ES, IG-98-033, Early Payment and Billing Frequency on Long-Term Contracts

EARLY PAYMENT AND BILLING
FREQUENCY ON LONG-TERM CONTRACTS
IG-98-033

Executive Summary

Introduction
During the 1996 negotiation of the Space Flight Operations Contract, ⁽¹⁾ the NASA Office of Inspector General (OIG) expressed concerns about the Agency agreeing to early payments and more frequent billings because of related problems with other long-term contracts. In March 1997, the OIG issued a management letter (see Appendix E) on the payment and billing practice. Nevertheless, NASA negotiated with United Space Alliance for early payment of its invoices. NASA's position is that the United Space Alliance adequately lowered the available award fee ⁽²⁾ as consideration ⁽³⁾ for early payment. However, we believe the early payment practice was not in the best interest of the Government.

Objective
Our objective was to assess the adequacy of consideration NASA obtained for providing early payment and more favorable billing frequency terms on long-term contracts. ⁽⁴⁾ Appendix A contains additional details on objective, scope, and methodology.

Results of Audit
NASA needs to improve policies with regard to approving and assuring adequate consideration is received for early payment and more favorable billing frequency terms. Specifically, Agency policies did not discourage routine use of these negotiation tools, provide guidance on determining their cost to the U.S. Government over the life of the contract for purposes of negotiating consideration, or encourage use of invoice-based discounts as a method to ensure adequate consideration is received for early payment. NASA received consideration for all four long-term, high-value contracts reviewed for which favorable early payment and more frequent billing terms were granted by NASA Centers. ⁽⁵⁾ Over the life of the contracts, the more favorable terms will cost the U.S. Treasury an estimated $36.1 million ⁽⁶⁾ in interest expense for which the Centers stated they received $104.2 million ⁽⁷⁾ as consideration. However, the consideration amount that NASA will actually receive, and therefore its adequacy, cannot be precisely determined until contract completion. The dollar value of these concessions to the contractors is dependent on the U.S. Treasury interest rates which fluctuate over time. Therefore, at the time of contract award, the appropriate level of consideration must be estimated. Additionally, we found that the consideration associated with granting these concessions was overstated in some cases. The practice of early payment and more frequent billing could conflict with Federal regulations that require the value of consideration to be greater than the cost to the U.S. Treasury and should be clearly specified to ensure proper use. As an alternative, contractors can offer discounts on individual invoices and NASA management can take the discounts when it is advantageous to the Government.

Recommendations and Management's Response
This report contains recommendations aimed at controlling the use and approval of early payment and more frequent billing terms during contract negotiations, and encourages the use of invoice-based discounts. Management did not concur with the recommendations contained in a draft of this report and provided additional information that we agreed was a sufficient basis for revising our recommendations. We request additional management comments on the revised audit recommendations.

FOOTNOTES

1. Contract NAS9-20000, United Space Alliance.

2. Award fee is an amount a contractor may earn in whole or in part based on evaluations of performance during the contract period. The amount of award fee available is negotiated and included in the contract.

3. Consideration can mean reduced available award fee, a waiver of negotiations on change orders, a fee waiver, or other compensation.

4. At our request, the NASA Office of Procurement, Program Operations Division, identified six current contracts that receive early payment or more frequent billing. We reviewed the four largest in terms of dollar value.

5. Marshall Space Flight Center, Johnson Space Center, and Langley Research Center.

6. Early payment and more frequent billing terms will cost the U.S. Treasury $34.9 million and $1.2 million, respectively. At contract definitization, the combined cost to the U.S. Treasury was $32.7 million. Changes in contract values and interest rates have increased the cost to the U.S. Treasury.

7. The amount comprises award fee pool concessions of $5.9 million and $56.9 million by Rocketdyne and United Space Alliance to Marshall Space Flight Center and Johnson Space Center, and a fixed fee waiver by Boeing Commercial Airplane Group of $41.4 million to Langley Research Center.

Introduction	During the 1996 negotiation of the Space Flight Operations Contract, ⁽¹⁾ the NASA Office of Inspector General (OIG) expressed concerns about the Agency agreeing to early payments and more frequent billings because of related problems with other long-term contracts. In March 1997, the OIG issued a management letter (see Appendix E) on the payment and billing practice. Nevertheless, NASA negotiated with United Space Alliance for early payment of its invoices. NASA's position is that the United Space Alliance adequately lowered the available award fee ⁽²⁾ as consideration ⁽³⁾ for early payment. However, we believe the early payment practice was not in the best interest of the Government.
Objective	Our objective was to assess the adequacy of consideration NASA obtained for providing early payment and more favorable billing frequency terms on long-term contracts. ⁽⁴⁾ Appendix A contains additional details on objective, scope, and methodology.
Results of Audit	NASA needs to improve policies with regard to approving and assuring adequate consideration is received for early payment and more favorable billing frequency terms. Specifically, Agency policies did not discourage routine use of these negotiation tools, provide guidance on determining their cost to the U.S. Government over the life of the contract for purposes of negotiating consideration, or encourage use of invoice-based discounts as a method to ensure adequate consideration is received for early payment. NASA received consideration for all four long-term, high-value contracts reviewed for which favorable early payment and more frequent billing terms were granted by NASA Centers. ⁽⁵⁾ Over the life of the contracts, the more favorable terms will cost the U.S. Treasury an estimated $36.1 million ⁽⁶⁾ in interest expense for which the Centers stated they received $104.2 million ⁽⁷⁾ as consideration. However, the consideration amount that NASA will actually receive, and therefore its adequacy, cannot be precisely determined until contract completion. The dollar value of these concessions to the contractors is dependent on the U.S. Treasury interest rates which fluctuate over time. Therefore, at the time of contract award, the appropriate level of consideration must be estimated. Additionally, we found that the consideration associated with granting these concessions was overstated in some cases. The practice of early payment and more frequent billing could conflict with Federal regulations that require the value of consideration to be greater than the cost to the U.S. Treasury and should be clearly specified to ensure proper use. As an alternative, contractors can offer discounts on individual invoices and NASA management can take the discounts when it is advantageous to the Government.
Recommendations and Management's Response	This report contains recommendations aimed at controlling the use and approval of early payment and more frequent billing terms during contract negotiations, and encourages the use of invoice-based discounts. Management did not concur with the recommendations contained in a draft of this report and provided additional information that we agreed was a sufficient basis for revising our recommendations. We request additional management comments on the revised audit recommendations.