TSP board fires, sues computer modernization firm

The Thrift Savings Plan board on Tuesday fired the contractor that has spent four years trying to modernize the retirement savings program's computer system. The board also filed a $350 million lawsuit against American Management Systems of Fairfax, Va., in the U.S. District Court for the District of Columbia. The lawsuit seeks $50 million in actual damages and $300 million in punitive damages for AMS' "breach of contract and fraud in its engagement with the board," TSP officials said in a statement. AMS officials said they will defend the suit vigorously. "AMS is disappointed by the actions of the Federal Retirement Thrift Investment Board that are intended to shift the focus from the board's own deficiencies in performance and contract breaches," AMS said in a statement released Tuesday. The Federal Retirement Thrift Investment Board, which manages 401k-style accounts for 2.5 million current and former federal employees, hired AMS in 1997 to modernize the TSP record-keeping system. The new system aimed to make it easier for the board to make statutory and regulatory changes to the TSP, such as the introduction of two new investment options this May and the enrollment of military participants beginning in October. AMS was supposed to complete work on the system by May 2000 for $29.5 million. The schedule slipped four times and cost estimates rose, with AMS estimating in March that it would complete the new system by January 2002 at a cost of nearly $90 million. While the project has dragged on, the TSP board has been making temporary changes to its existing recordkeeping system, maintained by the Agriculture Department's National Finance Center, to accommodate the new investment options and other changes. In its statement, AMS contended that the board, after three years, has still not determined its system needs. Company officials pointed out that AMS has developed more than 1.2 million lines of software code for the project, five times more than the original estimate, and that more than 70 percent of software for the TSP project has been completed and fully tested. TSP officials said that AMS last week refused to provide a schedule confirming a January completion date. "It has become evident … that AMS is incapable of fulfilling its commitments," TSP Executive Director Roger Mehle said. "This appears to be a very different company from the one with which we contracted in 1997." As AMS fell farther and farther behind schedule, the board in September 2000 issued a request for proposals seeking other software developers to take over the modernization. After firing AMS on Tuesday, the board put the record-keeping modernization project in the hands of Materials, Communication & Computers Inc., of Alexandria, Va., which will lead a team of subcontractors: technology firms Centech Group of Silver Spring, Md., Computer Sciences Corp. of El Segundo, Calif., Keane Federal Systems of Boston and SunGard Employee Benefit Systems of Wayne, Pa. The board has already paid the new contractor $2 million to review AMS' previous work. TSP officials said the new contractor is slated to complete the modernization within one year for no more than $20 million. A successful modernization would allow federal workers' TSP accounts to be updated daily. Now accounts are updated monthly. In its complaint filed with the district court, the board accused AMS of failing to develop a quality assurance program to reduce errors or to create a plan to keep track of software changes. According to the board, AMS also used a "bait-and-switch" personnel tactic, promising that experienced people would be involved in the project only to place less experienced personnel on the project once the contract was awarded. The board also alleged that AMS employed a "calculated strategy of shifting contract tasks from the fixed-price phases to the cost-reimbursable phases of the contract," a practice that drove up AMS' bills to the board. "In hindsight, it is now also clear that such misconduct is part of AMS's business practice; AMS has recently been held liable for defrauding the state of Mississippi over a period of years in ways virtually identical to those alleged herein," the board's complaint said. In the Mississippi case, a jury ordered AMS to pay the state $475 million for failing to deliver a new tax system. Under a settlement, AMS agreed to pay the state $185 million. The TSP board paid AMS $30 million before canceling the contract on Tuesday. The board is asking a jury to decide whether AMS should be forced to pay $350 million for "breach of contract, fraud and concealment, breach of fiduciary duty, negligence, negligent misrepresentation, unjust enrichment and money paid by mistake," according to the complaint. Federal employees have $100 billion invested in the TSP, which is the largest 401k-style defined contribution plan in the country.