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Military Sealift Command: Weak Controls and Management of
Contractor-Operated Ships (Chapter Report, 12/12/95, GAO/NSIAD-96-41).

Pursuant to a congressional request, GAO reviewed the Military Sealift
Command's (MSC) management of its contractor-operated ships, focusing on
whether MSC has: (1) adequate management controls to oversee contractors
and prevent abuses; and (2) sufficient oversight to ensure contractual
requirements are being met.

GAO found that MSC: (1) is vulnerable to contract abuse, since its
internal controls are inadequate to oversee its contractor-operated ship
programs; (2) does not verify crew-performed repairs, review
subcontractor invoices, or supervise overhaul work due to a lack of
communication between headquarters reviewers and field personnel; (3)
Comptroller is responsible for coordinating the internal control
program, but he does not have the authority to ensure that MSC internal
controls are sufficient and being adhered to; (4) has no guidelines for
systematically establishing personnel requirements or comparing
contractual requirements with contractor performance; (5) has no formal
system to identify and implement best practices that could improve
contractor performance and reduce costs; and (6) has acknowledged its
organizational problems and plans to designate program managers and
establish formal lines of accountability.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-41
     TITLE:  Military Sealift Command: Weak Controls and Management of 
             Contractor-Operated Ships
      DATE:  12/12/95
   SUBJECT:  Internal controls
             Repair costs
             Ships
             Navy procurement
             Equipment maintenance
             Contract monitoring
             Contractor performance
             Contractor personnel
             Overpayments
             Documentation
IDENTIFIER:  T-5 Tanker
             T-AGOS Ship
             DOD Operation Restore Hope
             Desert Storm
             Desert Shield
             Saudi Arabia
             Somalia
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Oversight of
Government Management and the District of Columbia, Committee on
Governmental Affairs, U.S.  Senate

December 1995

MILITARY SEALIFT COMMAND - WEAK
CONTROLS AND MANAGEMENT OF
CONTRACTOR-OPERATED SHIPS

GAO/NSIAD-96-41

Military Sealift Command

(703061)


Abbreviations
=============================================================== ABBREV

  CFO - Chief Financial Officer
  DCMC - Defense Contact Management Command
  DOD - Department of Defense
  GAO - General Accounting Office
  MSC - Military Sealift Command

Letter
=============================================================== LETTER


B-265707

December 12, 1995

The Honorable Carl Levin
Ranking Minority Member
Subcommittee on Oversight of
  Government Management and the
  District of Columbia
Committee on Governmental Affairs
United States Senate

Dear Senator Levin: 

This report responds to your request that we review the Military
Sealift Command's management of its contractor-operated ships.  Our
review focused on whether the Military Sealift Command has (1) an
adequate system of management controls in place to oversee
contractors and prevent abuses and (2) sufficient oversight to ensure
contractual requirements are being met. 

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 10 days after its issue date.  At
that time, we will send copies to the Secretaries of Defense and the
Navy; the Commander, Military Sealift Command; and other interested
parties.  We will also make copies available to others upon request. 

Please contact me on (202) 512-5140 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
II. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Two cases involving the Military Sealift Command's (MSC)
contractor-operated ships illustrate the dangers of poor management
controls and the resulting too-heavy reliance on contractors'
integrity.  One case involved fraudulent overtime practices by the
crew members of a ship management company, and the second case
involved the severe deterioration and improper crewing of MSC's
sealift tankers.  As a result of GAO's 1994 report on the sealift
tankers,\1 the Ranking Minority Member of the Subcommittee on
Oversight of Government Management and the District of Columbia,
Senate Committee on Governmental Affairs, asked GAO to examine MSC's
contractor-operated ship programs.  Specifically, GAO determined
whether MSC has adequate management controls (1) to oversee
contractors and prevent contract abuses and (2) to ensure contractual
requirements are being met. 


--------------------
\1 U.S.  Navy/Military Sealift Command:  Weak Contract Administration
Led to Unsafe and Poorly Maintained Ships (GAO/OSI-94-27, Aug.  31,
1994). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

To carry out its mission, MSC uses a combination of government and
privately owned ships with civilian crews who work either directly
for MSC or for MSC's contract-operators.  This report focused on 40
of MSC's
69 contractor-operated ships.  These 40 ships were in the 5 programs
where MSC awarded long-term contracts for 3 or more ships.  These
programs include maritime prepositioning ships, T-5 tankers,
oceanographic survey ships, T-AGOS surveillance ships, and fast
sealift ships.  MSC spends over $400 million per year to operate and
maintain these 40 ships.  In fiscal year 1994 alone, MSC spent $93.8
million to maintain and repair these ships. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

MSC's internal controls are inadequate to oversee its
contractor-operated ship programs.  As a result, MSC is vulnerable to
contract abuse.  MSC lacks basic internal controls in its
verification of crew-performed repairs, in its review of invoices for
subcontracts, and in its supervision of overhaul work.  MSC does not
verify that it has received the goods or services it is paying for,
in part because there is a disconnect between headquarters reviewers
and field-level personnel, whose main concern is the operation but
not the cost of the ships' repair.  Also, though MSC's Comptroller is
responsible for coordinating MSC's internal control program, he does
not have the authority to ensure that MSC's system of internal
controls is sufficient and is being adhered to. 

