Performance of the missions of the Department of Health, Education,
and Welfare involves the making and subsequent administration of
$4 billion of discretionary grants and $700 million of contracts
annually. Fulfillment of the determination that you, as the prin-
cipal officials of the Department, share with me, to perform these
missions with utmost effectiveness, efficiency and economy, depends
very greatly on the integrity of the processes by which those grants
and contracts are made and administered. From the outset of my
tenure as Secretary, I have regarded strengthening these processes
as among our most urgent responsibilities. You will have in mind
that one of my earliest directions to heads of agencies was to begin
an implementation of specific organizational and procedural improve-
ments in grant and contract management, and that I have established
the Office of Grants and Procurement Management (OGPM) in the Office
of the Assistant Secretary for Administration and Management to
ensure concentrated, vigorous action in identifying remaining weak-
nesses, correcting them and ensuring continuous proper functioning
of the grant and contract processes.

I am convinced that weaknesses in the grant and contract processes
do remain and that many of them are fundamental. I have, in fact,
examined a considerable number of them and have concluded that there
are certain categories of actions that must be taken to improve the
way in which we conduct the affected basic activities of the Depart-
ment. In order to share with you a specific identification of the
most prominent weaknesses, to indicate the nature of the corrections
required, and to contribute your ideas and assistance, I am sending to
you, as Attachment A hereto, a summary prepared for the purpose by
OGPM. It must be emphasized that the solutions to the problems dis-
cussed in Attachment A are designed to improve and indeed reform the
quality and integrity of certain of the existing processes. They are
not intended either to inhibit or infringe upon those decisional
processes which are of proven reliability or to interfere with sub-
stantive program judgments.

2

As you know, action is already under way on several of the matters described in Attachment A, and some improvements in organization and procedures have occurred. We are mandating the use of contracts, with the associated well developed award and administration procedures, to fund specified classes of activities for which grant procedures are less adequate or appropriate, and setting standards for documentation of award and administration decision processes in grant programs: Rules setting uniformly high standards of sensitivity to possible conflicts of interests in program management, and minimizing incentives for such conflicts, are about to be adopted. Specific guidance has been issued identifying grant terms that are to continue to operate as standards of project administration and control use of grant funds even where performance is placed in the hands of subgrantees or subcontractors. In those programs that have suffered from delays forcing compression of project funding decisions into the end of the fiscal year to the detriment of quality, we are trying to get better spacing by continuously monitoring progress and promptly moving to clear away obstacles, and we are formulating procedures to alleviate last-minute negotiation problems when they do occur. Further, we intend, this fiscal year, by selective preaward, or early post-award, grantee business management capacity reviews, and by reinforcing the role of legal review, to improve support of grant award and management decisions as far as they depend on new assessments of grantee capabilities or on considerations amenable to judgments based on legal expertise. The cooperation of yourselves and your staffs has been and will continue to be most important in making all of these efforts productive.

On all of the matters described in Attachment A, solutions are available. I have directed OGPM to prepare outlines of the nature of the actions necessary to effect those solutions and, as far as feasible at this time, specifications of the particular actions themselves. I have approved generally the outlines and specifications accordingly prepared. They will be immediately transmitted to you by OGPM in preparation for commencement of the very large effort that must now be undertaken.

I have assigned to OGPM, with the full support and assistance of OGC and C, the lead responsibility for the full development and implementation of the indicated solutions to the problems referred to. The head of OGPM, Mr. Robert L. Trachtenberg, will proceed to institute necessary work groups and task forces drawing on the talents of the constituent organizations of the Department. Mr. Trachtenberg will request of you nominations for the task forces. His call on you is my direction to him to proceed. Because of the importance I attach to these undertakings, I am asking the Under Secretary to approve the selections for each task force.

