A $4.5 million D.C. Board of Education contract with a private law firm to help prepare a suit against asbestos manufacturers was improperly awarded and financed, according to a draft report by D.C. Auditor Otis H. Troupe.

Troupe's report, which has not been released publicly, raises questions about whether the school board actually needed the services of the firm of Leftwich, Moore and Douglas and recommends that the contract be suspended.

"The Board approached a serious and important issue in a wrong and very costly way," the report says. The handling of the contract by school officials "has been haphazard . . . and guided more by the contractor than the board."

The contract was awarded without seeking competitive bids and has been paid for, in large part, out of funds appropriated in the capital budget for asbestos removal. The report called the use of $3.6 million in capital funds "absolutely inappropriate."

The report criticizes David Eaton, school board president from January 1982 to January 1985, for awarding the initial contract without the review or approval of the board. Also, it chastizes R. David Hall, who was board president from 1985 until December, for ignoring a December 1985 authorization by the board to limit the cost of the contract to $10,000 a month or to terminate it.

Hall said in a telephone interview that he sought the board's authorization for use as a lever with the contractor to help control costs. He said he waited to impose the $10,000-a-month limit because he feared that it would jeopardize the suit at a critical point.

The costs of the contract "were higher than anyone expected,' Hall said.

Willie Leftwich, who heads the firm of Leftwich, Moore and Douglas, said yesterday that he had not seen the report or discussed the audit with the auditor's office. But, he said, "I don't think that Troupe has had anything to say that adversely reflects on our services to the client . . . . It was a contract, and we tried to do the best we could on it."

Eaton could not be reached for comment.

According to the report, school officials began considering hiring a law firm in the fall of 1984, in anticipation of a lawsuit filed in December of that year by the D.C. corporation counsel's office.

The suit, with the D.C. government as plaintiff, seeks $400 million in damages from manufacturers and suppliers whose asbestos products were used in government and school buildings. Some similar suits by local governments have produced multimillion-dollar awards.

The board instructed an ad hoc committee of its members to negotiate an agreement with Leftwich to help assemble the massive amount of documentation needed for the suit, on the condition that the arrangement and the cost be approved by the entire board.

"There is no record that the entire board reviewed or approved" the contract, which was signed by Eaton in December 1984, the report says.

Neither is there any sign that the committee reviewed a competing proposal from the law firm of Bracewell and Patterson, the report says.

The agreement called for Leftwich's firm to be paid $125 an hour, with a contingency provision for an additional $50 an hour if the school board collected $1 million as a result of the suit.

The school board believed that its in-house legal staff could not handle the massive preparation needed, but the corporation counsel's office, which was responsible for the litigation, "did not need or request any assistance" and was not consulted before the outside firm was hired, the report said.

The report also questions whether the school board will ever be able to recover its costs in court.

It says a recent ruling in the case "potentially excluded" 80 to 85 percent of all District government buildings.

If upheld, that decision would seriously limit any potential award, according to the report.

The report notes that board members estimated the contract would cost no more than $75,000 a year.

In fact, the law firm collected an average of $60,000 a month for the first six months and $120,000 a month for the following 10 months.

"The president failed to enforce this decision and the board failed to follow up," it says.

Contract costs were reviewed, but not controlled, according to the report.

For example, the board never acted on a proposal from Leftwich to replace law firm clerks with school board personnel, which could have saved the school board $100,000, the report says.

Leftwich said that once the lawsuit was filed, "it became an extremely difficult case to control anything on."

The asbestos companies adopted an aggressive stance and compelled the city to prove the existence of asbestos in school buildings and document the manufacturer and supplier, requiring massive amounts of work, according to the report.

The case is likely to continue through 1990, further increasing the cost of the contract, the report says.