MSC also lacks sufficient oversight to ensure that contractual
requirements are met.  MSC has no guidelines for systematically
establishing personnel requirements such as citizenship and security
requirements.  Neither does it systematically compare contractual
requirements with contractors' performance in obtaining security
clearances and trustworthiness evaluations for crew members. 
Finally, MSC does not have a formal system to identify and implement
best practices that could be used to improve the contractors'
performance or reduce the programs' cost. 

MSC's fragmented lines of organizational authority represent a
significant impediment to sound management controls.  MSC has
acknowledged such organizational problems and plans to designate
program managers and establish formal lines of accountability. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      MSC'S INTERNAL CONTROLS ARE
      INADEQUATE TO PREVENT
      OVERPAYMENTS FOR SHIP
      REPAIRS
-------------------------------------------------------- Chapter 0:4.1

In two programs, MSC does not require contractors to adequately
document that minor repairs are actually accomplished.  GAO's review
of minor repair reports, which list repairs to be applied toward
contract-defined thresholds, found that contractors for three
programs were overstating these reports in various ways.  One
contractor was billing MSC for the straight time hours of its regular
crew, when only overtime hours are reimbursable.  Another contractor
was wrongfully claiming cleaning jobs as reimbursable.  A third
contractor was billing twice for the same jobs.  After the
contractors for two of these three programs met their minor repair
thresholds, they were reimbursed by MSC for all minor repairs.  One
was paid $685,946 for fiscal years 1991 through 1995.  The second was
paid $741,360 in fiscal year 1994 alone.  At the time of GAO's
review, MSC had not yet determined whether the contractor for the
third program had met its minor repair threshold. 

For some programs, MSC's review of invoices for subcontracted work is
also insufficient to prevent excessive payments by MSC.  First, MSC
does not uniformly require contractors to provide invoices with
supporting documentation that would indicate that prices are fair and
reasonable.  For example, GAO found that one contract required the
contractor to submit evidence of competitive bidding with every
subcontract and that the MSC field unit had deducted amounts from the
contractor's invoices for inadequate documentation. 

For another contractor, on the other hand, GAO found no supporting
documentation with invoices that would indicate whether prices were
fair and reasonable.  In one case, MSC had approved an invoice for
$3,560 to "provide labor, tools and material necessary to replace
twenty (20) lampshades .  .  .  [and] relamp and repair as necessary"
without any evidence of whether this work had been awarded
competitively, why it had not been done by the ship's crew, or how
extensive the work was.  GAO also found that MSC had paid a
subcontractor $260 per lamp to repair
10 lamps and replace their lampshades, when it could have purchased
new lamps for $210 each (excluding the cost of installation).  A
qualified electrician, who is part of the ship's crew, could easily
have performed this repair at about half the labor rate charged by
the subcontractor. 

For two programs, MSC headquarters invoice reviewers could rely on
available field staff to verify that the subcontracted work was done
or that it was reasonably priced.  However, in only one program are
field staff involved in the invoice review process. 

One MSC contract requires that the contractor obtain MSC approval
before subcontracting for industrial assistance that costs more than
$25,000.  However, this contractor split large jobs into smaller ones
and thereby circumvented this requirement.  In one instance, the
contractor submitted 71 separate invoices totaling $202,294 for
welding-related work; 18 of these invoices were submitted on the same
day.  MSC has known about this practice since 1990 but has not taken
any action to prevent it. 

Also, even though a ship's overhaul can cost MSC up to $6 million,
MSC does not always have assurance that repair work, particularly
unforeseen repairs not specified in overhaul contracts, is completed
or is reasonably priced.  This lack of assurance is due in part to
the fact that MSC has no agencywide requirement for its
representatives to be present during ship overhauls.  When an MSC
representative is not present during an overhaul, MSC is relying
entirely on the integrity of the contract operator to protect the
government's interest. 

At MSC, internal controls to prevent contractor fraud and abuse are
weak in many cases.  In response to the Chief Financial Officers Act
of 1990, the Secretary of Defense directed that senior managers play
a more active role in identifying, reporting, and correcting poor
internal controls.  However, though MSC's Comptroller is responsible
for the coordination of MSC's internal control program, he does not
have direct authority to ensure the sufficiency of these controls or
their implementation. 


