever, during our review, we could find no records or reports indicating
                                 that the competition advocate had reviewed this type of contract. F’ur-
                                 ther, District officials told us that they did not believe the competition
                                 advocate reviewed any competitive contracts having restrictive

                                 Although our work focused on the Clear AFScontract, we conducted lim-
Management Control               ited testing to determine if the management weaknesses and practices
WeaknessesReflected              identified also extended to other contracts managed by the Corps’
Common Practices                 Alaska District and the North Pacific Division. We confirmed that the
                                 management control weaknesses reflected common practices.

                             l   The District’s Contracting Division Chief said that District contracting
                                 officers and contracting staff did not closely monitor contracts during
                                 the presolicitation phase to ensure that all FARrequirements are met;
                                 instead, they relied on engineering personnel to provide the balance
                                 between the goals of the project and procurement regulations. However,
                                 he agreed that the project managers generally were not as knowledge-
                                 able of FAR requirements as contracting personnel and probably needed
                                 closer oversight than had been provided. Such oversight might have
                                 assured compliance at key decision points during the presolicitation

                                 Page 8                                      GAO/NSIAD44O-268 Corps of Engineers

              l The Division’s waiver review procedure did not assess District actions to
                identify alternative manufacturers or otherwise ensure that FAR require-
                ments related to use of restrictive specifications were met.
              . The competition advocate did not review any of the District’s competi-
                tively awarded contracts having restrictive specifications.

                  The presence of these control weaknesses suggests the possibility that
                  similar problems exist on other contracts with restrictive specifications,
                  District and Division officials advised us that the District’s use of
                  restrictive specifications occurred about once or twice a year; we identi-
                  fied four such contracts issued since fiscal year 1985.4 The District may
                  also submit a request for restrictive specifications for a fire alarm
                  system at Elmendorf Air Force Base, Alaska, according to the project
                  management branch chief. We were unable to verify whether any other
                  waivers had been submitted or planned since fiscal year 1985 because
                  District and Division officials told us they did not maintain separate
                  competition waiver files.

                  We did not evaluate these contracts in detail, as we did the Clear AFS
                  contract. We did, however, discuss three of the contracts with District
                  and Division officials” and determined that the control weaknesses pre-
                  sent on the Clear AFS contract existed on these contracts. According to
                  these officials, the control weaknesses reflected common practices, In
                  addition, we examined fiscal year 1989 District and Division Financial
                  Integrity Act assessments” of internal control procedures and practices
                  and found that these control weaknesses were not identified during the
                  Corps’ annual assessment.

                  Full and open competition is the government’s best assurance of
Conclusions       receiving a fair and reasonable price in the marketplace. Therefore,
                  agencies must avoid restrictive specifications that tend to reduce compe-
                  tition. However, the Corps’ Alaska District did not properly justify
                  restricting specifications to one manufacturer for electrical equipment

                  4These were the purchase of generator engines at Cape Liiburne, diesel engines at Shemya Air Force
                  Base, backup relays for electrical circuit breakers at Shemya Air Force Base, and a fire alarm system
                  at King Salmon Airport, all in Alaska.
                  “For the Cape Lisburne project, we were unable to speak with the project manager and contracting
                  officer, and District officials could not locate the official contract files.
                  “The Federal Managers’ Financial Integrity Act of 1982 (P.L. 97-266) requires agency heads to report
                  annually on whether the agency’s system of internal accounting and admiistration control meets the
                  act’s requirements. If a material weakness is found, the report must describe the weakness and a plan
                  and schedule for correcting it.

                  Page9                                                       GAO/NSIAD-9&268
                                                                                           Corpsof Engineers
                      needed to upgrade the Clear AI%power plant. As a result, the District
                      may have increased the government’s costs by over $600,000, or 18 per-
                      cent of the $3.3 million contract.

                      Three key management controls-oversight        by the contracting officer,
                      the waiver review procedure for restrictive specifications, and contract
                      reviews by the competition advocate-were not effective internal con-
                      trols for this contract action. Because of the added risk to the govern-
                      ment when specifications are restricted to one manufacturer, the Corps
                      needs to strengthen these controls and clarify its regulation on the use
                      of restrictive specifications.