I wis outlin

you to consider very seriously the problems presented and th and specified actio.

and provide OGPM the benefit of your

best t. king in the process such further development of them, for the gui ence of the work to i done, as you may believe useful. It will require the best effort and most constructive participation of all elements of the Department to guarantee that the necessary solutions are in final and workable form, and then to make them work. While all agencies have special knowledge and experience to contribute, it is especially desirable that the task forces consider the unique progress that NIH has made in the field of grants award and administrat:

Many of the solutions which I anticipate will flow from these undertaki are consistent with the recommendations of the Administrative Conference of the United States and certain proposed recommendations under consideration by that body. Other solutions simply represent sound management and the imposition of minimum disciplines that the public rightly should expect of the Department. In sum, I expect to obtain from this effort a credible system of grants and contracts which assures that awards are made on the basis of maximum, publicly announced competition, to responsible individuals and organizations, strictly on the basis of the most meritorious proposals, such merit being determined by an objective evaluation system that eliminates conflicts of interest or improper influence at any stage in the process; and that once a grant or contract is made, we are assured of genuine, economical best-effort or successful performance of the project being supported. To accomplish these and related objectives, we must develop a rational basis for selection of the awarding instrument, thoughtful and well documented decisions, a sensible system of contracts and grants management which provides checks and balances throughout the life cycle of the award document, and a process by which proven performers are rewarded and shoddy performance is penalized.

Good grant and contract management does not, of course, guarantee good grants or contracts. It can only support and facilitate accomplishment of the high objectives that you and your staffs are maintaining and vigorously pursuing in your special, professional capacities as the developers, leaders, operators and evaluators of this Department's programs. However, the best conceived projects, poorly managed, frequently end as a loss or a setback to the overall effort. Without aggressively and promptly dealing with the fundamental issues, we will not achieve our ulta ce aim of improving the ity of grant and contract results apt the delivery of better se es to our

constituencies.

I will observe our progress in this area with persistent interest.

Attachment

ATTACHMENT A

A.

Inadequate Checks and Balances in the Grant Process

Grants management as a function is inadequately defined and is not always organizationally placed to perform as a check and balance and as a consequence we do not enjoy strong compliance with the Department's fairly substantial body of grants policies. We need both a working definition of what constitutes 'grants management,' and then an organizational placement for this function that assures it strength to make a maximum contribution in execution, review and verification of the major administrative events in the life cycle of grants.

Volume of Work as Related to Efficiency

While there are some factors controlling work volume which are difficult for us to impact upon appreciably, such as aspects of the appropriations process that lead to 'bunching' of grants and contracts during the fourth quarter of the fiscal year, we can and should address the question of relationship between grant and contract management resources and work volume. As matters stand now, the management resources are inadequate to assure timely monitoring, auditing, and evaluation of grant and contract activities.

Project Proposal Criteria Inadequate to Ensure Meaningful Competition

Insufficient guidance, understanding and effort go into the development of objective criteria for the selection of grantees and contractors. Even where competition exists, selection often is subjective or at least based on diverse concepts of what a good project really is. We must move further towards a genuinely objective system for selection of grants and contracts.

Grantee/Contractor Fiscal and Management Evaluation is

Missing

We do not perform evaluations of the total management ability of grantees on a timely and systematic basis. It is often too late by the time an audit discovers

Page 2 ATTACNT A

inadequate financial practices or systems, poor procurement or subcontracting practices, or deficient personnel procedures. Such inadequacies need to be known before a grant is made or soon enough after to make such knowledg worthwhile.

Inadequate Management of Subcontracts and Subgrantees

There is extensive use of contracts under grants or subgrants with little Departmental control over the process or the activities. We must assure that grantees do not serve merely as conduits of Federal assistance to ineligible, improperly selected or incapable subcontractors. Inadequate Documentation of Grant Award Decisions

There is no Departmental standard for identifying documentation comprising a grant file. Therefore in some programs it is difficult to trace the decision making process, or project management, or obtain accountability

Lack of Competition

In certain research programs there is no formal competition among applicants. The absence, of structured competition could invite or suggest cronyism and favoritism in the grant award process.

Inappropriate Uses of Grants for Procurement

There is extensive use of grants to obtain items, properl the subject of contracts. This undermines the procurement system, is an abusive use of grants, and causes pub lic distrust in the integrity of our processes.

Improve Enforceability of Grants and Grantee Accountability

We need to address the matter of Department-wide regulations for standard terms and conditions governing grant performance, and procedures for grant suspension and termination for cause.