The move comes as pressure intensifies for the drug office to dismiss Ogilvy, a unit of WPP Group, over its difficulty in meeting government accounting standards. U.S. Rep. Bob Barr, R-Ga., is expected to strongly question the continuation of the shop's contract at a congressional hearing set for Aug. 1 to examine a June General Accounting Office report on Ogilvy's billing practices.
The drug office's required studies would allow it to elect not to renew Ogilvy's contract three years into its five-year term. The government has until Nov. 3 to notify the agency whether the current contract will be renewed, but would almost certainly have to make a decision in the next month to have another ad agency in place by Jan. 4, when the current year of the contract ends.
The Defense Contract Administration Agency, which with the U.S. Navy currently administers the drug office contract, "will be evaluating the contract and with the Navy is helping [the drug office] conduct market research to determine if the nature of the contract is appropriate and are there other organizations that can provide more services," said Jennifer DeVallance, a drug office spokeswoman. "We are not at a point to determine if we can go to bid. We are going to see what the research tells and see if the issues are resolved on accounting procedures."
Complicating the situation for Ogilvy are the delays in naming a new official to run the drug office. President Bush last week called on the Senate to move faster to speed approval of his nominee, John P. Walters, whose nomination has met some resistance from Democrats who feel he places too little emphasis on treatment programs and too much on law-enforcement efforts.
Spokesmen for the ad agency said Ogilvy has exceeded the government's goals for the advertising program and that billing issues are close to resolution. The spokesmen said the ad agency, with the help of an outside accountant, has revamped its accounting system, and that the system will be certified as meeting government standards today, thereby greatly reducing the possibility of any future billing woes. Elimination of the accounting system as an issue will permit full attention to resolving past bills, they added.
"Ogilvy has been with this program for a couple of years. We believe in the program. We are committed to the work," said Paul Clark, a spokesman for the agency. "Now that the independent accountants have made it clear how to administer a very complex federal contract, we believe we can administer the program in the future with the same comparable level of quality."
Whether that is enough remains to be determined. Many of the billing problems the government had with Ogilvy were about substantiation and whether the government should be paying certain types of administrative costs-the new accounting system will resolve these issues. But the GAO report also included charges the agency submitted fraudulent time sheets; Ogilvy has acknowledged that some time sheets were wrong.
The Ogilvy contract, the ad agency's first with any federal government unit, was always a little unusual due to the nature of the job. While most government agencies hire shops to create and place ads, almost all the drug office's creative comes from the Partnership for Drug Free America.
Under the anti-drug program, the government spends about $160 million a year buying ads, but expects to get a free ad or one of equal value for each ad it buys. Ogilvy's job is to plan spending and negotiate with media companies for the ad buy, as well as match and monitor compliance while researching the campaign's needs.
The current contract gives the ad agency a $1.7 million annual fee, then pays about $12 million a year for labor, $6 million for subcontracts and $6 million for production. The remainder of the money goes to paid media. The exact numbers vary somewhat from year to year.
The drug office said it remains happy with Ogilvy's advertising performance on the work. "We continue to be pleased with Ogilvy's technical performance," said Alan Levitt, director of the media campaign, noting that the shop has exceeded goals for generating matching media dollars and has also saved the drug office money on media buys.
The problem has been the billing (AA. Oct. 9). Ogilvy has acknowledged that as a first-time federal contractor that didn't fully understand the differences between billing the government and billing private industry, it failed miserably to meet government requirements for substantiation.
"The commercial business of advertising has historically not operated on a cost system, but a fee-based system," said a second Ogilvy spokesman who asked not to be identified. "In this case the government contract was entirely cost-based. It was an entirely different animal than what has been used in the industry, especially when you throw on the arcane accounting requirements of government regulations."
As of last week Ogilvy, which hired PricewaterhouseCoopers to refashion its accounting system to meet government requirements, still had about $7.6 million outstanding from its first bills in 1999. The agency had held off in billing for $70 million to $80 million in costs while awaiting certification of its new accounting system.
The billing discrepancies included Ogilvy billing for services the government doesn't cover, such as lunches at shoots, as well as lacking adequate substantiation of its bills.
Two GAO reports and a congressional hearing last year, however, also produced whistleblower charges that an unnamed Ogilvy official, upset the ad agency wasn't generating more revenue on the contract, had pushed personnel to increase billable hours.
A GAO report issued in late June will be the focus of this week's hearing of a panel of the House Committee on Government Reform. The report urged against extending Ogilvy's contract if the accounting issues weren't resolved.