AUDIT GUIDE
FOR
CONSTRUCTION
GRANT PROGRAM
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, B.C. 20460
Revised January 1978
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This document is not a replacement for or supplement to EPA
regulations, guidelines, or official EPA policy statements. It is a guide
used by the Environmental Protection Agency and its auditors to assist in
conducting interim and final construction grant audits. As such, this
guidance is subject to be modified as EPA regulations, guidelines, and
policies change.
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TABLE OF CONTENTS
Page
Chapter 1: Introduction 1-1
1.1 Purpose of Audit Guide 1-1
1.2 Program Background 1-1
1.3 Authority for Audit 1-2
1.4 Audit Standards 1-2
1.5 Audit Objectives 1-2
1.6 Matters Requiring Immediate Attention 1-3
1.6.1 Suspected Fraud, Irregularity,
or Collusion 1-3
1.6.2 Insufficient Data or
Inadequate Systems 1-3
1.7 Quality Control l'-3
Chapter 2: Definition of Program Terms 2-1
Chapter 3: Preliminary Procedures 3-1
3.1 Developing the Audit Approach 3-1
3.2 Types of Audits 3-1
3.2.1 Interim Audits 3-1
3.2.2 Final Audits 3-3
3.3 Developing the Plan 3-3
3.4 Major Activity Areas for Audit Focus 3-7
3.4.1 Accounting Practices 3-7
3.4.2 Procurement Practices 3-9
3.4.3 Project Management Practices 3-12
Chapter 4: Field Audit Procedures 4-1
4.1 Approach to Audit of Costs 4-1
4.1.1 Factors for Determining
Allowability 4-1
4.1.2 Review of Costs 4-4
4.2 General Audit Steps 4-5
4.2.1 Initial Field Audit
Procedures 4-5
4.2.2 Verification of Claim 4-6
4.2.3 Verification of Eligibility 4-6
4.2.4 Credits, Rebates, and
Refunds 4-6
4.2.5 Unpaid Bills 4-7
4.3 Specific Areas of Audit 4-7
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4.3.1 Audit of the Force Account 4-7
4.3.2 Audit of Engineering
Services 4-9
4.3.3 Audit of Construction
Costs 4-19
4.3.4 Other Costs 4-27
4.3.5 Other Audit Matters 4-27
Chapter 5: Exit Conferences 5-1
5.1 Audits with No Findings 5-1
5.2 Audits with Significant
Findings 5-1
5.3 Documentation 5-1
Chapter 6: The Audit Report 6-1
6.1 Introduction 6-1
6.2 Content and Format of Audit
Report 6-1
6.2.1 Scope Paragraph 6-i
6.2.2 Opinion 6-1
6.2.3 Comments on Compliance,
Performance, and
Internal Controls 6-1
6.3 Presenting the Findings 6-2
6.4 Example Audit Report No. 1 6-3
6.5 Example Audit Report No. 2 6-14
Appendix A: Survay of Grantee's
Accounting, Procurement, and
Property Management Systems A-l
Appendix B: Bond Calculation Guidance B-l
Appendix C: Supplemental Audit
Procedures for Relocation Costs C-l
Appendix D: Criteria for Eligibility and
Allowability of Selected Items of Costs D-l
Appendix E: Consulting Engineer
Subagreements-Records Subject
to Audit E-l
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Appendix Ft Consulting Engineer
Subagreements--Allowable Methods of
Compensation F-l
Appendix G: Consulting Engineer
Subagreements Subject to 40 CFR
35.937-5, -6, and -7 G-l
Appendix H: Interpolation of Fee
Percentage H-1
Appendix I: Application of Paragraph B.5
of Appendix D to 40 CFR 35, Subpart E M
Appendix J: EPA Division Audit Offices
and Cognizant Geographic Areas J-l
Appendix K: References K-l
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CHAPTER 1: INTRODUCTION
1.1 PURPOSE OF AUDIT GUIDE
This guide has been prepared to assist the Environmental Protection Agency (EPA) and its
auditors in conducting interim and final audits of the construction grant program. The audit
steps in this guide are intended to provide general insight into the nature and scope of audit
contemplated. This guide is npt intended to be a complete manual of procedures, nor is it
intended to supplant the auditor's judgment of the work required to meet the audit objectives
outlined in this audit guide. The audit procedures contained in this guide may not cover all
circumstances or conditions encountered in auditing a particular grant, and, similarly, not all of
the audit procedures will apply to each grant audited. The auditor must use his professional
judgment to tailor the procedures to meet conditions at the audit site so that the audit objectives
set forth in the guide may be achieved.
1.2 PROGRAM BACKGROUND
The first Federal legislation concerning water pollution was the Rivers and Harbors Act of
1899. The Act provided that those convicted of polluting navigable waters or their tributaries
would be guilty of a misdemeanor and, upon conviction, would be fined between $500 and
$2,500 and imprisoned for not less than 30 days nor more than one year. Forty-nine years later,
the 1948 Federal Water Pollution Control Act was enacted. It provided grants for the planning
and design prior to construction and loans for construction of waste-water treatment plants.
The Federal Water Pollution Control Act of 1956 provided the basis for the current
construction grant program. This Act was amended in 1961,1965, 1966, 1970, 1972, 1973, and
1977. The Act, as amended, provides for Federal grants to municipalities, intermunicipal
agencies, states, and interstate agencies for the purpose of planning, designing, and constructing
waste treatment facilities.
The Department of Health, Education, and Welfare administered the program until 1966.
The Federal Water Pollution Control Act of 1966 transferred this responsibility to the
Department of the Interior. The construction grant program was transferred to the
Environmental Protection Agency in 1970 (Reorganization Plan No. 3).
After June 30, 1967, Federal participation in grants for the cost of constructing a waste
treatment facility could be increased to 40 percent if the state agreed to pay not less than 30
percent of the estimated reasonable cost of all state construction projects receiving Federal
grants. The percentage limitation could be-further increased to 50 percent if (1) the state agreed
to pay not less than 25 percent of estimated reasonable cost of all projects for which Federal
grants were made and (2) enforceable water quality standards had been established for the
waters into which the project discharged. An additional Federal participation of as much as ten
percent of the approved grant was permitted if the funded project was in conformity with a
metropolitan plan for that particular area. Thus, it was possible for a Federal grant to be
awarded for an amount equal to 55 percent of the total estimated reasonable project cost.
Title II of the Federal Water Pollution Control Act Amendments of 1972 authorized a
Federal grant of 75 percent of the cost of construction of a treatment works. In addition, Section
206(a) through (e) of P.L. 92-500 (codified in Subpart D of 40 CFR 35 and amended by P.L.
93-207) may provide for reimbursement of public sewage treatment projects on which
construction was initiated after June 30,1956.
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1.3 AUTHORITY FOR AUDIT
The authorized representatives of the Administrator of EPA and the Comptroller General
of the United States have authority to audit the grantees' books, documents, records, and papers
(P.L. 92-500). This audit authority is extended to the subcontractors' books, documents,
records, and papers which are pertinent to the project (40 CFR 35.935-7). EPA auditors and
auditors under contract to EPA, are the Administrator's representatives.
The EPA Office of Audit is responsible for audits of EPA grants. The Division Audit
Director (see Appendix J to this guide) may elect to have an individual audit conducted by his
staff, another Federal agency, state or local government auditors, or an independent public
accountant. When the Division Audit Director elects to have the audit performed by an
independent public accountant, the Director must notify the grantee or contractor as to the firm
performing the audit. The selected firm must contact the grantee or contractor to arrange for
the start of the audit.
1.4 AUDIT STANDARDS
Audits of EPA construction grants will be made in accordance with this guide and the
"Standards for Audit of Governmental Organizations, Programs, Activities, and Functions"
issued by the Comptroller General in August 1972. The independent public accountant will not
be required to express an opinion as to the efficiency and economy of operations or with respect
to program evaluations. He will, however, be required to perform certain audit tests related to
these aspects and to report the results of his examination.
In performing audits of EPA grants/contracts, the auditor is expected to adhere to
generally accepted auditing standards. In addition, the auditor should utilize applicable
portions of the American Institute of Certified Public Accountants' (AICPA) Industry Audit
Guides. Of particular importance is the guide "Audits of State and Local Governmental
Units."
1.5 AUDIT OBJECTIVES
The objectives of the audits of grants and contracts are to:
a. Determine whether the management controls exercised by the grantee through
its management system, accounting system, procurement system, and property control system
are adequate to provide assurance that costs claimed/incurred are reasonable, allowable, and
allocable to the sponsored project under the grant terms and conditions, Federal Management
Circulars (FMCs), and applicable EPA regulations.
b. Identify any noncompliance with applicable grant provisions or EPA rules
and regulations and, based upon the review, provide recommendations for improvement.
c. Determine whether the costs claimed under the EPA grant are reasonable,
allowable, and allocable to the sponsored project.
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1.6 MATTERS REQUIRING IMMEDIATE ATTENTION
1.6.1 Suspected Fraud, Irregularity, or Collusion
Audits performed in accordance with this guide are not for the purpose of detecting fraud,
although audits may minimize fraud loss, discourage irregularities, and identify conditions of
gross mismanagement. If, during the examination, instances of possible fraud, gross
mismanagement, or other similar irregularities are noted, the auditor should:
a. Document the situation;
b. Immediately notify the Division Audit Director of the situation encountered;
and
c. Proceed only in accordance with instructions provided.
1.6.2 Insufficient Data or Inadequate Systems
The auditor is expected to use professional judgment in arriving at conclusions concerning
the sufficiency of available supporting data. If additional guidance is needed as to the
acceptability of certain data, the auditor should contact the Division Audit Director or his
designated representative. Where insufficient data or inadequate systems preclude reaching
opinions concerning the reasonableness, allocability, and allowability of costs within a
reasonable period of time, the auditor must, as a minimum:
a. Document tests and observations to support the auditor's opinion regarding
insufficient data or inadequate systems.
b. Notify the Division Audit Director and cease work until instructions are
received.
1.7 QUALITY CONTROL
EPA retains the right to review audit workpapers to evaluate the overall quality of the
audit performed. In this regard, EPA may require that copies of the audit workpapers be
forwarded along with the completed audit report to the responsible Division Audit Director or
his designated representative. The audit workpapers will be returned to the auditor upon
completion of the EPA evaluation. Based on this review, the auditor may have to return to the
job site to perform whatever additional work is required. In this regard, the auditor should
retain the workpapers applicable to the audit of any EPA grant or contract for three years after
completion of the assignment and submission of the required audit report.
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CHAPTER 2: DEFINITION OF PROGRAM TERMS
In conducting a construction grant audit, it is extremely important that the auditor
understand certain program terms. Program terms are defined in 40 CFR 35.805 and 35.905 of
EPA's Final Construction Grant Regulations. In addition, the following definitions are
presented to further assist the auditor.
Cutoff Date--A cutoff date is established by the EPA Regional Office. The grantee is
normally notified of the cutoff date by letter. After the cutoff date, the cost of work performed,
equipment or materials delivered or installed, or services rendered will not be allowable for
Federal participation. If no other cutoff date is established, the cutoff date will be the date of the
final inspection performed by either the state agency or EPA, whichever the Region deems the
true final inspection.
Federal Share--The amount of the Federal grant not to exceed the smaller of the amount of
the approved grant or the actual allowable audited costs multiplied by the percentage of Federal
participation on which the grant was computed.
Force Account-The grantee's use of its own employees, material, and equipment for
construction, construction-related activities, or facility repair or improvement.
Grantee-An applicant who has received a grant. A grantee may be a municipality,
intermunicipality agency, state, interstate agency, District of Columbia, Puerto Rico, Virgin
Islands, Guam, American Samoa, or Trust Territory of the Pacific Islands.
Industrial Cost Recovery-Recovery, from the industrial users, of construction costs of a
treatment works. This recovery is based on the proportionate treatment of waste from such
users over a period of 30 years or the life of the facility. Fifty percent of the recovered funds,
together with any interest earned during the year, is to be refunded annually to the U.S.
