April 16, 2012 – The Department of Transportation’s Office of Inspector General released is final report on the Federal Aviation Administration's (FAA) Systems Engineering 2020 (SE-2020) contracts. SE-2020 is a portfolio of contracts that FAA is using to obtain professional and technical services to support its development and implementation of NextGen.  

The National Airspace System handles almost 50,000 flights a day and more than 700 million passengers each year. To accommodate the Nation’s air traffic, which is expected to triple by 2025, the Federal Aviation Administration (FAA) is developing the Next Generation Air Transportation System (NextGen)—an effort that involves multibillion-dollar investments from both the Government and the airline industry. 

The FAA awarded seven SE-2020 base contracts between April and October 2010, which have a cumulative maximum value of $7.3 billion the largest award in FAA's history. On February 4, 2010, the Chairmen of the House Committee on Transportation and Infrastructure and its Aviation Subcommittee, Representatives Mica and Petri requested OIG review FAA's SE-2020 effort.  

OIG assessed whether FAA manages its SE-2020 contract costs effectively, and uses sound contracting practices to select contractors and oversee their performance. OIG found that unclear FAA Acquisition Management System requirements resulted in unreliable cost baselines and overstated contract values, which impedes FAA's ability to manage total contract costs.  

The FAA’s Acquisition Management System (AMS) establishes a number of requirements for managing FAA’s contracts; however, the requirements for ensuring fair and reasonable labor rates are unclear, which has led to unreliable cost baselines. Without a reliable baseline, the FAA cannot effectively monitor and control contract costs. 

For example, AMS lacks clear requirements for addressing significant differences between contractors’ proposed contract costs and the FAA’s estimated contract costs. FAA awarded the SE-2020 contracts using the contractors’ proposed labor rates, which cumulatively were 29 percent, lower than the FAA estimated. The FAA also included 18 million more labor hours than needed in the contracts’ ceilings to provide more flexibility during contract administration, although the contracts already allow for such flexibility.

Consequently, the FAA’s baseline is overstated as the labor hours included in it exceed FAA’s estimate. Further, AMS does not clearly define requirements for Defense Contract Audit Agency (DCAA) audits. As such, the FAA did not verify five of seven prime contractors’ proposed labor rates, which may have provided a basis for determining a reliable cost baseline.  

Weaknesses in its monitoring tools and critical acquisition data errors further impede the FAA’s ability to ensure it does not overpay for professional and technical services. For example, the FAA predicted that one of its SE-2020 task orders will experience an overrun of more than $55 million, but our calculations showed the task order is actually projected to be under budget by about $10 million. 

In addition, the FAA's practices to select contractors and oversee their performance are not sufficient. OIG made 12 recommendations to improve the FAA's cost management and contracting practices, the agency concurred or partially concurred with 10 recommendations.  

1. Require the SE-2020 program office to submit to the CFO a written reconciliation of the difference between its IGCE and the contractors’ proposals and use this reconciliation as a basis to develop a reasonable cost baseline.  

2. Revise AMS to require that, when IGCEs exceed contractor proposals by 15 percent or more, program officials submit an explanation and recommended corrective actions to the CFO before contract award.  

3. Revise AMS to specifically require pre-award and post-award audits of contracts in excess of $100 million and define the types of pre-award audits required, including—at a minimum—direct labor rates, indirect rates, and accounting system reviews.  

4. Amend SE-2020 awarded contract values using contractors’ proposed rates and the FAA’s estimated need for 40 million hours and adjust fixed fees to reflect revised contract costs. 

5. Require the SE-2020 program office to develop policies and procedures to ensure timely reconciliations and corrections to acquisition databases and revise its cost monitoring spreadsheets to ensure accurate data for effective cost control of SE-2020 contracts.  

6. Revise AMS to establish controls that require more comprehensive evaluations of contractor past performance.  

7. Require the FAA’s contracting and program staff to use performance-based acquisition principles in their SE-2020 task orders and ensure staff is adequately trained to develop and monitor such awards.  

8. Require the SE-2020 program office to define criteria that specify when competing task orders are in the Government’s best interest.  

9. Revise AMS to include guidance on how to identify and mitigate risks of potential OCIs prior to contract or task order award.  

10. Require the FAA contracting personnel to develop, maintain, and use a record of active prime contractors and subcontractors to identify and mitigate risks of potential OCIs.  

11. Require the SE-2020 program office to develop policies and procedures to ensure adequate documentation of task order award decisions.  

12. Require the SE-2020 program office to amend the standard performance monitoring templates to include measurable criteria to evaluate desired performance outcomes, such as quality, cost, and schedule.