ES, IG-98-007, Contractor Facility Leases

CONTRACTOR FACILITY LEASES
IG-98-007

Executive Summary

Background Contract awards with commercial organizations sometimes require contractors to acquire facilities to perform government work. NASA's Office of Procurement (Code H) and installation procurement divisions are responsible for carrying out the acquisition process which includes complying with applicable contract regulations and evaluating contractor facility costs.

According to the Federal Acquisition Regulations (FAR), lease costs for facilities are an allowable cost, but must be reasonable (FAR 31.205-11 and 31.205-36). FAR implements requirements of the Financial Accounting Standards Board for recording the costs of leased facilities. A leased facility can be classified as either a capital lease (i.e., treated as a purchased asset and depreciated) or an operating lease (i.e., treated as an expense).

Objectives The audit objective was to determine whether NASA is adequately managing facility leasing. Specifically, we answered the following questions:

Were contractor facilities effectively utilized?
Were contractor facility leases correctly classified?
Did contractors accurately bill lease costs to the government?

Additional information on objectives, scope, and methodology is shown in Appendix 1.

Results of Audit NASA's management of facility leasing can be improved. The lease costs billed to the government were accurate; however, a significant number of contractor facilities were not effectively utilized. In addition, four contractor leases were not correctly classified. For the 82 leases reviewed, we found NASA could spend over $13.7 million needlessly over the remaining life of the leases or contracts with the prime contractors. However, NASA has already taken action on seven facilities with idle space and may realize a savings of approximately $4.5 million.

Management Action During the Audit During the audit, we issued a rapid action report on two leases at the Lewis Research Center. For one leased facility, the contractor submitted a $164,000 proposal to NASA for reconstruction work; however, we found that the City of Cleveland was planning to purchase the same building as part of an airport expansion project and destroy it to make room for a runway expansion. NASA canceled the reconstruction work and saved the $164,000. On a second leased facility, a contractor requested NASA to pay refurbishment costs of $1 million. The original documentation called for refurbishment costs of $250,000, and we found no documentary evidence to support the increased costs. Management subsequently received an estimate for $470,000, which would save $530,000. Negotiations for a final cost are on-going.

Recommendations We recommend that the Associate Administrator for Procurement direct contracting officers to:

reevaluate the facility requirements for those contractor sites with idle space,
review the allowability of costs for those leases that have substantial idle space for over one year,
request DCAA to include FAS 13 analysis in their full cost proposal reviews, and
review the classification of the specific questioned leases to ensure that leases are appropriately classified, and if not, take corrective action as required; including determining the allowability of costs.

Background	Contract awards with commercial organizations sometimes require contractors to acquire facilities to perform government work. NASA's Office of Procurement (Code H) and installation procurement divisions are responsible for carrying out the acquisition process which includes complying with applicable contract regulations and evaluating contractor facility costs. According to the Federal Acquisition Regulations (FAR), lease costs for facilities are an allowable cost, but must be reasonable (FAR 31.205-11 and 31.205-36). FAR implements requirements of the Financial Accounting Standards Board for recording the costs of leased facilities. A leased facility can be classified as either a capital lease (i.e., treated as a purchased asset and depreciated) or an operating lease (i.e., treated as an expense).
Objectives	The audit objective was to determine whether NASA is adequately managing facility leasing. Specifically, we answered the following questions: Were contractor facilities effectively utilized? Were contractor facility leases correctly classified? Did contractors accurately bill lease costs to the government? Additional information on objectives, scope, and methodology is shown in Appendix 1.
Results of Audit	NASA's management of facility leasing can be improved. The lease costs billed to the government were accurate; however, a significant number of contractor facilities were not effectively utilized. In addition, four contractor leases were not correctly classified. For the 82 leases reviewed, we found NASA could spend over $13.7 million needlessly over the remaining life of the leases or contracts with the prime contractors. However, NASA has already taken action on seven facilities with idle space and may realize a savings of approximately $4.5 million.
Management Action During the Audit	During the audit, we issued a rapid action report on two leases at the Lewis Research Center. For one leased facility, the contractor submitted a $164,000 proposal to NASA for reconstruction work; however, we found that the City of Cleveland was planning to purchase the same building as part of an airport expansion project and destroy it to make room for a runway expansion. NASA canceled the reconstruction work and saved the $164,000. On a second leased facility, a contractor requested NASA to pay refurbishment costs of $1 million. The original documentation called for refurbishment costs of $250,000, and we found no documentary evidence to support the increased costs. Management subsequently received an estimate for $470,000, which would save $530,000. Negotiations for a final cost are on-going.
Recommendations	We recommend that the Associate Administrator for Procurement direct contracting officers to: reevaluate the facility requirements for those contractor sites with idle space, review the allowability of costs for those leases that have substantial idle space for over one year, request DCAA to include FAS 13 analysis in their full cost proposal reviews, and review the classification of the specific questioned leases to ensure that leases are appropriately classified, and if not, take corrective action as required; including determining the allowability of costs.