Treasury. Forty percent of the recovered amount is to be retained by the grantee and used only
for EPA-approved construction. The remaining ten percent may be used as the grantee wishes.
The amendments to PX. 92-500 (P.L. 95-217, dated December 27, 1977) provide for an
18-month moratorium on the collection of industrial cost recovery payments by the grantee.
Operation and MaintenanceThe operation and maintenance of a treatment works during
its service life, following completion of the Step 3 phase.
Project File~The EPA file which contains each grant agreement or amendment (such as
Step 1, Step 2, or Step 3) and supporting documents, correspondence with the grantee, copies of
inspection reports, and the grantee's payment requests.
Value Engineering (VE)--A specialized cost control technique based on a systematic and
creative approach which identifies and focuses on unnecessarily high cost in a project in order
to arrive at a cost saving without sacrificing the reliability or efficiency of the project. Value
engineering is required for all Step 2 grant applications having a projected total Step 3 grant-
eligible construction cost of $10 million or more, excluding the cost of interceptors and collector
sewers, for all construction grant projects certified by the state on or after October 26, 1976.
(See Section 4.3.5.i of this guide.)
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CHAPTER 3: PRELIMINARY PROCEDURES
3.1 DEVELOPING THE AUDIT APPROACH
The scope of each construction project is initially defined by a prospective applicant, with
final determination made by the Regional Administrator when grant assistance is awarded
(35.930-4).
Grants are generally obligated in three separate stages of project development (see Figure
3.1):
a. Step 1facility plans and related elements;
b. Step 2--preparation of construction drawings and specifications; and
c. Step 3-fabrication and building of a treatment works.
A "Project" may consist of an entire step, a segment, or a combination of steps (35.905-24).
Construction grant projects funded under Public Law 84660 consist of a combination of Steps
1, 2, and 3. An average sized project may require approximately two years to plan and
construct. Very large regional projects may require 12 to 15 years.
3.2 TYPES OF AUDITS
Two types of field audits will be discussed in this guide: interim audits and final audits.
(Preawards and defective pricing audits are integral parts of EPA Audit's workload. They are
not covered by this guide, but will be the subjects of separate guidance.)
The overall objectives of interim and final audits are to ensure that the grantee is in
compliance with grant requirements and to identify any areas in the management of the
construction grant program which need improvement.
The auditor is expected to have the skills necessary to perform the reviews required to meet
the objectives of this guide. If the auditor encounters situations requiring skills of an
engineering technical nature, he should contact the Division Auditor Director, who will review
the situation and arrange for technical assistance.
3.2.1 Interim Audits
The primary purpose of the interim audit is to (1) review grantee operations during
construction to detect weaknesses in internal controls or in the controls over contractors
responsible for design and construction and (2) offer recommendations for improvements.
Interim audits will be performed during the earlier part of a construction project, often shortly
after the construction contractor has submitted a construction payment request. Accordingly,
interim audits will be primarily directed toward:
a. Internal accounting controls,
b. Procurement systems,
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Figure 3.1
CONSTRUCTION PROJECT MILESTONES-OVERVIEW
STEP 1
Facility Plans and Related Elements
Municipality submits application
State and EPA review application
Facility plans and alternatives are proposed
Environmental and social aspects are considered
Priorities are set by state for Step 2
STEP 2
Preparation of Construction Drawings, Plans, and
Specifications
Municipality submits application
State and EPA review application
Plans and specifications are completed
State and EPA review and approve plans and
specifcations
Priorities are set by state for Step 3
STEP 3
Fabrication, Building, and Certification of Treatment
Works
Municipality submits application
State and EPA review application
Applicant advertises and selects low, qualified bidder
State and EPA review and approve selected bidder
Construction
a) Progress payments
b) Request for changes approved
c) Interim inspections by state/EPA
d) Interim audits by state/EPA
e) User charge, industrial cost recovery system
f) Operations and maintenance manual approved
g) Grantee certifications
Project completed
« Final audit, payment
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c. Design and construction controls, and
d. Costs incurred.
3.2.2 Final Audits
The primary purpose of the final audit is to review grantee records after completion of the
project to assure that costs claimed are reasonable, allocable, and allowable and that the grantee
has met the grant objectives. Final audits will also be concerned with controls in effect at the
time of grant performance, to provide assurance that the grant was administered efficiently and
resulted in an acceptable final product.
3.3 DEVELOPING THE PLAN
The EPA Office of Audit will utilize the criteria presented in Figure 3.2, other relevant
reports, construction grant and audit information, and sampling techniques to select projects
for audit.
Once the grantee has been selected, the Office of Audit will review the project files and,
after consultation with the Regional Office, assemble an audit planning package which will be
used to:
a. Determine whether a field audit will be performed;
b. Determine the scope of audit; and
c. Provide a basis for preparing the audit services order.
Descriptive data needed for completing the audit estimates will be provided (Figure 3.3) to
the prospective auditor for use in developing an audit plan. Other data relevant to actual project
costs and contract information (Figure 3.4) should be obtained from the project file by the
auditor selected to perform the audit.
When an auditor under contract to EPA is to perform the audit, the Division Audit
Director will coordinate the entrance conference date with him and confirm the date by letter to
the grantee.
There are substantial regulatory requirements with which the grantee must comply under
the P.L. 92-500 construction grants program. These requirements are primarily set forth in
Parts 30 and 35 of EPA regulations published in Title 40 CFR, but other parts are applicable
when referenced (e.g., Part 4, Implementation of the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970). The auditor must also review the grant documents
in order to identify the terms and conditions unique to the audit being performed.
In reviewing the project, the Division Audit Director will determine if there are areas
requiring special attention. The Director will identify areas which require detailed audit
coverage as well as areas requiring little or no coverage. In addition, the Director may decide to
expand the audit to cover certain aspects of efficiency, economy, or program effectiveness.
Whenever the scope of audit is expanded, the Director will provide the necessary additional
audit guidance.
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Figure 3.2
FACTORS TO BE CONSIDERED IN DETERMINING AREAS OF
AUDIT EMPHASIS
Size of grants/projects
Existence of unit-price contracts
Type of construction contracts and subcontracts
Type and materiality of engineering contracts and
subcontracts
Number and significance of change orders
Experience with prior grantee/project audits
Indication of deficiencies
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Figure 3.3
INFORMATION TO BE PROVIDED TO PROSPECTIVE AUDITORS
FOR USE IN DETERMINING SCOPE, SCHEDULE, RESOURCES, PLANS,
AND ESTIMATES OF AUDIT REPORTS
Grant number
Grantee name, address, and phone number
Eligible project cost
Grant amount
Number and dollar value of change orders
Number, amount, and type of construction contracts
Number, amount, and type of engineering agreements
Extent of force account work (as available)
Cutoff date
Notification if construction is located in a flood
hazard area requiring the grantee to purchase flood
insurance
National Pollutant Discharge Elimination System
(NPDES) permit
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Figure 3.4
INFORMATION TO BE OBTAINED FROM THE PROJECT FILE
BY THE AUDITOR PERFORMING THE AUDIT
* Final project inspection date
Any additional engineering, construction contracts
Copies of related subcontracts (as available)
* Final inspection reports and cutoff dates
(final audits)
Copies of EPA-approved change orders
Bid tabulations, contractor proposals
Expenditure work sheet calculations
Payments made by EPA
Approvals to advertise, award contracts
Other pertinent correspondence (e.g., management
problem areas)
Grants information and control data sheets
Inspection reports, correspondence, and memorandums
* Final Project Progress Report and Payment Request
(PPR & PR) or Outlay Report and Request for
Reimbursement for Construction Program
Form FWPCA-7 or Form 5700-32, Application, with
supporting documentation
Form FWPCA-7c, State Priority Certification and
Project Approval
Form FWPCA-8a or Form 5700-20 (Offer and
Acceptance)
* Normally not available from Regional Office project
files for an interim audit.
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After the auditor has been selected and he has studied the project file furnished by EPA, he
must:
a. Note any special grant conditions which may be significant to the audit; and
b. Familiarize himself with the regulations applicable to the grant/project as
indicated in grant award documents.
3.4 MAJOR ACTIVITY AREAS FOR AUDIT FOCUS
The general scope of audits will be established by the EPA Division Audit Director during
the definition and audit planning stages. The major activity areas to be addressed during the
audits include the grantee's:
a. Accounting practices,
b. Procurement practices, and
c. Project management practices.
Both interim and final audits will include the audit of costs incurred associated with these
activities.
3.4.1 Accounting Practices
A primary requirement for the competent management of any project is a good accounting
system. The major areas which should be of primary concern to the auditor during his survey
(see Appendix A of this guide) are discussed below. For additional information on the criteria of
an adequate/acceptable accounting system, see the EPA publication, "Accounting Guide for
Construction Grants" (October 1977).
a. Accounting records
In order to have an accounting system, there must be records of all financial transactions.
This system should document all receipt and disbursement transactions, including explanations
and identifying codes (e.g., invoice number) on a chronological basis. It should also group them
by type of account (e.g., expense, asset) and by individual account (e.g., Board of Supervisors
payroll, communications expense).
Accounts should be set up in such a way as to identify each cost with a cost center and cost
objective in the form of a task or subtask. A cost center may be an organizational unit, a
function, or even an item of expense. Its purpose is to collect costs on a functional basis. Thus,
accounts might be divided into more than one cost center (e.g., payroll expense might be
distributed into several departments) and cost centers may have more than one account (e.g.,
the accounting department's costs might include payroll expense, supplies, and other accounts).
An important project management objective of accounting records is the derivation of
information regarding actual versus budgeted costs by project task and by performing
organization. A separate cost center or series of subaccounts should be established to identify
and accumulate the costs applicable to the EPA construction grant.
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All entries in the chronological and account groupings should be cross-referenced.
Further, the groupings should be cross-referenced to the supporting documents. (See 40 CFR
30.800 and 30.805.)
b. Supporting documents
Every entry in the accounting records should be supported by appropriate documentation.
This could be a document from outside the grantee's office, as in the case of an invoice, or it
could be an internally generated document, as in the case of payroll. In many cases, several
documents will support a single transaction. For instance, a purchase of materials should have a
purchase request, purchase order, and receiving report in addition to an invoice. It might also
involve requests for proposal, contracts, advisory board resolutions, progress reports, and
progress payments. The key is that the files of supporting documents should contain all
information necessary to explain every transaction completely and should be cross-referenced
in such a Way that transactions can be traced from any document dealing with the transaction
back to the initiation of that transaction and forward to the entry or entries concerned with that
transaction.
c. Traceability
Traceability is composed of two elements. The first is mechanical in nature. All entries
should be traceable to supporting documents. This requires a good filing system based on
reference codes for each entry and document. In a small system, codes may not need to be as
detailed, due to the lower volume of transactions, but in almost all systems referencing based
solely on a date or name will eventually prove cumbersome, inefficient, and probably
inadequate. Sequential numerical codes are usually best, not only for ease of referencing but also
for internal control.
The second element of traceability is the logic behind the transaction. One should be able
to determine not only what was done but why it was done. It is here that written procedures
become important. Some companies and governmental units survive without them; however,
they constantly experience exceptions to the unwritten rules and loose internal control because
of employee turnover and changes in circumstances. A grantee should have or should prepare
complete procedures for handling grant funds.
d. Segregation of costs
Accounting systems under Federal grants must provide for segregation of costs. In order
to permit grantees and EPA to determine in which costs the government will participate, the
accounting system must differentiate between:
(1) Eligible and ineligible costs
Each construction grant project is normally evaluated by EPA Regional Office personnel
to determine which portions of the project are eligible for Federal participation under Federal
statutes. All costs applicable to eligible portions of the project are considered eligible costs.
Costs applicable to the ineligible portion, conversely, are considered ineligible and cannot be
claimed for Federal participation.
(2) Allowable and unallowable costs
All costs related to construction grants must be allowable under applicable Federal
regulations and the terms of the grant if EPA is to participate. Grantee costs must also be
considered allowable under FMC 74-4 and EPA regulations in 40 CFR 35.940. Each cost
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should be scrutinized in view of these requirements. Unallowable costs should then be
segregated, thus preventing their inclusion in the grantee's claim for Federal participation.
