Table Of Content\t\/
S. Hrg. 103-282
\^ OFF-LOADING: THE MULTIMILLION DOLUR
LOOPHOLE IN GOVERNMENT CONTRACTING
Y 4. G 74/9; B. HRG. 103-282
Dff-Loa4ing: The Hultinillioo Do.ll.a.^. . a,R-^I^N^tG^
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT OF
GOVERNMENT MANAGEMENT
OF THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JULY 30, 1993
Printed for the use of the Committee on Governmental Affairs
- 1 ?
f:^
U.S. GOVERNMENT PRINTING OFFICE
71-180ti WASHINGTON : 1993
ForsalebytheU.S.GovernmentPrintingOffice
SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402
ISBN 0-16-041805-4
\ A / S. Hrg. 103-282
\^ OFF-LOADING: THE MULTIMILLION DOLLAR
LOOPHOLE IN GOVERNMENT CONTRACTING
Y 4. G 74/9: S. HRG. 103-282
Qff-Loadlns: The Hultinillion Dolla. .a. R..I^^N^^G^
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT OF
GOVERNMENT MANAGEMENT
OF THE
COMMITTEE ON
GOVERNMENTAL AFEAIES
UNITED STATES SENATE
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JULY 30, 1993
Printed for the use of the Committee on Governmental Affairs
»;
U.S. GOVERNMENT PRINTING OFFICE
71-180«=; WASHINGTON : 1993
ForsalebytheU.S.GovernmentPrintingOffice
SuperintendentofDocuments.CongressionalSalesOffice,Washington,DC 20402
ISBN 0-16-041805-4
COMMITTEE ON GOVERNMENTAL
AFFAIRS
JCbSIAAAMRMMLSNMALTSUESTNVEMNIRM,N,,nGTeMeoinrcngheiis•agsaene '^^"^ ^^^^^' ^STwhtE^t°D-rSSCiTahT»Ea,w.ViLrEtm,NSaS^n,,,L^A"l'asfka'- ^'""^''^
JDDAOANSVIEIEPDLHPKRI..YL6AIRKE,ABTKrEAkR,aMnAHsNaa,wsaCioinnecticut ^TToO"HA^MDMmmc^rC?HAtPI^?N^,S^^A'Sr'i^z-'o^n^"a'^^^^'P"P^^
BYRON L. DORGAN, North Dakota
FVrank1l1i-n ^G. P„ol.k^O"M^i'n'o^riWteyisSst,afSftaD/i-r/e-cAt>o¥rctaonrd ChiefCounsel
MichaJ Sue Prosser, ChiefClerk
SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT
JDDAA0NVSIIEED?LhPKTR.YLaO?RSE'BhA4IM.SA^N^"^c^n^n^^""'"^^"K^"^*^.'^'^' ^''*™W^'IL^L""L%'IA^^'M^H«S".T^'C;^O«H^EN^,^Maine
BSYARMONNUNL.ND.OGReGoArgNi,a North Dakota V^^^S'S^S'^^t^n'^^''^''"^^^^"^^^^'PP'•
Linda J. Gustitus, StaffDirectorand ChiefCounsel
Peter K. Levine, Counsel
Paul Brubaker, Minority StaffDirector
Frankie de Vergie, CAte/"Clerk
(II)
CONTENTS
Opening statements: Page
Senator Levin 1
Senator Sasser 15
Prepared statement:
Senator Cohen 6
WITNESSES
Friday, July 30, 1993
DerekJ. Vander Schaaf, Acting InspectorGeneral, Department ofDefense 8
John C. Layton, Inspector General, Department ofEnergy 11
William L. Hinshaw II, InspectorGeneral, Tennessee Valley Authority 13
Admiral Eugene B. Harshbarger, Deputy for Acquisition Policy, Integrity and
Accountability, Department ofthe Navy 26
Norman A Zigrossi, President, Resource Group, Tennessee Valley Authority... 28