      MANAGEMENT CONTROL
      WEAKNESSES IMPEDE MSC'S
      EFFORTS TO EFFECTIVELY
      MANAGE ITS SHIP PROGRAMS
-------------------------------------------------------- Chapter 0:4.2

MSC does not have standard procedures for developing personnel
requirements in its contracts.  For example, while most contractors
are required to submit the resumes of key personnel to MSC for
approval before the personnel are assigned to a ship, one contractor
is not.  Also, a similar inconsistency exists for the requirement
that crew members be U.S.  citizens.  Finally, MSC has not provided
guidance or standardized procedures to be used in establishing
security requirements for crew members.  As a result, key contract
requirements have inadvertently been left out in some cases, and MSC
has no assurance that its ships' crew members are qualified,
trustworthy, and properly cleared. 

No one person or office in MSC is responsible for tracking
trustworthiness evaluations and security clearances for all MSC's
contractor-operated ship programs to ensure that contractors comply
with contract requirements.  People from the Office of Security, the
Operations Office, and the Operating Contracts Division are involved
with the security clearances and trustworthiness evaluations of ship
crews, but communication among these offices is poor.  As a result,
MSC cannot ensure that contractual requirements for crews to be
trustworthy or appropriately cleared are being met. 

The contractor-operated ship programs GAO reviewed used two different
contracting methods to control ship maintenance and repair costs. 
However, MSC has no formal system for comparing the two contracting
methods to determine whether one method is more cost-effective than
the other and therefore should be used for all of MSC's
contractor-operated ship programs. 

MSC's program managers rely on legal, contracting, engineering,
accounting, and security personnel who are located in different
departments in MSC and report to the heads of their individual
departments.  This fragmented organization has contributed to MSC's
failure to ensure that its contractors comply with their contracts. 
MSC was planning a reorganization beginning in October 1995 to
"clarify accountability, responsibility, and authority" for its ship
programs. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making a number of recommendations to the Secretary of Defense
to strengthen MSC's internal controls and to improve its oversight of
contractor operations.  For example, GAO is recommending that MSC
institute procedures to improve its verification of crew-performed
repairs and its review of subcontractor invoices.  To assist in the
implementation of these and GAO's other recommendations, GAO is also
recommending that MSC consider expanding the responsibilities of
MSC's Comptroller or creating a new position, which would include the
current Comptroller's duties.  Further, GAO is recommending that
MSC's program managers assign an individual responsibility for
contract provisions, such as those dealing with trustworthiness and
security clearances.  In addition, GAO is recommending that the
Commander of MSC instruct his personnel to discuss and evaluate ways
of identifying and implementing best practices into their
contractor-operated ship programs. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

In official oral comments, the Department of Defense (DOD) generally
agreed with GAO's recommendations.  DOD partially concurred with the
findings but disagreed with the conclusion that internal controls are
weak.  DOD did agree that there are opportunities for further
improvements in the internal controls applied to contractor operation
of MSC ships and said it has already implemented remedial measures. 
DOD also stated that in view of the unusual procurement situations
highlighted in the report, the Commander of MSC is focusing
additional attention on risk analysis and the design of appropriate
internal controls. 

GAO continues to believe that MSC does not have an adequate system of
controls over its contractor-operated ships.  Recent fraudulent
practices of a former MSC contractor and the continuing investigation
by federal law enforcement agencies into MSC operations support GAO's
conclusion that MSC's internal controls are inadequate. 


INTRODUCTION
============================================================ Chapter 1

The Military Sealift Command (MSC) provides ships for fleet support;
special missions; and strategic sealift of equipment, supplies, and
ammunition to sustain U.S.  forces worldwide.  While MSC uses a
combination of government and privately owned ships to carry out this
mission, all these ships have civilian crews who work either directly
for MSC or for MSC's contract operators. 


   MSC'S CONTRACTOR-OPERATED SHIPS
---------------------------------------------------------- Chapter 1:1

This report deals with contractor-operated ships, which account for
69 of the 200 ships in MSC's fleet (see table 1.1).  Our review
specifically focused on 40 ships in the 5 programs where MSC awarded
long-term charter contracts for 3 or more ships.\1

These programs include maritime prepositioning ships, T-5 tankers,
oceanographic survey ships, T-AGOS surveillance ships, and fast
sealift ships (see fig.  1.1).  MSC spends over $400 million per year
to operate and maintain these 40 ships.  This figure includes
payments for leasing the 18 privately owned ships in the group. 



                               Table 1.1
                
                     MSC's Fleet as of June 1, 1995


--------------------
\1 Twenty of the contractor-operated ships that we did not review are
under short-term charters.  The remaining nine ships are operated by
seven different contractors. 


*** Error occurred during conversion.  Document is incomplete.  ***