(3) Direct and indirect costs
A further distinction must be made between direct and indirect costs. Direct costs are
those which can be directly identified to a particular grant. For example, accounting or
procurement costs are commonly not identified with individual grant projects. Grantee indirect
costs are not allowable as charges to a grant program unless an indirect cost proposal
identifying indirect costs and showing the proposed allocation is prepared, audited, and
accepted by the Federal government. (See 40 CFR 30.715-2 and 40 CFR 35.940-4.)
e. Internal control
Internal control is the means by which the accounting, procurement, and other
management systems are regulated. It serves to assure management that proper procedures are
being followed with respect to receipts and disbursements.
Each grantee should have controls which act to check the functioning of the system
automatically and which ensure that all major transactions have checks and balances on the
individuals involved. Contractors hired by the grantee should be supervised not only with
respect to their work but also with respect to their accounting for the costs of work under
reimbursable contracts. This supervision should also be provided for as a part of the grantee's
internal control system. For example, costs of contractor efforts by task should be recorded and
should have an audit trail which the grantee could examine in detail if the contract were
significant in amount.
f. Accounting reports
Accounting reports are an integral part of an accounting system and are often the least
planned aspect of the system. This applies more to internal reports than to external reports
because the form of many external reports is prescribed. Grantees should realize that the data
which must be reported to outside sources is not always the same, as that which is required for
internal management. Like internal control, report content will vary from grantee to grantee.
The keys here are simplicity, comparability, and advance planning.
g. Summary
The constant question must be: has the grantee given sufficient thought to planning the
accounting system? It should be based on analysis of needs and resources, rather than on a
standard system copied from a book. The thing to look for is an understanding of those needs
and an analysis of how the accounting system will fulfill them.
3.4.2 Procurement Practices
a. Construction contracts
EPA regulations (40 CFR 35.938-3) require that each construction contract greater than
$10,000 (see 40 CFR 35.936-19 for those under $10,000) shall be either a firm-fixed-price (or
lump sum) contract, a unit price contract, or a combination of the two, awarded by means of
formal advertising to the lowest reponsive, responsible bidder. Exceptions include negotiated
change orders (see 40 CFR 35.938-5) and other construction contracts negotiated for reasons
given in 40 CFR 35.936-18.
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(1) Firm fixed price (FFP)
The FFP contract generally provides that the contractor will be paid a lump sum agreed to
in advance for the construction of the facility reflected in detailed plans and specifications. It is
not subject to adjustment by reason of contract cost experience and, when appropriately
applied, places maximum risk upon the contractor. The grantee and the Federal government
are assured of a reasonable price through the receipt of competitive bids under the formal
advertised procurement process. For changes in scope of work, noncompetitive change orders
to formally advertised procurements must be negotiated.
(2) Unit price
The unit price contract generally provides that the contractor will be paid a fixed sum for
each unit of work performed under the approved plans and specifications. This type of contract
is commonly used where the work represents a repetition of things, such as the laying of sewer
lines, or where the quantity of work may vary substantially. Unit prices are not subject to
adjustment by reason of cost experience. As in FFP contracts, the reasonableness of the total
contract price is assured through the receipt of competitive bids under the formal advertised
procurement process. Where there are significant differences in unit quantities awarded and
unit quantities constructed, the reasonableness of unit prices must be established through
negotiation.
b. Engineering contracts (Figure 3.5)
Engineering and consulting services under grants are generally obtained through a
negotiated procurement. This type of procurement should involve screening a number of firms
for technical competence. Under a negotiated procurement, there are a number of types of
contracts: firm fixed price, cost plus fixed fee (or cost reimbursable), time and material (or labor
hour), or combinations of the above. The Federal Procurement Regulations (FPR), Section
1-3.4, discuss in detail these forms of contracting, when they are considered applicable, and
their limitations. The following summary of each is provided.
(1) Firm fixed price
The FFP contract generally provides for a firm price agreed to in advance for the services
to be procured. It is not subject to adjustment by reason of the contract cost experience and,
when appropriately applied, places maximum risk upon the contractor. Since the contracting
firm assumes full responsibility for profit or loss, it has maximum incentive for effective cost
control and contract performance. The FFP contract is suitable for use in procurements only
when definite performance requirements are available and when fair and reasonable prices can
be established at the outset. Prior to award, a negotiation process which includes either price or
cost analysis should take place between the firm and the grantee to arrive at a reasonable
estimate of cost plus a negotiated profit. The grantee is expected to document this negotiation.
(2) Cost plus fixed fee (CPFF)
The CPFF contract provides for the payment of actual cost plus a fixed fee to the
contractor. The fixed fee once negotiated does not vary with actual cost. Therefore, the CPFF
contract provides the contractor only minimum incentive for effective management control of
costs.
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The CPFF contract provides that the contractor receive its actual allowable labor, other
direct costs, and indirect costs, plus a fixed-fee profit. The CPFF contract is written to provide
for a total estimated cost (contract ceiling). The firm's costs are subject to an audit during or
after completion of performance to determine that its claims included only allowable costs in
accordance with applicable regulations.
(3) Time and materials
This type of contract provides for the procurement of services on the basis of direct labor
hours at specified fixed hourly rates (which include direct labor, overhead, and profit). This
type of contract does not afford the contractor with any positive incentive to control cost. It is
essential that time and materials contracts be used only where provision is made for adequate
controls, including appropriate surveillance during performance. Because this type of contract
does not encourage effective cost control and requires almost constant surveillance, it should be
used only after determination that no other type of contract will suitably serve. This type of
contract shall establish a ceiling price which the contractor should not exceed.
The time and materials contract has been used frequently by engineering and consulting
firms in the past. While it is an acceptable form of contracting, certain controls that have not
existed in the past are essential. The grantee is responsible for obtaining cost data from the
consulting engineer for evaluation and negotiation in establishing hourly rates. This should be
documented to show that a determination of reasonableness was made. In addition, the grantee
is responsible for maintaining surveillance over the hours charged by the contractor. The
contract must set a reasonable ceiling on the total cost of these services. A final audit will be
made to assure that the contractor has appropriate documentation to support the time charged
to the project.
In summary, any of the above forms of engineering contracts can be acceptable. However,
the grantee is responsible for demonstrating that:
(1) The method selected is appropriate for the services to be performed (see
FPR 1-3.4);
(2) The necessary evaluation of the reasonableness of the proposed costs
was made; and
(3) Controls were maintained during performance.
In reviewing systems for procurements awarded under EPA's "Subagreement Regulations
for Construction Grants," the auditor should be guided by the requirements of 40 CFR 35.936,
40 CFR 35.937, and 40 CFR 35.938.
3.4.3 Project Management Practices
The grantee's ultimate ability to control costs and construction schedules is strongly
influenced by the project management approach applied. In addition to establishing a clear
understanding of contractual relationships, the grantee, the engineering firm, and the
construction contractor must maintain a complete communication system with effective
controls over costs and schedules and with a rapid decision-making and feedback capability.
The basic principles of such a system of management controls are shown on Figure 3.6.
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Figure 3.6
Basic Principles of the Grantee-Engineer-Construction Contractor System
Proper definition of project scope; estimated cost; schedules; and responsibilities of the
grantee, the engineer, and the construction contractor
Prompt revision of scope, estimated costs, and schedules after changes
Control of design costs and procurement of engineering services and construction
Control of schedule, costs, and changes during construction by monitoring:
work schedules, material schedules, and start-up;
material quantities purchased and used
Planning and Design Phase Cost and Schedule Control Activities
Inclusion of VE for Step 3 projects with eligible construction costs of $ 10 million or more
(excludes interceptor and collector sewers)
Regular planning and design meetings attended by proper management membership
Regular reports on planning and design progress as related to prior schedules
Specifications, reviews, and approval for major equipment, much the same as for drawings
Controls Applied During Construction
A program for viewing overall time schedule and cost variances from budgets and
schedules
Inspections and reports of installed quantities of materials, with comparison between
planned and actual construction
Control of field progress by periodic site reviews or continuing on-site
inspection/monitoring
A change-order budget system which shows dollars, man-hours, and quantities of
materials or equipment
A change-order approval system with (1) adequate formalized evaluations of the impact of
pending changes and (2) change notification procedures for fully implementing approved
changes
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a. Planning and design phases cost and schedule control
The control of costs and construction schedules during planning and design is of great
importance. Common activities and management control activities are shown in Figure 3.6.
b. Construction phase cost and schedule control
Emphasis during the construction phase is focused on the management and monitoring of
project cost and schedule data for construction labor, material installations, and performance of
subcontractors providing equipment and services. The grantee must ensure that adequate
inspections at the project locations are provided and that construction and equipment conform
with the approved plans and specifications. Controls exercised during this phase are shown in
Figure 3.6.
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CHAPTER 4: FIELD AUDIT PROCEDURES
In performing the audit, the auditor must use professional judgment on a case-by-case
basis in determining the specific audit procedures to be applied. Not all of the audit procedures
outlined in this guide will apply to each audit.
The auditor must consider the materiality of costs incurred by the grantee as related to
administrative labor and materials, engineering services, and construction. In addition, the
management controls applied by the grantee to the overall program must be reviewed.
The prior sections of this manual outline project management systems and their
relationships to the audit, including the need to focus on the specifics of the procurement,
accounting, and project management activities. This section sets forth the field audit procedures
to be used in conjunction with this guidance.
4.1 APPROACH TO AUDIT OF COSTS
In conducting audits of EPA construction grants, the auditor will be attempting to reach a
conclusion as to the acceptability of costs. In an interim audit, the auditor will express an
opinion on costs incurred through the grantee's most current accounting period even though
these costs may not have been claimed on a reimbursement voucher to EPA. In a final audit, the
auditor will express an opinion on the costs reported on the final report of expenditures or
updated form. Thus, in a final audit where the grantee has actually incurred costs in excess of
the amounts claimed or reported, the auditor may not increase the amount of the grantee's
claim. Nor should the auditor allow the grantee to offset unclaimed costs with questioned costs,
even if the net amount would not increase the grantee's claim. He should, however, disclose
through footnotes the extent of unclaimed or unreported costs which would normally be
considered allowable.
4.1.1 Factors for Determining Allowability
To be allowable under a grant program, costs must meet the following general criteria:
a. Be necessary and reasonable for proper and efficient administration of the grant
program, be allocable thereto and, except as specifically provided herein, not be a general
expense required to carry out overall responsibilities of state or local governments;
b. Be authorized or not prohibited under state or local laws or regulations;
c. Conform to any limitations or exclusions set forth in the grant document,
Federal laws, or other governing limitations as to types or amount of cost items;
d. Be consistent with policies, regulations, and procedures that apply uniformly to
both Federally assisted and other activities of the unit of government of which the grantee is a
part;
e. Be accorded consistent treatment through application of generally accepted
accounting principles appropriate to the circumstances;
f. Not be allocable to or included as a cost of any other Federally financed program
in either the current or a prior period; and
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g. Be net of all applicable credits.
Costs questioned normally fall under one or more of the following categories (see Figure
4.1):
Ineligible costs: Costs which are specifically prohibited by (1) Federal statutes or
regulations, (2) the terms of the grant, (3) other cost principles cited in the grant, or (4)
applicable EPA regulations or guidelines.
Unreasonable costs: In determining the reasonableness of a given cost, consideration shall
be given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for
the conduct of the grantee's (contractor's) business or the performance of the contract;
b. The restraints or requirements imposed by such factors as generally accepted
sound business practices, arm's length bargaining, Federal and state laws and regulations, and
grant/contract terms and specifications;
c. The action that a prudent businessman would take in the circumstances,
considering his responsibilities to the owners of the business, his employees, his customers, the
government, and the public at large; and
d. Significant deviations from the established practices of the grantee/contractor
which may unjustifiably increase the grant/contract costs.