Joseph R. Varady, Jr., Director for Procurement Policy, Department of the
Army 30
Brigadier General Robert W. Drewes, Deputy Assistant Secretary of the Air
Force iFor Contracting, Department ofthe Air Force 31
Colleen A. Preston, Deputy Under Secretary of Defense for Acquisition
Reform, Department ofDefense 44
Alphabetical List of Witnesses
Drewes, Brig. Gen. RobertW.:
Testimony 31
Prepared statement 145
Harshbarger, Adm. Eugene B.:
Testimony 26
H"
Prepared statement
Hinshaw II, William L.:
Testimony 13
Prepared statement °°
Layton, John C:
Testimony 11
Preparedstatement '^
Preston, Colleen A.:
Testimony 44
Prepared statement 1^^
VanderSchaaf, DerekJ.:
Testimony °
Prepared statement ^3
Varady, Joseph R. Jr.:
Testimony ^"
Prepared statement ^^^
Zigrossi, Norman A.:
Testimony ^°
Prepared statement l'^4
(in)
IV
APPENDIX **^^
"'"
ixhr£'p1.rn"^"'a\t:i.f4--"" ofappearance ,,
'iS^S'aaV^ "'^ Problem," a list of quotes compiled by the Subcom-
"°
"fte^utomiSri^-'^'^'''"^*'^"^^^^^^^^
Statementssubmitted for the record- ^^^
"^and^mrffJ^f^'l''^ Allegation of Contracting Irregularities
^.""''^u
^'tsSLsfli^-JuTy etS^- ^-^^-^' ^'^" ^' CocLrhrand
1993'!''!..!"^"'^ ^' ^™P'°"' President, ESGrincorporated; Juiy 28;
Statutes and RegulatoryDirectives- ^'^^
^tl^^T^Zl ^^J"' ^^ ^^9 ^^^'i^'^^ 1535 and 1536 190
MaovfD2eqfeiiqsqeottmdIXT^t^^^e^^l^u^^^'^^S'er"vi-c^e"ArcPq"u-i^si^t^iPo"n*E^x'ecAustsiisvteasnt"Secretary 1'9'1'
'^=r^
AiiS'coSr^^'^'"''^"^^^^^^^ !!'
October 25, 1991, Memorandum from Under'SecretaZry oFDefense Do^n
A,^'"^^^^°QQ%'^!;^^^"^^ofMilitary Departments 199
S'eTpa^^m^bKe;rifi?i?gfol&'^M^^^m^n^^^'T'"^^'''''}'' ^-^^"°"^P*«"^N^avAys'sCisotmamntanSedcsre:-:: 2^?
Additional Materials Regarding Off-Loading to the Tennessee"Vailey Author:
^Office? WA 7±^^^^''-^T'S^^T? ^^"^ President and ChiefFinancial
fSPm^Sn^SrctS^^^^^ ^^
,1,
'fS.T.'T^^S^^S'^.Z^^^^^^ °^th-Navy,^?r^o^m-.ohna:
pTur?rrpf£' J,°^" Crane, Office of D6D'lnspector"General,'from
SOfrficeoff^D/^OiD^°^InsDpeepcuttoryGDeinreercatlo,r,JuCloynt22r,ac1t993Management Di^iirreeccttoorraattee.
Le,t^t,e^r«°"t/o-<t^h%eGrOovuepr,sTiVghAt,SJuublcyo2m7m,i1t9t9e3e, wfirtohmaNtotarcmhamnen"tzi^CTO.ss:i "^P^r^e's^i'd*e^n"t^'' 323
T
GLxrroou\p,iDIVTAV,?SWe^pTte'm'bier^'14T,Q1a99?3,°™wiut^h"att2^a^c^h°m^^e^n't President, Resource 225
OFF-LOADING: THE MULTIMILLION DOLLAR
LOOPHOLE IN GOVERNMENT CONTRACTING
FRIDAY, JULY 30, 1993
U.S. Senate,
Subcommittee on Oversight of Government
Management, Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:36 a.m., in room
SD-342, Dirksen Senate Office Building, Hon. Carl M. Levin, Chair-
man ofthe Subcommittee, presiding.
Present: Senator Levin.
Also Present: Senator Sasser.