                      In our final meeting with Alaska District officials, the District Com-
Alaska District       mander affirmed that the management control weaknesses we identified
Actions               at the District would be corrected. Subsequently, on July 2, 1990, the
                      Commander established a District policy requiring that requests to use
                      restrictive specifications for competitive contracts must

                  . comply with Engineering Regulation 1110-345-100;
                  . have joint concurrence by the project manager, contracting specialists,
                    District counsel, and competition advocate that restrictive specifications
                    are warranted;
                  . indicate that market research and analysis were performed in accor-
                    dance with FAR 10.004 and 11.004 and were reviewed by the competition
                    advocate; and
                  . be signed by the District Engineer.

                      We believe that full implementation of this policy will strengthen the
                      District’s contracting practices.

Recommendations       because the District Commander’s internal policy, issued on July 2,
                      1990, addresses the District’s management weaknesses discussed in this
                      report. However, we are making recommendations to clarify a pertinent
                      agency regulation and improve Division oversight of the use of restric-
                      tive specifications.

                      We recommend that the Secretary of the Army direct the Chief, Corps of
                      Engineers, to ensure that

                      Page10                                       GAO/NSIADBO-262
                                                                                Corpsof Eq#neem
                  l   Engineering Regulation 1110-345-100 is revised to clarify the specific
                      conditions that, as required by FAR 10.004 and 11.004, must exist to jus-
                      tify restricting specifications to a single manufacturer;
                  l   the North Pacific Division’s waiver review procedure for restrictive
                      specifications is based on a revised engineering regulation that reflects
                      pertinent FARrequirements, as recommended above; and
                  l   the North Pacific Division includes the three management control weak-
                      nesses identified in this report in the Division’s next Financial Integrity
                      Act report to assure that corrective action will be taken.

                      As arranged with your office, we did not obtain written agency com-
Agency Comments       ments on this report. However, agency officials gave us oral comments.
                      They concurred with our conclusions and recommendations and told us
                      that the corrective actions we are recommending would be implemented.
                      In addition, agency officials said they plan to evaluate other Corps divi-
                      sions and districts to determine if the problems identified in our report
                      exist in other units.

                      We examined FARrequirements, Army and Air Force regulations, and
Scopeand              Army, Air Force, and Corps policies and procedures that provide gui-
Methodology           dance for developing and awarding construction contracts.

                      We performed the majority of our work at the U.S. Army Corps of Engi-
                      neers’ Alaska District, Anchorage, Alaska. We reviewed records per-
                      taining to the Clear AIS contract and interviewed District officials,
                      including the District Commander, contracting officer, project manager,
                      resident engineer, field engineer, and competition advocate.

                      We also identified four other contracts managed by the Alaska District
                      since fiscal year 1985 in which restrictive specifications were used. We
                      discussed these contracts and waiver procedures with engineering and
                      contracting personnel at the Alaska District and the North Pacific Divi-
                      sion, Portland, Oregon.

                      At Clear AFS, we toured the power plant, examined files, and inter-
                      viewed the Commander, the power plant superintendent, the site civil
                      engineer, and representatives of Clear AFS’Soperations and maintenance

                      Page 11                                      GAO/NSIAB9O-2f3g Corps of Engineera

           We interviewed Air Force officials at SPACECOM,
                                                         located at Peterson Air
           Force Base, Colorado, to document SPACECOM'Srole in the Clear AFScon-
           struction contract. We also examined SPACECOM'S project management
           files pertaining to this contract.

           We interviewed officials from all eight companies that submitted bids
           for the construction contract. We also contacted Bechtel North American
           Power Corporation in San Francisco, California, to discuss design con-
           tract requirements and Bechtel’s role in developing design specifications
           for the contract. Finally, we contacted GEofficials and requested specific
           information concerning GE'Sinvolvement in the contract.

           We conducted our review from January 1990 to June 1990 in accor-
           dance with generally accepted government auditing standards.

           We will send copies of this report to the Secretaries of Defense, Air
           Force, and Army; the Chief, U.S. Army Corps of Engineers; the Director,
           Office of Management and Budget; and other interested parties. Copies
           will also be made available to others upon request.

           GAOstaff members who made major contributions to this report were
           Henry L. Hinton, Associate Director, and Fred Dziadek, Assistant
           Director, Army Issues; Seattle Regional Office staff William R. Swick,
           Evaluator-in-Charge; Thomas C. Perry, Site Senior; and Robert J.
           Bresky, Staff Member. Please contact me at (202) 275-4141 if you or
           your staff have any questions concerning this report.

           Sincerely yours,

           Richard Davis
           Director, Army Issues

(393883)   Page 12                                     GAO/NSIAD!+O-268 Corps of Engineers
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