In conducting his examination, the auditor should be cognizant of the costs incurred which
indicate to him that they may be excessively high or even unwarranted. In determining whether
to question any costs as being unreasonable, the auditor should rely on his own judgment; he is
not expected to make judgments on technical matters outside of his area of expertise.
Unallocable costs: In reviewing the allocability of costs, the auditor will be guided by the
following criteri?:
.a. A cost is allocable to a particular grant/contract to the extent of benefits
received.
b. Any cost allocable to a particular project or function may not be shifted to a
Federal grant/contract to overcome fund deficiencies, to avoid restrictions imposed by law or
grant/contract agreements, or for other reasons.
c. Where an allocation of common costs will ultimately result in charges to a
grant/contract, an indirect cost rate proposal must be prepared to justify the equitability of the
charge.
Undocumented costs: Costs for which detailed documentation is not available to show that
the costs claimed were incurred under the EPA grant/contract.
Unapproved costs: Costs for which grant/contract provisions or applicable cost principles
require awarding agency approval, but for which the auditor finds no evidence of such
approval.
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Figure 4.1
Examples of Ineligible Costs
Interest on bonds or other financing costs
Fines and penalties resulting from violation of Federal, state, and local laws
Personal injury compensation or damages as a direct result of construction on the project
Examples of Unreasonable Costs
Purchase of expensive equipment needed only for a short period when a lease would have been
more economical
Costs for which appropriate evidence is not available under a negotiated contract that the
grantee or contractor employed those controls necessary to assure that the price was reasonable
Examples of Improperly Allocated Costs
Costs already matched to another Federal program
Inequitable allocation of indirect costs to the contract/grant
Costs allocated in total to the grant, which also benefited other grantee/contractor programs
Examples of Improper Documentation of Costs
Lack of time and attendance records, invoices, etc.
Lack of written contracts with consultants
Lack of proper authorization to incur costs or to disburse funds
Non-Federal contributions recorded but not documented
Examples of Costs Not Approved by EPA
Purchase of capital equipment
Costs incurred before or after grant/contract period, except Step 1 and 2 grants prior to July
1,1975 (40 CFR 35.925-18)
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Unresolved costs: During the course of an audit, the auditor should attempt to reach a
definite conclusion as to whether each item of incurred/claimed cost is allowable. There may be
instances in which the allowability of cost cannot be determined without the assistance of an
EPA engineer or other program official. In these instances, the auditor should designate these
costs in the audit report as unresolved pending the Region's approval/disapproval of actual
allowability. Examples of unresolved costs are (1) change orders of force account work not
approved by EPA and (2) costs for which an assist audit has been requested but not received as
of the audit report date.
The auditor must perform all audit tests on unresolved costs to determine that the costs
would otherwise be allowable pending resolution of the issue resulting in the cost being
unresolved.
4.1.2 Review of Costs
Under the terms of the grant, EPA's participation in a project is for a limited period. Thus,
EPA may only participate in those costs properly chargeable to that period, with the exception
of certain pregrant costs which will be allowable (40 CFR 35.925-18). In reviewing costs, the
auditor will be examining total project costs. For many projects, EPA is only participating in a
portion of the project. Thus, it will be necessary for the auditor to review the grantee's
segregation of costs as to the eligible and ineligible portions of the project.
When portions of the project are considered ineligible, the ineligible portions should be
clearly identified by EPA in the review of plans and specifications. Bid documents commonly
distinguish between eligible and ineligible portions of a construction contract. Where the
contractor's monthly pay estimates are prepared on the same basis as the bid documents,
distinction between eligible and ineligible construction costs is simplified. Further guidance
concerning the eligibility of specific items is included in Appendix D of this guide.
EPA may only participate in the acceptable portion of eligible costs. The auditor will
review each cost to determine whether it is acceptable as a charge to the EPA project. During
the audit, the auditor will be testing the systems utilized by the grantee in managing the grant.
Where items of costs are shown to be unallowable (unreasonable, unallocable, undocumented,
unapproved, or ineligible), the costs should be questioned. Where the audit tests have not
disclosed any material deficiency with respect to items of cost, the cost should be accepted.
Once the auditor has evaluated eligible construction costs, he will classify the costs as
accepted or questioned.
The auditor must review costs other than construction costs claimed to determine whether
or not they are acceptable. He then should allocate other acceptable costs over the eligible and
ineligible portions of the project on the following basis:
Total Eligible Construction Other Other Eligible
Costs Accepted x Acceptable = Accepted
Total Construction Costs Costs Costs
For final audits, this formula should only be applied in situations where:
a. Other acceptable costs incurred are associated with both eligible and ineligible
construction, and
b. Accounting records accumulating and segregating these costs are not available.
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Examples of items exempt from this formula are (1) bond costs (on P.L. 84-660 projects),
because the bond formula takes into consideration total eligible project costs (see Appendix B of
this guide for an illustration of bond formula); and (2) special studies not related to construction
which are totally eligible. The auditor should use the above criteria to determine whether the
formula should be applied to a particular cost category.
For interim audits where the eligibility ratio is applicable, the following qualifying
language should be incorporated in the report:
The approved grant application estimates eligible construction costs which, when taken
over total construction costs, result in an eligibility factor of percent. To arrive at the
total eligible project costs, a ratio based on actual costs will be applied to all other
acceptable costs at the time of the final audit.
Total eligible project costs will be computed as follows:
Total Eligible Construction + Other Eligible = Total Eligible
Costs Accepted Accepted Costs Accepted Costs
The percentage of project costs in which EPA is participating, through the grant
agreement, will then be applied to total eligible project costs accepted. This will show the
Federal share earned. The designation of a cost as questionable by the auditor does not
necessarily mean that the cost will be disallowed. The determination as to the acceptability of
costs will be made by the EPA Regional Administrator.
4.2 GENERAL AUDIT STEPS
4.2.1 Initial Field Audit Procedures
In starting the audit, the auditor should:
a. Conduct an entrance conference with the official-in-charge upon arriving at the
audit site. The purpose of the entrance conference is to (1) inform the grantee of the purpose of
the audit, the general plan of audit approach, and the records to be used during the audit; and
(2) answer the grantee's questions regarding the audit. During the conference, the auditor
should also arrange for private, adequate working space.
The auditor should document the entrance conference in his workpapers. He should
include the names and positions of those attending the conference and details of the matters
discussed.
b. Obtain background information on the grantee organization. This may be in the
form of charters, bylaws, incorporation documents, or public relations documents which
identify the nature of the organization's operations and key employees. In addition, the auditor
should obtain copies of the organization's financial reports as well as access to any audit reports
issued by the organization's internal or external auditors.
c. Identify any additional EPA or other Federal grants or contracts awarded to the
grantee. In this regard, the auditor will obtain the grant/contract number, the amount of the
agreement, the status of the grant/contract, and the Federal agency involved. The auditor
should promptly communicate this to the Division Audit Director so that he may decide
whether the scope of the audit will be expanded to cover these agreements.
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d. Familiarize himself with the grantee's accounting, personnel, procurement, and
property management systems as they relate to grant expenditures. The auditor should initially
obtain information regarding established policies and procedures governing these activities. In
this regard, each audit should be initiated with a survey of the project utilizing, as a minimum,
the survey questionnaire contained in Appendix A of this guide. The purpose of this survey is to
identify significant weaknesses in the systems, as they apply to the EPA grant, and to establish
the scope of the audit. The survey should include documentation and testing of the records to
validate the information obtained and to support decisions affecting the scope of audit.
Appendix A should be included as documentation in the workpapers for all interim audits and
any final audits where the grantee has other active EPA grants.
4.2.2 Verification of Claim
The auditor should reconcile the control account (that is, total cost incurred) with the
latest/final request for reimbursement/cash outlay report and reconcile each expense item in
total to the project cost and/or disbursement ledger. The auditor should:
a. Determine the mathematical accuracy of the report and the ledger.
b. Determine whether the grantee prepared the report based on its own accounting
records or whether the report was prepared by EPA or the grantee's consultant. If it was
prepared by others, determine what records were used.
c. Analyze supporting data (e.g., contractor's and/or other certification for
cumulative billing amounts submitted for the cash outlay reimbursement report).
d. Determine the total cash payments to the grantee under the construction grant.
e. Determine the total disbursement by the grantee to date and compare with
Federal payments. Any under- or over-payment should be documented.
4.2.3 Verification of Eligibility
Identify from the EPA project file any portions of work under each construction contract
or engineering subagreement which have been designated ineligible for Federal participation.
Review the grantee's disbursement ledger to determine if project costs are segregated by
means of a special project account which (1) identifies eligible and ineligible costs, (2) identifies
allowable and unallowable costs, and (3) contains separate accounts for each item of expense
(FMC 74-4); that is:
a. Construction, by contract;
b. Engineering services; and
c. Legal and administrative services.
4.2.4 Credits, Rebates, and Refunds
Throughout the audit, the auditor should be alert for evidence of credits, rebates, or
refunds. Such items should be credited properly to the construction account. As part of the
audit:
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a. Examine contractor hillings, rioting whether certain items are marked or
indicated for deletion;
b. Examine cash receipt records, noting funds received from contractors and/or
other sources (i.e., state sales tax refunded to grantees or subcontractors); and
c. Determine that funds received for copies of the phns and specifications
(unrefunded deposits) are credited to the grant costs.
4.2.5 Unpaid Bills
If the grantee has any unpaid bills relating to the specific grant under audit, the following
audit steps should be taken:
a. Determine the reasons for the unpaid bills.
b. Determine whether there are sufficient funds available to pay bills in a timely
manner.
c. Assure that costs related to long-standing unpaid bills or retainages have not
been included on the request for reimbursement or cash outlay report to EPA. If they have,
such costs should be set out in the audit report unless they represent normal accounts payable.
4.3 SPECIFIC AREAS OF AUDIT
4.3.1 Audit of the Force Account
The actual construction work is normally performed by construction contractors under
contracts awarded through competitive bidding. Construction-related activities such as
preliminary planning, designing, preparation of plans and specifications, and resident
inspection services are normally performed by consulting engineers under subagreements.
However, in some instances the work is performed by employees of the grantee. This is known
as "force account" work. If force account costs are claimed, such costs should consist of project
work performed by employee labor of the grantee or materials, equipment, and supplies
purchased by the grantee. (Direct travel costs may be allowed.)
Determine that:
a. Force account work (construction/engineering/administration) was specifically
approved by EPA as provided in EPA regulations 40 CFR 30.645, 40 CFR 35.935-2, and 40
CFR 35.936-14.
b. Construction work handled through the force account was not for repair,
maintenance, or operation of existing facilities.
c. Completed construction was appropriately approved by the grantee's engineer.
d. Purchases of material or supplies were based on competitive bids as required by
state or local procedures or Federal regulations. (This step may be included under the Review of
Procurement Controls.)
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The auditor should include in his workpapers a schedule showing force account labor
costs, and on a selective basis he should:
a. Trace hours charged to time records;
b. Verify payroll computations;
c. Verify payments made from the payroll to the construction account; and
d. Verify fringe benefit costs.
All indirect costs claimed by the grantee must be supported by an approved indirect cost
proposal. If the auditor encounters a situation where indirect costs are not supported by an
approved proposal, he should contact the Division Audit Director for further instructions. The
auditor should also be alert for situations where:
a. Persons are working in a capacity other than that for which they are getting paid
(e.g., engineer working as a draftsman).
b. Costs are claimed for hours worked on the project but not paid for by the
grantee, i.e., overtime hours not paid for. These costs are not an actual cost to the grantee and
therefore are not allowable.
c. Labor hours are charged on a departmental average hourly rate. This should not
be accepted unless there is supporting documentation to prove that it represents actual cost.
d. Overtime hours are being charged solely to an EPA project when the employee
works on other jobs during the same period.