Staff Present: Linda J. Gustitus, Staff Director and Chief Coun-
sel; Peter K. Levine, Counsel; Frankie de Vergie, Chief Clerk; Paul
Brubaker, Minority Staff Director; Roger Martino, Majority Legis-
lative Fellow; Michael McGaughey and James Calvin Cunningham
III, Majority Interns; Peter Wade and Chris Tuttle, Minority Detai-
lees.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody.
Today's Subcommittee hearing will examine the practice of con-
tract off-loading at Federal agencies. Contract off-loads are inter-
agency purchases, which occur when one agency buys goods or
services through a second agency, under a contract administered by
that second agency. Such purchases are expressly authorized under
certain circumstances under the Economy Act and, when properly
used, can save money by consolidating similar requirements in a
single contract.
Unfortunately, today's testimony will show that the abuse and
the misuse of contract off-loads have become rampant and now
totals in the hundreds of millions of dollars every year. Off-loads
have been abused and misused to avoid competition. They have
been abused and misused to spend expiring funds before they
revert to the Treasury. They have been abused and misused to
avoid audits and contract oversight. All too often, such off-loads
result in sole-source contracts with favored contractors, for which
agencies escape management responsibility.
Let me describe a typical case. In 1991, DOD's Non-Acoustic
Anti-Submarine Warfare Office decided that it needed outside ex-
pertise. Instead of competing the requirement, the office entered
into an interagency agreement with the Tennessee Valley Author-
(1)
^*^j T^^L^^^^ ^P *^®^^ shows that agreement between the DOD
and the Tennessee Valley Authority.
opuaNtrottwmhe,anttwihsoafwthDeatftheentshTeeeynancdteiidsv.sietieesVaisllaenyaAmuatzhionrgitsytohraysastoitdwoilwliutnhfoDled-
v^Jn^ V(^ *^^^ entered into an agreement with a company called
b.bG, which subcontracted 96 percent of the work on a sole-source
basis to subcontractors selected by the DOD's Anti-Submarine War-
tare Office So instead of the Anti-Submarine Warfare Office con-
tracting with those contractors at the end of the chain—the people
^^r k7uw?"t?^-they went through TVA which went through
ptl^ehboeGpr,leenbdwothohof ottfhhaewtyhwcohamanitnt,atoktehcoeandtDmrOaiDcnti'.sstrAanttiiv-eScuobsmtasrianned OrfafkieceitgeotfsftAhte
Now, that was pure subterfuge, and it was at the expense of the
taxpayers. The Tennessee Valley Authority had no expertise in the
area of non-acoustic anti-submarine warfare. The DOD Inspector
tGheinserparoljefcotuntod TthVaAt tfhore oAnnetip-uSrupbomsaeriannedWfaorrfoanreepOufrfpioceseofofn-lloya—detdo
quickly obligate funds and obtain the support ofa specific contrac-
tor without having to advertise or compete the program "
And what was the result of this offload? The Department of De-
fense Inspector General found that the DOD paid inflated billing
rates, paid for people who were not working on the project, paid
costs which should have been allocated to other projects, and paid
teeAsccfoorrduinnaglltoowtahbeleInistpeemcstolrikGeenleirqaulo,r tahnedatdrdaevdelcoosntctoortphoerattaexpjaetys-.
er could be as much as $2.8 million on an $18 million program
And that doesn t even include the half million dollars that ESG
Cbhraorkgeerdinfgorfeiets" pthraotgrTaVmAmraankaegdeomfefntthesteorpv.ices or the $1.1 million
Now, the story gets even worse. After two critical Inspector Gen-
eral reports and a directive from the Under Secretary of Defense,
.rr,.u }^;^?^1?-^'^S^^*""*,^"®Wa°^r^f^a^®re^sOefdficaensetowppseudbtseernfduignegtmoocnoenytidniureectthley
off-load.
