19 July 1996
Mr. Richard Goodman
Staff Assistant to
The Honorable David Pryor
United States Senate
Committee on Government Affairs
Washington, DC 20510-6250
Dear Mr. Goodman:
Pursuant to discussions at our meeting in October of last year and subsequent telephone conversations, the office of the Inspector General, Naval Sea Systems Command, has examined in greater depth several issues raised by Senator Pryor and you. The additional information below supplements those discussions we have had and addresses the results of our examination.
First, with regard to the selection and use of Coopers & Lybrand to conduct the shipyard Activity Based Costing (ABC) studies and the award and administration of contract delivery orders, the entire effort was directed at reducing overhead costs throughout the shipyards. The Naval Shipyard Management and Field Activity Support Directorate (SEA 07), Naval Sea Systems Command, had tried for some time to get shipyard commanders to reduce overhead costs as a necessary adjunct to Defense Department budget cuts and downsizing. In 1989, then CAPT (now RADM) Thomas Porter, Department Head, Norfolk Naval Shipyard, learned of Activity Based Costing through a colleague at Norfolk Naval Shipyard. This colleague informed RADM Porter that Coopers & Lybrand was one of the companies with experience conducting Activity Based Costing in the Navy sector. Shortly after this conversation, RADM Porter assumed duty as Commander, Charleston Naval Shipyard, and asked Coopers & Lybrand for a demonstration of Activity Based Costing. The Coopers & Lybrand demonstration energized RADM Porter's interest in Activity Based Costing, and he relayed his interest to SEA 07.
The Deputy Commander, SEA 07, approved the concept of Activity Based Costing and decided to test it at Portsmouth Naval Shipyard in the Planning and Estimating Department. Contracts Department personnel at Portsmouth Naval Shipyard believed SEA 07 had chosen Coopers & Lybrand from a Federal Supply Schedule. They also believed that the Office of Personnel Management (OPM) had competitively awarded contracts to contractors on this Schedule and that as a result any government agency wishing to contract for Total Quality Management (TQM) services could select a contractor from the Schedule and issue a delivery order. Consequently, in March 1991, Portsmouth Naval Shipyard issued a delivery order to Coopers & Lybrand under OPM Contract 89-2884.
In July 1991, RADM Porter requested and received authority from SEA 07 to conduct Activity Based Costing at Charleston Naval Shipyard. From March 1991 through March 1992, the Shipyard Board of Directors discussed Activity Based Costing at its meetings. In February 1992, the Board invited Coopers & Lybrand to the Shipyard Board of Directors meeting to give a presentation on Activity Based Costing. After the presentation, the Directors decided to initiate Activity Based Costing at all shipyards except for Philadelphia and Long Beach, which were expected to be closing in the near future. In a letter dated March 26, 1992, SEA 07 confirmed the decision to use Activity Based Costing at six shipyards. In this letter, SEA 07 provided the Statement of Work used by Charleston Naval Shipyard and advised the shipyards to follow Charleston's lead on this procurement. The letter did not direct the shipyards; to use any specific contractor to perform the Activity Based Costing, but the Shipyard Commanders assumed that to follow Charleston Naval Shipyard's lead meant to use the same contractor. The Executive Director of SEA 07 said that although not directed, there was benefit to having one contractor collecting information. He said data collected was uniform and consistent at the shipyards.
Other than providing the shipyards with Charleston's Statement of Work for use in awarding the Activity Based Costing delivery orders, SEA 07 had no involvement. The DoD IG Audit found that SEA 07 personnel did not have any acquisition training and therefore did not facilitate the award or administration of the acquisition process. SEA 07 personnel were aware of the OPM contract and Federal Supply Schedule and understood that they could use the contract and Schedule to purchase TQM services. Coopers & Lybrand personnel informed SEA 07 that Coopers & Lybrand was on the Schedule.
Portsmouth Naval Shipyard was the only activity with its own purchasing authority and solely responsible for the award and administration of their contracts. The other shipyards received contracting authority from the Naval Supply Systems Command. The shipyards were responsible for providing the justification for award to the Naval Supply Systems Command field contracting offices, Fleet and Industrial Supply Centers, and Naval Regional Contracting Centers, which were responsible for following procurement regulations for the award of the contract. Shipyard contract administrators compared the OPM contract for TQM services with the Federal Supply Schedule, and then chose one
contractor off the schedule, awarded a sole source procurement and by-passed the competition in contracting procedures defined in the Federal Acquisition Regulations, just as they would have done under the Federal Supply Schedule. This procedure was followed due to the hybrid nature of the OPM contract, and not because of direction from SEA 07 or the Shipyard Board of Directors.
Second, with regard to retired Department of Defense employees working for Coopers & Lybrand, there was no evidence of any improper activity by them in this procurement process. According to the Dun & Bradstreet report, Coopers & Lybrand had 16,300 employees. Because of that large number, we examined the prior employment only of those Coopers & Lybrand personnel who worked on Activity Based Costing contracts. Senator Pryor's letter of February 15, 1995, asked about former military personnel who had worked on the Mare Island contract. As reported previously, three Coopers & Lybrand employees who were former military personnel worked on the Mare Island Naval Shipyard contract. They are Robert Reeve, Dennis Fish, and O. Keith Evans. In addition to the three who worked on the Mare Island contract, four other Coopers; & Lybrand employees previously employed by the Department of Defense worked on Activity Based Costing contracts at other shipyards. They were:
Additionally, 18 U.S.C. 281 places a restriction on retired military officers regarding certain matters affecting the Government. The first restriction prohibits a retired military officer from accepting compensation for a period of two years after release from active duty for selling anything to the United States through the Military Department from which the military officer is retired. All former military personnel involved in this case occupy positions that are not procurement related. Accordingly, the former military personnel did not violate the sales restrictions of 18 U.S.C. 281.
The second restriction under 18 U.S.C. 281 prohibits former military from prosecuting or assisting in the prosecution of any claim against the United States involving the Military Department from which they are retired, or involving any subject matter with which the military officer was directly connected while in an active duty status. Since there were no claims in this case, there were no violations of the second restriction of 18 U.S.C. 281.
Third, with regard to the expertise Coopers & Lybrand personnel brought to the Activity Based Costing studies, many of them had extensive military careers or had been civilian employees at a Naval shipyard. They possessed knowledge of shipyard organization, had received hours of training and facilitating in process improvement and training initiatives with teams, were experienced in the development and application of process modelling and simulation in the public and private sector, as well as in civilian federal agencies and other Defense Department organizations. In addition, they brought continuity to the project by their participation in Activity Based Costing at more than one shipyard. Our examination disclosed extensive TQM training, facilitation and participation in TQM Projects, including participation in kickoff training and preparation of two Department of Energy teams to tackle the Vice President's National Performance Review initiative on reinventing government. Our examination did not determine whether Coopers & Lybrand was the best choice for the Activity Based Costing contract, only that Coopers & Lybrand was capable of performing the contract and no regulations were violated as a result of the performance.
The only improper conduct that we have found in this contracting process was incorrect sole souring under the OPM contract off the Federal Supply Schedule, which was promptly stopped after it was noted in the DoD IG Audit.
I hope the above information is helpful and responsive to the outstanding issues. If I can be of further assistance, please contact me.
MILTON D. FINCH
CAPT, JAGC, USN
Inspector General
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