The auditor should include in his workpapers a schedule of force account material, supply,
and equipment costs. On a selective basis, he should:
a. Verify types and quantities of items used to issue slips or similar documentation.
b. Determine that the amounts charged were reasonable and computed in
accordance with the grantee's normal costing policy.
c. Determine that costs claimed do not include nonexpendable construction
equipment (i.e., exceed minimal cost and life expectancy) even though such equipment may
have been purchased specifically for the project.
d. Determine that any write-offs of expendable items do not exceed the amounts
allowable under the cost principles contained in FMC 74-4.
e. Determine whether the grantee followed EPA guidance in disposing of or
adjusting costs for unused materials which remained after completion of construction.
If use allowance or rental rates were used in arriving at costs charged to the project,
determine whether these factors are in line with FMC 74-4. Review and test the method used to
accumulate hours of equipment usage. Test payments made for use of equipment to invoices
and cancelled checks and/or to fund transfer documents.
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4.3.2 Audit of Engineering Services
In reviewing procurements of engineering services, the auditor should be aware that EPA
regulations governing these procurements have changed with the issuance of Program
Guidance Memorandum (PG) 53 and with the issuance of EPA's "Subagreement Regulations
for Construction Grants" (40 CFR 35.935, 35.936, and 35.937, dated December 17, 1975).
Appendix F to this guide (Consulting Engineer SubagreementsAllowable Methods of
Compensation) addresses the acceptability of the type of engineering contract during the
transition period of the December 17, 1975, regulations. Accordingly, the audit criteria may
change depending upon whether the engineering contract was awarded prior to or after the
effective date of the above regulations.
a. Contracting procedures
It is the responsibility of the grantee in contracting for engineering services to take
reasonable measures to ensure that services are obtained from qualified firms at a reasonable
price.
Grantees could prior to July 1, 1975, use their own procurement regulations which reflect
applicable state and local laws, rules, and regulations, provided that these rules and regulations
adhere to minimum standards as set forth in Attachment O to FMC 74-7. Effective July 1,
1975, grantee procurements of consulting engineering services must be in accordance with the
requirements of Program Guidance Memorandum 53. Effective December 17, 1975, grantee
procurements of consulting engineering services must be in accordance with (1) the
requirements of Appendix D to EPA's "Subageement Regulations for Construction Grants"
(which superseded PG 53) and (2) 40 CFR 35.936 and 35.937.
For procurements awarded under 40 CFR 35.936 and 40 CFR 35.937, the auditor should
review the grantee's procurement procedures for consulting engineering services and determine
that these procedures include, where applicable, requirements for:
(1) Public notice (40 CFR 35.937-2);
(2) Evaluation of qualifications (40 CFR 35.937-3);
(3) Solicitation and evaluation of proposals (40 CFR 35.937^-);
(4) Negotiation (40 CFR 35.937-5);
(5) Cost and price considerations (40 CFR 35.937-6
and 40 CFR 35.937-7); and
(6) Required solicitation and Subagreement provisions
(40 CFR 35.937-9).
Note that 40 CFR 35.937(a) provides that the provisions of 35.937-2 (Public Notices),
35.937-3 (Evaluation of Qualifications), and 35.937-^ (Solicitation and Evaluation of
Proposals) are not required, but may be followed where the population of the grantee
municipality is 25,000 or less according to the most recent U.S. census. When $10,000 or less of
services (e.g., for consultant or consultant subcontract services) is required, the provisions of
35.936-19 (Small Purchases) shall apply.
For procurements awarded prior to the effective date of 40 CFR 35.936 and 40 CFR
35.937, the auditor should determine that the grantee has documentation to show that:
(1) Procurements were conducted so as not to prohibit maximum open and
free competition.
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(2) Contracts were made only with responsible contractors who possess the
potential ability to perform successfully under the terms and conditions of a proposed
procurement. Consideration should have been given to such matters as contractor integrity,
record of past performance, and financial and technical resources.
(3) The contract clearly defines the scope of services to be provided under
each reimbursement method included in the contract. The contractual language should be
specific enough to identify the services provided under each phase of the contract.
Agreements between grantees and engineering firms covering engineering services take a
number of forms. Usually, a single agreement covers all phases of engineering. Traditionally,
these agreements were entered into well in advance of the award of a construction grant and
represented a continuing relationship for engineering services. The reimbursement provisions
contained in such agreements varied from a single fee covering all services to separate fees for
each phase of work or combination thereof. Historically, the reimbursement for engineering
services included: (a) firm-fixed-price (lump sum) contracts, (b) time and materials (labor hour)
contracts, (c) percentage-of-construction-cost (fee curve) contracts, and (d) actual Isbor cost
plus a stipulated multiplier for overhead and profit (cost plus a percentage of cost).
However, for agreements awarded after June 30, 1975, the cost-plus-percentage-of-cost
(including salary multiplier where profit is included in the multiplier) and the percentage-of-
construction-cost types of contracts are not acceptable. (See Appendix D to EPA's
"Subagreement Regulations for Construction Grants," published December 17, 1975.)
In some cases a negotiated subagreement may have been executed prior to July 1, 1975, to
cover work under more than one step of a grant. Guidaace for these situations is given in
Appendix D as referenced above.
Note that Appendix E has been added to this guide to provide an outline of the types of
records subject to audit under various situations, and Appendix F has been added to provide an
analysis of types of engineering contracts allowable during the transition period.
b. Contracts for engineering services awarded prior to July 1, 1975
EPA does not consider that the fee curve or multiplier method of compensation ensures a
reasonable price in the absence of an effective negotiation based on current cost data. However,
EPA does not take exception to these forms of contracting prior to July 1, 1975, as they were in
accordance with industry practices which EPA regulations did not prohibit. The auditor's
report should disclose instances where the fee curve or multiplier forms of contracting were
used. The auditor will not be responsible for determining the reasonableness of fees awarded
under the fee curve or 1 he multiplier. However, the auditor will be responsible for evaluating the
application of the fee curve for reasonableness and consistency. The fee curve will be evaluated
in accordance with historical and advisory guidelines in general use or guidelines acceptable
locally such as the American Society of Civil Engineers (ASCE) Manual No. 45. Other data
relied upon or utilized by the contracting parties in negotiation of the agreement will also be
evaluated for reasonableness and consistency.
In cases where engineering services are compensated under a multiplier, fee curve, or FFP
contract awarded prior to July 1, 1975, the following audit steps and paragraphs, as
appropriate, should be included in the schedule and referenced to technical service costs
incurred, claimed, accepted, and questioned.
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If multiplier and/or tec curve v : nv-i, MI'-I i::<- 'Q'l.<>yi.'ig^aragraph_shoulJLbe included
in the report
We noted that compensation lor engine?; ir-g services was based upon
the method <>!' con!i acting. I he use of the and
profit resulting solely therefrom have been accepted because, at the time the contractual
arrangement was made, this me'hod of contracting was not prohibited and was in
accordance with accepted industry practices. The.- method of
contracting is now prohibited try Appendix D to Snbpart E of 40 CFR 35, dated December
17, 1975.
If a multiplier contract was used, the auditor should:
(1) Determine whcthet t.'ic amounts hilled were based on the terms of the
agreement.
(2) Determine whether the grantee has performed an audit of the
engineering firm's records to establish the propriety of rhe salary rates and hours billed. If not,
the auditor should arrange through the grantee to perform an audit of the engineer's records. In
instances where access to records is denied, aU engineering fees billed under this method of
contracting should be questioned.
If a fee curve contract was used, the auditor should:
(1) Determine whethei the (Ve billed agrees with the contract terms as to the
rate used and the method of application
(2) Ascertain whether the fee provided in the contract is consistent with the
ASCE or state society guidelines in effect a< 1 he lime oi'the award. If not, why?
(3) Ascertain whethei ihe ree percentage is determined in accordance with
the engineering agreement and wheihir ;he use of separate contracts is justified (e.g.,
interceptor versus treatment plant). If sepaiaie contracts aie not justified, the additional
compensation should be questioner!
If an FFP contract was used jnjhe £bseiK_e_o[ an ct'feciive price negotiation, then th^e
following paragraph should be included in (he repmr
We noted that compensation for engineering services was based upon a firm-fixed-price
method of contracting without the use of tin the gi antee.
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(2) Evaluate the reasonableness of the fixed price. In this regard, the auditor
should compare the services provided, the price charged to the services, and the price obtained
by using the fee curve as outlined in the ASCE manual,
c. Contracts for engineering services awarded subsequent to June 30, 1975 (under
EPA "Subagreement Regulations for Construction Grants," 40 CFR 35.936 and 40 CFR
35.937)
Determine whether the grantee performed a negotiation to establish the reasonableness of
compensation. As a minimum, this should include a cost review to determine the composition
of each element of cost and the profit proposed by the consulting engineer.
Unless available documentation shows that the grantee's negotiation resulted in a
reasonable price, the auditor will review the reasonableness and validity of cost data submitted.
Where review of the engineer's records shows that cost data was incorrect, unreasonable, or
unallowable under applicable cost principles (FPR 1-15.2, FPR 1-15.4), the excessive costs
should be questioned. In addition, the fee curve and multiplier contracts where profit is
included in the multiplier are generally considered ineligible if awarded after June 30, 1975.
The right of access to records in auditing charges for engineering services under
agreements awarded prior to the effective date of EPA's "Subagreement Regulations for
Construction Grants" is governed by the terms of the engineering agreement and Appendix D
to the Subagreement regulations. This guidance generally prescribes the right of audit access to
the engineer's records. In instances where indications of fraud, gross abuse, or corrupt practices
are noted, the auditor has the right of access to all records. Refusal by a consulting engineer to
allow access to his records as provided by Appendix D will render costs incurred under such
contracts ineligible. Accordingly, all such costs will be questioned pending access to records.
See Appendix E to this guide, Consulting Engineer Subagreements-Records Subject to Audit.
Guidance for reviewing engineering costs is as follows:
d. Verilication of engineering costs
Before auditing the engineering firm's records, the auditor should determine from the
Division Audit Director whether another Federal agency has audit cognizance of the firm. If
another agency has cognizance, the Director will provide further instructions. If no other
agency has audit cognizance, the auditor should complete the applicable sections of this guide.
(1) Determine amount of charges for engineering services. (This should be
detailed by services billed under the various methods of reimbursement, e.g., FFP or CPFF.)
(2) Based on a review of the records, determine that claims for services
provided are applicable to the eligible portion of the construction.
(3) Determine whether technical service costs were incurred prior to the
EPA approval of the grant award or after the date of completion of construction. If work was
initiated before October 31, 1974, prior EPA approval was not required. However, for grants
awarded after this date the provisions of 40 CFR 35.925-18 apply.
(4) When evaluating the engineering services charged on a reimbursable
basis, determine that:
(a) Salaries of partners doing less than "partner's" work (e.g., drafting)
are billed at a rate commensurate with the duties performed.
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(b) Services included as a basic service under an FFP or fee curve
contract are not also billed on a reimbursable basis.
(c) An offsite overhead rate was used when appropriate.
(d) Partners' salaries are reasonable.
(5) Determine the adequacy of the engineering firm's accounting system to
account for the type of contract awarded.
(6) Determine that the costs of engineering services claimed by the grantee
do not include charges related to ineligible services such as site acquisition, bond preparation,
easement, rights-of-way, or claims against the government. The engineer's invoice should be in
sufficient detail to clearly define the nature of the work performed.
(7) Verify the mathematical accuracy of the billing for engineering services
and test grantee payments for engineering services to vouchers and cancelled checks.
e. Engineering services compensated under the fee curve
Question all costs billed under this method of compensation for agreements entered into
after June 30,1975.
For subagreements awarded prior to July 1, 1975:
(1) Determine whether the amount billed agrees with the contract terms as
to the rate used and the method of application.
(2) Ascertain whether the compensation provided in the contract is
consistent with the ASCE or state society guidelines in effect at the time of the award, except as
provided for in steps three and four below.
(3) Determine whether the compensation (fee) percentage is based upon the
total of all construction contracts under a specific project (e.g., treatment plant, interceptor
sewers). If a separate fee percentage was used for each contract, the resulting additional cost
should be questioned. In determining the allowability of costs based on a separate fee
percentage for each contract, consider the appropriate ASCE or state society guidelines in effect
at the time the engineering agreement was negotiated. (See Appendix I of this guide,
Application of Paragraph B.5 of Appendix D to 40 CFR 35, Subpart E.)