AAn^t!i^.-^So®u^b^m°a^rtmeermWianraftairneg tOfhfeicreelraet-idoinrsehcitpedwitthhe TfuVnAdsa—nndowESwGe, tarhee
following the red lines; follow the bouncing ball, the red lines—to
National Oceanic and Atmospheric Administration, NOAA, which
y1oVuAguaensdserdigihtt, btaucrknedtoaErSoGu.ndSoanndowoffw-eloahdaevdetghoetrfeiqveuiprreomnegnst otno
this chain After DOD was told to quit it, you can't do this any-
more, don t off-load to TVA, ESG, and then to the subcontractors,
they offloaded it to NOAA that in turn offloaded it to TVA ESG
and then to the subcontractors. ' '
The documents directing the money to NOAA, by the way ex-
cperepstsolry—sttahtaetd itsheNfOoAllAow—in"gm:u"sFtubnedsthmeapyernfootrmbeer.re"diTrheacttedis.rTihgehtaicn-
the documents with the money going to NOAA. But NOAA, at the
troeqTueVsAt aofndthteo AEnStGi-aSnuybwmaayr.ine Warfare Office, sent the money on
I wish I could tell you that this case is unique, but it is not. For
every abuse in the Anti-Submarine Warfare Office case, we have
Inspector General reports documenting a dozen more cases almost
asFboard.example, we have the Army ^Tra.mm. g tD>irect.lorati.e spenjd-mg^
$24 million on instrumentation systems for its com.bat trammg cen-
tCeSrCs tThrhoeugsholethpeuMrpaorsieneofCotrhpescaonntdratchte bMeatrwieneenCtohrepsMacromntersactaonrd,
CSC was to do Army work—not Marine work—Army work. The
GAO concluded that the Army used the contract to give the project
to a favored company which employed several relatives and friends
ofArmy program officials.
We have the Navy Ship Systems Engi,neeri.ng Stmation sending
$32 million to TVA for ship modernization system.s, an apparent
effort to obligate expiring funds that otherwise would have been re-
turned to the Treasury at the end ofthe fiscal year.
We have an Air Force Wing spending $1 million on a gas utility
vehicle, hand-held walkie-talkies, asbestos removal, design of a ma-
chine gun range, and brush-clearing services from the Tennessee
Valley Authority, which the IG found was done so that the Air
FoHrceerecoiuslwdhsaptenodneexAprirmiyngmyeemaor-reannddfuunmdsh.as to say abuout^ ^tuhe abuuse
and the misuse ofcontract off-loads:
"Unauthorized and ill-considered off-loading of Army acqui.sition
requirements to other agencies, particularly to agencies not subject
to the Federal Acquisition Regulation (FAR) and the Competition
in Contracting Act (CICA) (thus circumventing the competition re-
quirements of CICA), are actions clearly contrarmy to policy and reg-
ulation They cost the Army millions of dollars fees lor perform-
ance of a function that we already pay a highly trained, profession-
al staffto perform properly."
One off-loading contractor who subsequently became disillu-
sioned with the process said the following:
sib'iTltitiysimnythbeeliDeefptahrattmethnettorfanEsnfeerrgryi'nsg 'ofWotrhke pforrocOutrheemresntPrroegsrpaonm-
ipsroagtralema'sst euxniesttheinccael iasntdopceirrhcaupmsveinlltegatlh.eTDhOeDsopleropcuurrpeomseentforprtohce-
ess. . . . It is a program oftechnological welfare that does not serve
any national interest."
In all we have documented more than $100 million of improper
off-loading through the TVA; almost $100 million of improper ofmf-
loading through a single DOE laboratory; more than $10 milhon
improper off-loading through NASA's Jet Propulsion Laboratory;
and more than $50 million in questionable off-loading through the
Department ofTransportation's Volpe Research Center.
There are billions of dollars in other off-loads that have not even
been analyzed to see whether they have been subject to similar
abuses The DOD Inspector General has found thatmthe Department
of Defense alone is making more than $3 billion off-loaded con-
tracts every year. And this m.ay be just the tip of the iceberg, be-
ctuatueseantyhesyDsetpeamrtfomrenttracofkiDnegfoefnfs-eloahdass, acnondsibsetceanutsley DreOfDuseisdttaorifnrstoim-
the only agency that improperly off-loads contracts. DUU
Despite hearings which were held years ago, where the
promised that this would not happen again, it has happened again
and again and again. It has happened again through the IVA. It
—
has happened again through the DOE labs. It has happened again
through NASA. It has happened again through the Department of
Transportation and on and on.
Today we are going to look at off-loading abuses and what steps
the new administration can take to close this multimillion dollar
loophole and put this sorry history to rest.