(4) Paragraph B.5 of Appendix D of 40 CFR 35, Subpart E, provides that in
no event will allowable costs for a percentage-of-construction type contract be based on an
amount exceeding the low bid for construction. This specifically excludes the cost of
construction contract change orders and cost overruns from the computation basis. The
method of computing allowable cost depends on the time between completion of plans/
specifications and bid opening.
(a) Less than one year: If less than one year elapses between
substantial completion and bid opening, paragraph B.5.a of Appendix D limits allowable cost to
the amount obtained by applying the applicable fee curve percentage to the low bid for
construction.
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(b) More than one year: When one year or more elapses between
substantial completion of design and bid opening, paragraph B.S.b of Appendix D limits
allowable costs to the lowest of:
The applicable fee curve percentage applied to the total of the
consulting engineer's construction cost estimate provided at substantial completion of plans
and specifications plus an escalation of up to five percent of the estimate.
The applicable fee curve percentage applied to the consulting
engineer's construction cost estimate provided at substantial completion of plans and
specifications. A consulting engineer's compensation escalation of up to $50,000 is added to the
resultant amount.
The applicable fee curve percentage applied to the low bid for
construction.
(5) It is EPA policy to recognize those costs incurred by the consulting
engineer that are not in the scope of the contract at the time of the construction contract award.
For example, a change (ordered by the grantee/owner) which requires specific design and
specification preparation by the consulting engineer in the scope of the construction contract
probably should be recognized as requiring a change in the consulting engineer's contract for
which reasonable additional compensation is allowable. Conversely, additional consulting
engineering fees will not be considered eligible if these fees are the result of a change order to the
construction contract to correct a design deficiency which is attributed to the consulting
engineer.
Of course, these two examples are the extremes in the premises, and between these two
poles may arise situations requiring a subjective judgment on the part of the EPA project officer
as to the validity of the consulting engineer's request for added compensation. Additional
compensation for such design work should be based on actual cost records available for audit.
In the absence of cost records, the auditor should determine whether the change order was
of a type which generated an increase in design effort and, therefore, an increase in design cost.
Certain change orders do not require additional design effort; for example, an increase solely in
construction quantities does not increase design cost. However, a change ordered by the
grantee/owner for a modification in the scope of the construction contract does require
additional design effort. If these additional design costs are not supported by actual cost
records, the costs should be suspended with the recommendation that the Regional
Administrator determine the eligibilty of these costs.
Also, in the period between the original substantial completion (a subjective judgment on
the part of the project engineer) and the bidding of the project, EPA regulations may have been
issued which would require some changes in the plans and specifications for which the
consulting engineer could request, and EPA could pay, additional compensation under
Paragraph B.S.c of 40 CFR 35, Subpart E, Appendix D.
f. Engineering services reimbursed under firm-fixed-price contracts
(1) Determine that the amount billed is in accordance with the terms of the
agreement and Appendix D to EPA's "Subagreement Regulations for Construction Grants"
(Part B of Appendix D to Subpart E of 40 CFR 35) and that the work was accepted by the
grantee.
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(2) For FFP contracts awarded prior to the subagreement regulations (July
1, 1975), the auditor should evaluate the reasonableness of the fixed price. In this regard, the
auditor should compare the services provided and price charged with the services and price
obtained by using the fee curve as outlined in the ASCE manual. Amounts in excess of the
comparable fee curve percentage should be questioned.
(3) For FFP agreements in excess of $100,000 awarded after June 30, 1975,
the auditor should analyze the information documenting the grantee's cost review of the
composition of costs and perform audit steps four through eight below. (See 40 CFR 35.937-6.)
(4) Determine what review was performed by the grantee to determine the
reasonableness and validity of the amounts proposed (both quantity and dollar estimates).
Where the grantee has not perfomed a review of subagreement costs or the review is
considered inadequate, the auditor should furnish the Division Audit Director with a list of all
applicable subagreements. (A review of proposed subagreement costs is considered adequate if:
(a) the grantee's in-house engineering staff develops an independent, detailed cost estimate
which, when compared to the proposed consulting engineering cost estimate, demonstrates the
reasonableness of the proposed amount; (b) the grantee performs a verification of the proposed
costs and quantitites to the data used by the engineering firm in developing the proposal; or (c)
sufficient cost and pricing data for work similar to this project is available to provide a basis for
comparison.) The Director will decide whether an audit of the subagreement is necessary and
will advise the auditor reviewing the grant.
If another agency will perform the audit, the Division Audit Director will initiate the
request for audit and provide a copy of the request to the auditor performing the review of the
grant. The auditor does not have to wait for the results of audit requests from another Federal
agency; he should prepare the audit report and set aside the requested portions. The audit
report should explain that the subagreement is being audited by another audit agency and that
the results will be transmitted as soon as received.
If the Division Audit Director has determined that no other Federal audit agency is
cognizant and that the subagreement should be audited, the auditor should make arrangements
to perform an audit of the documentation maintained by the engineering firm. In instances
where access to records necessary for the audit is denied, all engineering fees billed under this
method of compensation should be questioned pending access to records.
(5) The auditor should compare the fixed price negotiated under the contract
and the engineer's actual incurred costs. When actual costs were substantially less than
estimated costs included in the proposal used as a basis for negotiation, a comparison of
estimated and actual incurred quantities (labor hours/material quantities, etc.) should be made.
(EPA regulation 40 CFR 35.937~6(c)(6) requires that the engineer account for costs in the same
manner in which he proposes costs.)
(6) In instances where the actual quantities (labor hours) were significantly
less than estimated quantities, the auditor should obtain an explanation for the differences from
the consulting engineer. Where the reduction in quantities was due to new and improved work
methods or efficiencies in performance, the auditor should accept the lump sum price. In other
instances, the auditor should review the data used for estimating the quantities included in the
consulting engineer's proposal. In instances where the data used as a basis for negotiation was
not complete, current, or accurate, the auditor should question amounts claimed in excess of
costs computed using complete, current, and accurate data.
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(7) In instances where actual costs were significantly less than estimated costs
and where actual quantities did not vary significantly from estimated quantities, the auditor
should review the engineer's cost proposal used as a basis for negotiation.
(8) In reviewing the engineer's cost proposal, the auditor should as a
minimum determine that costs proposed were allowable under FPR 1-15.2 and 1-15.4.
In instances where amounts proposed do not represent current (at the time of negotiation),
valid cost or pricing data, the auditor should question any amounts claimed in excess of those
computed using current, complete, and accurate cost data.
The auditor should determine that:
(a) Salary rates proposed represented current salary data, factored for
the length of the contract.
(b) Fringe benefits represented cost history based on actual fringe
benefit cost incurred by the engineering firm.
(c) Costs of material and supplies were based on current cost
information.
(d) Costs of subcontracts were based on properly documented
previous experience of similar work or bids from the prospective subcontractors.
(e) Travel costs were based on amounts regularly paid under the
engineer's standard procedures.
(f) Other direct costs were based on accurate, valid costing data.
(g) Indirect costs were proposed based on rates computed in
accordance with FPR 1-15.2 and 1-15.4.
g. Engineering services reimbursed under the multiplier form of contracting
(1) Question all costs billed under this method of compensation for
agreements entered into after June 30, 1975, unless the agreement complies with 40 CFR
35.937-l(d) of the EPA "Subagreement Regulations for Construction Grants."
However, for agreements awarded under the new regulations, if under either a CPFF or
firm-fixed-price contract the grantee desires to utilize a multiplier for interim billing purposes,
all of the following must apply:
(a) The multiplier and the portions of the multiplier allocable to
overhead and allocable to profit have been specifically negotiated;
(b) The portion of the multiplier allocable to overhead includes only
allowable items of cost under the cost principles of FPR 1-15.2 and 1-15.4;
(c) The portions of the muliplier allocable to profit and allocable to
overhead have been separately identified in the contract; and
(d) The firm-fixed-price contract includes a guaranteed maximum price
for completion of the specifically defined scope of work; the CPFF contract includes a fixed
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dollar profit which may not be increased except in case of a contract amendment which
increases the scope of work.
Thus, the multiplier is not an acceptable form of contracting in itself, but under a CPFF or
FFP contract it may be used for interim billing purposes. Cost claimed under a multiplier
arrangement not meeting the above criteria should be questioned.
(2) For agreements entered into prior to the effective date of the new
subagreement regulations:
(a) Determine whether the amounts billed were based on the terms of
the agreement.
(b) Determine whether the grantee has performed an audit of the
engineering firm's records to establish the propriety of the salary cost billed.
(c) In establishing the acceptability of salary cost used as a base to
which the multiplier is applied, use actual salaries and wages paid. In addition, make sure that
the multiplier is applied to the labor of only bona fide employees of the engineering firm.
(d) Regardless of contract terms, the actual costs of fringe benefits
must be supported by the accounting records when they are claimed as a direct charge. If the
charges are not supported or if the actual cost is less than the amount claimed, the total of the
difference is unallowable for Federal participation. Where the fringe benefits are claimed as a
direct charge and also included in the multiplier, the duplicate direct charge is unallowable for
Federal participation.
(e) Regardless of contract terms, question charges made to the grant
where there was no cost incurred. Labor charges and related costs for straight time or overtime
hours which are billed but for which cost has not been incurred will be unallowable for Federal
participation.
(f) Regardless of contract terms, the actual cost of service charges
must be supported by accounting records. Service charges are defined as any supplemental
charges added to other direct cost (nonsalary) which are claimed on an actual cost basis. If the
service charges are not supported or if the actual cost is less than the amount claimed, the total
or the difference is unallowable for Federal participation. This is in accordance with the ASCE
manual, which states that the service charge is for expenses to be reimbursed by the client. (See
PG 64, dated February 5, 1976.)
In reviewing direct costs claimed by the engineer, the auditor should determine whether
service charges are claimed on an actual cost basis or a percentage added to a direct cost item
(for example, service charge of X% added to the cost of supplies purchased or outside services).
When such claims are identified, the auditor should:
Determine the engineer's actual cost of the services as
supported by the accounting records.
Determine that costs included in the service charge are
consistently applied and are not duplicated in other accounts (e.g., overhead).
Compare the service charge applied to the actual cost of the
service and question any over-recovery of actual cost.
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h. Engineering services reimnmsr-d nude; s time and materials form of contracting
(1) Determine whcliici tlio giants ha» performed an audit of the
engineering firm's records to establish the pioi/r K;! > of labor hours billed.
(2) For time and materials contracts ove 5100,000 awarded after June 30,
1975, perform Step 4 under FFPconira, t- i%.'-v t-^"--} lc /
(3) Determine the JtJ.-quacs » flu; lirnA accounting system to identify and
accumulate project labor hours.
(4) Verify the rc-. ur.. > . >t >\n Lib. t :,viu<,i 'aimed to the accounting records.
(5) Determine that the categories of labor billed are in accordance with the
contract terms and that employees are charged in the correct classification.
(6) In reviewing costs claimed under u lime and materials contract awarded
under 40 CFR 35.937, the auditor should compaie the iaU;s claimed to the engineer's proposal,
which details the labor rates, overhead rate, and pioht factor used as a basis for negotiation. The
auditor should determine that:
(a) The labor raies used as a basis for negotiaion were based on
complete, current, and accurate cost data al the time of negotiation. The cost data used should
include actual average labor rates for eategones of employees or for specific employees
anticipated to perform the work.
(h) The overhead rates used as a b.isis for negotiation were prepared in
accordance with FPR 1-15.2 and 1154 and were based on complete, current, and accurate
cost data.
(7) In instances where the total rate negotiated under 40 CFR 35.937 was not
based on complete, current, and accurate cost data or was not prepared in accordance with FPR
1-15.2 and 1-15.4, the auditor should compute an acceptable rate, using current, complete, and
accurate cost data, and question amounts resulting from rhe use of an unacceptable rate. The
auditor should determine that:
(a) Salary rates proposed represented current salary data, factored for
the length of the contract. *
(b) Fringe benefits represented cost history and were based on actual
fringe benefit costs incurred by the engineering firm.
(c) Indirect costs were proposed based on rates computed in
accordance with FPR 1-15. 2and 1-15.4.
i. Engineering services reimbursed under a cost-plus-a-fixed-fee contract
(1) Determine whether the grantee has performed an audit of the
engineering firm's records to establish the propriety of costs billed.
(2) Where the gramee has not performed reviews of subagreement costs or
the reviews were inadequate, the auditor should furnish (he Division Audit Director with a list
of all applicable subagreements. The Director will decide whether an audit is needed and, if one
is needed, who will perform the audit. If no audit of the subagreement is considered necessary,
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the Division Audit Director will so advise the auditor reviewing the grant. In such cases, the
costs claimed under the subagreement will be considered allowable if costs were claimed in
accordance with subagreement provisions.
If another agency will perform the audit, the Division Audit Director will initiaie the
request for audit and provide a copy of the request to the auditor performing the review of the
grant. The auditor does not have to wait for the results of audit requested from another Federal
agency; he should prepare the audit report and set aside the requested portions. The audit
report should explain that the subagreement is being audited by another audit agency and tha-.
the results will be transmitted as soon as received.
If the Division Audit Director has determined that no other Federal audit agency is
cognizant and that the subagreement should lie audited, the auditor should make arrangements
to perform an audit of the documentation maintained by the engineering firm.
(3) Determine whether other direct costs claimed are reasonable, applicable,
and allowable under the terms of the contract and the Federal cost principles contained in FPR
1-15.2 and 1-15.4.
(4) Review the firm's overhead rate to determine that it is reasonable,
equitable, and in accordance with the principles set forth in FPR 1-15.2 and 1-15.4 and the
"EPA Audit Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals."
(5) More complete guidance as to the audit of CPFF contracts is contained
in the "Audit Guide for EPA Contracts." The overhead rates considered allowable by the
auditor should be used in determining allowable indirect costs under the subagreement.
4.3.3 Audit of Construction Costs
Plant construction and equipment costs represent a major portion of the construction
grant program. The grantee will normally have established a procedure or engaged the design
engineer to ensure that construction is in accordance with the specifications, plans, schedules,
and construction contract. For grants awarded under P.L. 92-500, the basic procurement
system requirements and procedures utilized to award the construction contract must be in
accordance with the applicable grant regulations (40 CFR 35.936 and 40 CFR 35.938, dated
December 17, 1975).Specific criteria for procurement systems are outlined in section 3.4.2 of
this guide.
In reviewing procurements of construction contracts, the auditor should be aware that
EPA regulations governing these procurements have changed with the issuance of EPA's
"Subagreement Regulations for Construction Grants." Accordingly, the audit criteria may
change depending upon whether the construction contract was awarded prior to or afier the
effective date of the revised regulations.
a. Audit guidance for basic construction contracts and change orders
(1) The auditor will review the grantee procurement records for each
construction contract awarded in excess of $10,000 to determine whether-.
(a) Construction contracts awarded under the grant are firm fixed
price or unit price or combinations of two (40 CFR 35.938-3).
(b) Adequate public notice (40 CFR 35.938-4(a)) was given.
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(c) Adequate time (40 CFR 35.938-4(b)) was given for preparing
bids.
(d) Bidding documents include (40 CFR 35.938-4(c)):
A complete statement of the work to be performed, including
necessary drawings and specifications and the required completion schedule;
The terms and conditions of the contract to be awarded;
A clear explanation of the method of bidding and the method
of evaluating bid prices; and
Responsibility requirements or criteria which will be used in
evaluating bidders.
(e) The grantee provided for sealed bids and for safeguarding bids
received until public opening (40 CFR 35.938-4(d)).
(f) Contracts were awarded to the lowest responsive, responsible
bidder. If not, determine what rationale exists for awarding to other than the lowest bidder (40
CFR 35.938-4(h)).
(g) Approvals were obtained from EPA prior to contract award.
(h) Awarded contracts contain a provision for access to
contractor/subcontractor records, reports, drawings, and accounts for the purpose of
inspection, review, copying, and audit by EPA representatives (40 CFR 35.935-7).
(i) At least two brand names followed by the words "or equal" are
used in the specifications (P.L. 92-500 and 40 CFR 35.936-13(a)(l)). The use of only one brand
name is considered restrictive.
(j) Items considered ineligible to EPA were identified as ineligible in
the contracts.
(k) Special circumstances or provisions pertaining to the contract
require review; e.g., implementation of the provisions of the Uniform Relocation Assistance
and Real Property Acquisition Policies Act of 1970 when acquiring real property for the
project. (Appendix C of this guide provides supplemental procedures for auditing relocation
costs.)
(2) Review and test the grantee's procedures for accumulating cost of change
orders.
(3) Determine if change orders to the contract(s) pertain to eligible
construction and have been reviewed, checked for duplication of base contract items, and
approved by EPA. If approvals from EPA have not been received, such costs are not acceptable.
(4) Determine whether documentation is maintained that demonstrates the
purpose, cause, necessity for the change order(s), and reasonableness of the change order price.
In this regard, determine whether costs and quantities estimated were supported and evaluated.
Be alert for instances where support for a change order indicates that work was for a purpose
other than that described on the change order.
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(5) Determine that change orders for quantity increases or decreases were
approved by the grantee as soon as it could be readily determined that a change was necessary
and/or an overrun/underrun would occur.
(6) Determine that credits for deletions have been included in the change
order. Credit for deletions from FFP contracts should be based on the market price at the time
of deletion. Credit for deletions from unit price contracts should be based on the bid price of the
item.
(7) Determine that prior EPA approval was obtained for changes over
$ 100,000 and changes in the scope of the project.
(8) Determine whether the grantee or consulting engineer performed an
evaluation to establish the reasonableness of the change order price (40 CFR 35.938-5). Note
that EPA regulation 40 CFR 35.938-5 does not technically apply to change orders under grants
awarded prior to March 1, 1976. However, the requirement to assure the reasonableness of
change order costs has always existed in EPA regulations. Although 40 CFR 35.938-5 is not
applicable, the principles prescribed by this regulation are just good business practices; thus,
procedures comparable to those required by this regulation should be followed in negotiating
change order prices. Therefore, in auditing change orders under grants awarded prior to March
1, 1976, the auditor should follow the same basic audit procedures used for auditing change
orders under grants awarded after March 1, 1976. It is important to be aware, however, that in
writing deficiencies related to these change orders, the auditor should not cite 40 CFR 35.938-5
as a specific requirement.
(a) Original Bid Item. For variances in quantities of items included in
the original bid package, it is acceptable to use the original bid price. However, if the variance is
significant (15 percent) and the dollars are material, the grantee should be required to
demonstrate it has evaluated the reasonableness of using the original bid price.
(b) New Items. Since the reasonableness of the price of new bid items
was not established in the basic award, the grantee should take adequate measures to assure that
new items are reasonably priced. Prices for new items should be established on the basis of an
independent estimate developed from current cost and pricing data or a detailed analysis of the
data used to develop the contractor's price. The responsibility for establishing the
reasonableness of change order prices is frequently delegated to the consulting engineering
firms. In these instances, the audit should include a review of the engineer's records, which
should contain estimates of man-hours to be expended, quantities of material, hours of
equipment usage, and cost and pricing data.
(9) Change orders under grants awarded after the effective date of EPA's
"Subagreement Regulations for Construction Grants" (40 CFR 35.936 and 35.938) must be
negotiated on the basis of current cost and pricing data furnished by the contractor to the
grantee. For FFP or unit price change orders awarded, the auditor should analyze the
information documenting the grantee's cost review of the composition of costs and perform the
following audit steps:
(a) Determine what reviews were performed by the grantee or its
consulting engineer to ascertain the reasonableness and validity of the amounts proposed (both
quantity and dollar estimates).
(b) Where the grantee has not performed a review of change order
costs or the reviews are considered inadequate, furnish the Division Audit Director with a list of
all change orders under the specific contract being reviewed. (A review of proposed change
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order cost is considered adequate if (!) ihe grantee or its consulting engineer develops an
independent detailed cosi estimate which when compared to the contractor's proposed change
order cost demonstrates the reasonableness of the amount proposed or (2) the grantee performs
a verification of the proposed costs and quantities to the data used by the contractor in
developing the proposal.) The Director will decide whether an audit of the contractor's records
is needed. If no audit of the subcontracts is considered necessary, the Division Audit Director
will so advise the auditor -eviewing the grant. In such cases, the costs claimed under the change
order will be considered allowable if costs were claimed in accordance with FPR 1-15.2 and
FPR 1-15.4. If the Division A.udit Director has determined that an audit of the contractor's
records is necessary, the auditor should make arrangements to audit the documentation
maintained by the contractor.
(cj Initially, compare the amounts paid under the contract and the
contractor's actual incurred costs. Where actual costs were substantially less than estimated
costs, compare estimated and actual incurred quantities (labor hours/material quantities, etc).
(d) In instances where the actual quantities (material and man-hours)
were significantly less than estimated quantities, obtain an explanation of the differences from
the contractor. Where the reduction in quantities was due to new and improved work methods
or other efficiencies, the auditor should accep! the amount negotiated for the change order. In
other instances, the auditor should review the data used for estimating the quantities included
in the contractor's proposal. In instances where the data used as a basis for negotiation was not
complete, current, or accurate, the auditor should question amounts claimed in excess of costs
computed using complete, current, and accurate data.
(e) In instances where actual costs were significantly less than
estimated costs and where actuai quantities did not vary significantly from estimated quantities,
review the contractor's cost proposal used as a basis for negotiation.
(0 In instances where amounts proposed do not represent current (at
the time of negotiation), valid cost or pricing data, question any amounts claimed in excess of
those computed using current cost data. The auditor should also ascertain the rationale for
differences disclosed above. (See40CFR 35.938-5.)
(g) In reviewing the contractor's cost proposal, as a minimum
determine that:
Salary rates proposed represented current salary data factored
for the length of the contract.
Fringe benefits represented cost history based on actual fringe
benefit cost incurred by the engineering firm.
Costs of material and supplies were based on current cost
information.
Costs of subcontracts were based on properly documented
previous experience of similar work or bids from the prospective subcontractors.
Other direct costs were based on accurate, valid costing data.
Indirect costs were proposed based on rates computed in
accordance with FPR 1-15.2 and 1-15.4. (See 40 CFR 35.938-5(d)(4).)
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(10) Determine that all credit (decrease) change orders have been
considered in interim or final payments to contractors.
(11) Determine whether the work was completed and accepted by the
grantee or its designated representative.
(12) Determine whether the engineer accepted the change order work as
complete and in accordance with the change order specifications.
4
(13) If the auditor is unable to assure himself that the reasonableness of the
change order was evaluated by the grantee or the engineer, he should question the cost and
make a recommendation that the Region determine whether to participate in the cost of the
change order.
(14) Determine whether the contractor completed construction within the
time constraints provided in the contract. In instances where construction was not completed
within the time frame established by the contract, including amendments, determine whether or
not the grantee recovered liquidated damages as spectified in the construction contract. Any
additional costconstruction, engineering, legal, or administrative-generated because of a
contractor's lack of performance should be covered by the liquidated damages clause. Thus, any
such increase in cost is unallowable for Federal participation even if the grantee elects not to
exercise its right to recover liquidated damages.
b. Verification of construction pay estimates
It is the grantee's responsibility to establish adequate controls to ensure that construction
contractors are paid only for construction work performed and materials and equipment
furnished.
Audit tests of construction pay estimates depend, to a large degree, on the type of
construction contract awarded, i.e., FFP, unit price, or a combination of FFP and unit price
items.
(1) Firm-fixed-price contracts
In practice, the responsibility for initially approving interim pay estimates is normally
delegated by the grantee to the consulting engineer as an element of services during the
construction phase. However, it is the grantee's responsibility to determine that the consulting
engineer exercises procedures and controls adequate to ensure that contractors are paid only for
acceptable construction performed through the cutoff date of the pay estimate. Accordingly,
the auditor should determine whether the grantee has performed a review or analysis to make
such a determination.