Prepared StatementofSenator Levin
Today's Subcommittee hearingwill examine the practice ofcontract off-loading at
Federal agencies. Contract off-loads are inter-agency purchases which occur when
one agencybuys goods orservices through asecond agency, underacontract admin-
^tered by that second agency. Such purchases are expressly authorized under the
Economy Act in certain circumstances, and when properly used can save money by
consolidatingsimilar requirements in a single contract.
Unfortunately, today's testimony will show that the abuse and misuse ofcontract
off-loads has become rampant, and now totals in the hundreds ofmillions ofdollars
everyyear. Off-loads have been abused and misused to avoid competition. They have
been abused and misused to spend expiring funds before they revert to the Treas-
ury. They have been abused and misused to avoid audits and contract oversight. All
too often, such off-loads result in sole-source contracts with favored contractors, for
which agenciesescape managementresponsibility.
Let medescribe a typical case. In 1991, DOD's Non-Acoustic Anti-Submarine War-
fare office decided that it needed outside expertise. Instead of competing the re-
quirement, the office entered an inter-agency agreement with the Tennessee Valley
Authority.—You heard it right^the TVA. TVA then entered an agreement with
ESG, Inc. a tiny company made up ofjust a handful ofemployees, who did none of
the required research themselves. ESG subcontracted out 96 percent ofthe work, on
asole-source basis, to subcontractors selected by the Anti-Submarine Warfare office.
This was pure subterfuge, at the expense ofthe taxpayers. The Tennessee Valley
Authority had no expertise in the area ofnon-acoustic anti-submarine warfare. The
tDhOisDprIonjsepcetcttoorTGVenAerfaolr foonuendputrhpaotsethaendAnotnie-SupubrmpaorsieneonWlayr—fatroe"qouffiicckelyofofb-lliogaadteed
funds and obtain the support ofa specific contractor without having to advertise or
competethe program."
And what was the result ofthis off-load? According to the DOD Inspector Gener-
al, neither DOD nor TVA was able to document any formal approvals ofwork per-
fornied or costs incurred by ESG. ESG was paid without providing such basic infor-
mation as the names, positions, hourly rates, and number of hours worked by its
employees; its subcontractors were paid without even submitting invoices. As a
result, the IG found that DOD paid inflated billing rates; paid for people who were
not working on the project; paid costs which should have been allocated to other
proTjhecetsD;OaDndIpGaifdoufneedstfhoartutnhaellaodwdaebdlecoisttemtsoltihkeetlaiqxupoaryearndcoturladvebleoanscmorupcohrataesj$e2t.s8.
million on an $18 million program. And that doesn't even include the half million
dollars that ESG charged for its program management services, or the $1.1 million
"brokeringfee" that TVA raked offthe top.
The story gets even worse. As a result ofa DOD Inspector General investigation
of off-loading to TVA, the Under Secretary of Defense for Acquisition ordered all
commands to stop "pajdng other agencies to execute contracting functions that we
should be performing ourselves." The Anti-Submarine Warfare office ignored this
directive, and continued to send money to TVA and ESG. It took a second IG inves-
tigation before the Anti-Submarine Warfare office stopped sending money directly
to TVA, and even then, the office used a new subterfuge to continue the off-load.
Instead of terminating its relationship with TVA and ESG, the office re-directed
the funds to the National Oceanic and Atmospheric Administration (NOAA), which
tcreeucprttnioenrdgmaturhsio—stunmbdeonapeneydrfotoofrfmN-elrOo.aA"deABduettxhpeNreOrseAsqlAuyi—rsetamatteetnshte"tFroueTqnudVesAstMaoAnfdYthEeNSGOA.nTtTibh-eeSurdbedomicaruremicneteendt.WsaArdci---
fare office sent them on to TVA and ESG anyway. As a result of this deception,
the Anti-Submarine Warfare office was able to send an additional $3.3 million in
DOD funds to TVA and ESG, despite two InspectorGeneral reviews condemningthe
practice.
I wish I could say that this case is unique, but it is not. For every abuse in the
Anti-Submarine Warfare office case, we have Inspector General reports document-
ing adozen more cases almost asbad. Forexample