(2) Unit price contracts
Under unit price contracts, the contractor is normally reimbursed monthly on the basis of
actual quantities furnished under each bid item. The total cost of this type of contract is flexible
to the extent that quantities are estimated and final payment will be based on actual quantities
received. The responsibility for verifying unit quantities claimed is normally a part of the
services provided by the consulting engineer.
The auditor should perform adequate tests to determine whether the grantee or the
consulting engineer (acting as the grantee's representative) exercised the necessary controls to
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ensure that payments were made only for quantities received. Claims for quantities which
cannot be supported in the grantee's or consulting engineer's records should be questioned.
c. Audit guidance for construction pay estimates
(1) Firm-fixed-price contracts
Under FFP contracts, the contractor is normally reimbursed monthly on the basis of
percentage of completion of work plus project inventories stored. In performing final audits, the
auditor should:
(a) Examine vouchers, invoices, and disbursement records to determine
that costs claimed have been paid in accordance with the original contract award and approved
change orders.
(b) Determine that the work required under the contract has been
completed by the contractor and accepted by the grantee based on a final inspection by the
grantee.
In performing interim audits, the auditor should:
(a) Examine vouchers, warrants, and/or cancelled checks to determine
that costs booked have been paid in accordance with approved progress pay estimates.
(b) Ensure that costs claimed are based on the total value of work in
place (completed work) reduced by any amounts withheld by the grantee as a retainage
(usually a percent of costs claimed that is withheld to guarantee satisfactory completion of
work).
(c) Determine whether the grantee or the consulting engineer initially
approved pay estimates.
(d) Review the procedures actually used by the consulting engineer to
determine that the procedures limit interim payments to work completed and accepted and
inventories stored (40 CFR 35.938-6). This should include appropriate tests of specific items
included in the pay estimate to source documents which indicate the resident inspector's
acceptance. The source documents will include inspector's diaries, daily inspection reports, and
other correspondence.
(2) Unit price contracts
(a) Examine vouchers, invoices, and disbursement records to
determine that costs claimed have been paid. Costs claimed should be based on the total value of
work in place (completed work) reduced by any amounts withheld by the grantee as retainage
(usually a percent of costs claimed withheld to guarantee satisfactory completion of work).
(b) Review the procedures used for the verification of quantities
claimed under unit price contracts. The pay estimate should be prepared by the contractor and
approved by the grantee or its representative. In no instance should the contractor's pay
estimate be prepared by the grantee or its representative (the engineer).
(c) Verify quantities billed to the original contract and approved
change orders.
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(d) Describe briefly in the working papers the procedures in effect and
the type of records maintained for recording units of work completed, e.g., pipe placement, piles
driven, concrete placed, rock excavation, sheeting). Are the procedures used and the records
kept in accordance with the firm's written procedures?
(e) On a selective basis, determine that quantities claimed are properly
supported by documentation maintained by the contractor and/or determined by the resident
engineer. The documentation may include:
Daily inspection reports or inspector's diaries;
Calculations from excavation notes and shop drawings;
Receipts for materials delivered to the site;
Pile driving records; and
As-built drawings. (The auditor may use these to accept
quantities of pipe and manholes if he determines, by reviewing source documentation such as
field reports, that the as-builts accurately represent in-place construction.)
(f) Determine that all entries are dated. This applies to summary
records, books of secondary entry, and source documents.
(g) Determine that all records documenting quantities are maintained
on a current basis. Diaries and inspection reports should be maintained daily, summary sheets
weekly or monthly.
(h) Review and determine the mathematical accuracy of calculations
of excavation and backfill, sheeting, concrete, asphalt, rock excavation, and other items for
which quantities are determined through mathematical computations.
(i) Estimates for quantities of rock excavation, excavation below
grade, and backfill are often treated as contingencies because actual soil conditions may vary
significantly from those established in preliminary test borings. Determine that records show
that these items were actually used.
(j) Source documents such as the inspector's diary and/or daily
inspection reports sometimes indicate unacceptable construction. Determine whether the
inspector has a method for summarizing construction deficiencies that is useful in obtaining
corrections. Determine that all construction recorded as unacceptable has been corrected or is
in the process of being corrected.
d. Quality control
It is the grantee's responsibility to ensure that construction is performed in accordance
with the design plans and specifications. This responsibility is normally assigned to an
engineering firm which, under contract with the grantee, provides resident inspection services.
These services generally include furnishing a professional engineer to be in overall charge of the
project construction inspection, a qualified project representative, and a resident inspector. The
inspection of work and materials should normally be continuous whenever work is being
performed on the project and throughout the duration of construction.
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The grantee or its engineering firm should exercise controls to provide assurance that
construction was performed in accordance with the approved design plans and specifications.
The auditor should review records documenting this system of controls.
The auditor should exercise reasonable judgment in pursuing audit deficiencies and
indications of construction deficiencies. This guide does not require that audits include
engineering evaluations of grantee or auditee operations. Should conditions be encountered
which require such evaluations, the auditor should contact the Division Audit Director, who
will review the situation and arrange for appropriate technical assistance.
e. Guidance for auditing quality control procedures
In auditing controls exercised by the grantee over quality of construction, the auditor
should place maximum reliance on inspections performed by state or EPA inspectors. In this
regard, he should review inspection reports showing the results of such inspections. Where such
inspections are documented to show that each of the areas set forth below was properly
controlled by the grantee and its engineer, further audit work may not be required. If, however,
the grantee did not properly manage the areas below, the auditor should review them. Where
inspection documentation indicates management problems, the auditor should follow up to
determine that corrective action was taken. The auditor should proceed as follows:
(1) Where the grantee has delegated the responsibility for professional
services during construction and/or resident inspection, determine how the grantee stays
apprised of construction progress and problems encountered during the constructicn. The
grantee's procedures should include review and evaluation of daily inspection reports and
engineers' work progress reports, and observation of the work performed by the resident
engineer and resident inspectors.
(2) Determine the grantee's or consulting engineer's minimum qualification
requirements for resident inspectors.
(3) Review personnel records and determine the resident inspector's actual
qualifications. Do these qualifications meet the minimum requirements (step 2 above)?
(4) Determine whether the grantee or consulting engineering firm has
written procedures, in the form of a "construction manual" or otherwise, which prescribe the
duties and responsibilities of the resident inspectors in performing day-to-day activities. Were
these procedures followed?
(5) Determine whether there are written procedures requiring that certain
types of daily records be kept by the inspector (e.g., diaries, daily inspection reports). Were daily
inspection reports maintained? Do such records appear to be complete in accordance with
procedures?
(6) Review work progress reports and other correspondence maintained by
the grantee and note any major construction problems identified. Determine that noted
construction deficiencies were corrected. The auditor should also determine that a punch list of
minor construction deficiencies was maintained so that corrective actions may be taken during
project cleanup.
(7) Review the contract specifications and determine what tests (e.g.,
concrete density tests, soil compaction, line and grade tests) are required, who should perform
the tests, and what limits or tolerances have been established.
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(8) Determine, on a selective basis from the engineer's records, whether
tests were performed as required and whether test results were within the specified limits or
tolerances.
(9) Should the audit disclose construction deficiencies of a serious nature
which have not been corrected, attempt to identify the cost associated with that portion of
construction. These costs will not be considered acceptable for EPA participation until the
construction deficiencies are corrected.
4.3.4 Other Costs
In reviewing other costs, the auditor should determine whether the costs are allowable and
applicable to the EPA grant. Guidance concerning the allowability of specific cost items can be
found in PMC 74-4,40 CFR 35.940, FPR 1-15.2, FPR 1-15.4, and Appendix D to this guide.
The auditor should determine that:
a. The types of expenditures involved were contemplated in the original budget
and the expenditures were adequately documented;
b. In instances where the contractor has established separate pools for such costs as
computer services, reproduction, and communications, the methods used to calculate and
distribute such costs are equitable;
c. Amounts claimed are properly supported as other direct costs, and similar costs
are not recovered through indirect costing methods;
d. The contractor credits to the government the applicable portion of any income,
rebate, allowance, or other credits relating to any allowable costs received by or accruing to the
contractor;
e. When applicable, necessary approvals have been obtained from the EPA project
officer; and
f. Such costs are allowable under applicable cost principles.
The auditor should be alert for additional engineering costs or any other added costs due to
contract default. These costs are not eligible, as the grantee is compensated for these costs by the
contractor's bonding company.
4.3.5 Other Audit Matters
a. Flood insurance
Effective July 1, 1975 (or one year after a community's notification of identification as a
flood-prone community, whichever is later), for activities where the total cost is $10,000 or
more per structure, EPA is prohibited by law from making any grant for acquisition or
construction purposes in a flood hazard area unless the community in which the project is
located is participating in the flood insurance program and flood insurance is purchased by the
grantee. If the audit planning package furnished by the Division Audit Director identified
construction in a flood hazard area, the auditor should determine that the grantee has flood
insurance.
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b. Property control
(1) Real property
Real property should be reviewed to determine that it is (a) for the purpose of the grant
and (b) controlled in accordance with 40 CFR 30.810-5.
(2) Personal property
The auditor should review the grantee's property management system using the criteria set
forth in 40 CFR 30.810. In evaluating this system, the auditor should:
(a) Determine whether the grantee maintains property records to
account for equipment purchased for use in the EPA grant program.
(b) Review the property records maintained and consider whether
they contain necessary information, such as:
The manufacturer's serial number or other identification
number; the acquisition date; the cost; the source of acquisition; the percentage of EPA equity;
the ultimate disposition data (including sales price and the method used to determine fair
market value); and the location, use, and condition of the property.
A description of the property.
(c) Ascertain whether the grantee takes a physical inventory of grant
equipment and reconciles the results with property records at least once every two years to
verify the existence, current utilization, and continued need for the property.
(d) Determine whether:
Differences between the property record balances and
physical balances are investigated and fully documented.
Property records are adjusted as a result of the inventory.
The grantee takes action to dispose of an item of equipment
if it is no longer needed.
Periodic inspections and routine maintenance are
performed on equipment.
(e) Select from the property records a sample of equipment items
purchased for the EPA grant and physically inventory the equipment to see whether the system
is adequate in terms of (c) above.
c. National Pollutant Discharge Elimination System
The auditor should review the NPDES permit (furnished by the grantee or in the audit
planning package) to determine effluent limitations and other requirements as established in the
permit. He should determine from grantee records and discussions whether the permit
requirements are being met.
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(1) Does the grantee have procedures for performance reporting under the
NPDES permit requirements and/or state and local requirements? Have they been
implemented?
(2) Are required sampling, analytical, and reporting systems in operation?
(3) Do reports indicate that standards are complied with? Note exceptions.
d. User charge system (UCS)
The auditor should determine (for grants awarded after March 1, 1973) whether:
(1) The grantee has developed a UCS. If a UCS has not been developed, its
status should be documented.
(2) The Regional Administrator has paid more than 50 percent of the
Federal share of the Step 2 grant. If so, has the grantee submitted adequate evidence of timely
development of a UCS (40 CFR 35. 935-13(a))?
(3) The Regional Administrator has paid more than 80 percent of the
Federal share. If so, has the system been approved by the Regional Administrator?
e. Industrial cost recovery (ICR)
The auditor should determine (for grants awarded after March 1, 1973) whether:
(1) The grantee has indicated to the Regional Administrator that it has
industrial users. If it advised the Regional Administrator that it does not have industrial users,
the auditor should be alert for information to the contrary during the audit.
(2) The grantee has obtained letters from "significant" industrial users
agreeing to pay under the ICR system.
(3) Grantees requesting payment of more than 50 percent of the Step 3 grant
have made timely progress in developing an approved ICR system in accordance with the ICR
guidelines dated February 1976.
(4) Grantees requesting payment of more than 80 percent of the Step 3 grant
meet the criteria described in the guidelines.
(5) For final audits of construction grants which have ICR systems, the
system proposed by the grantee has been approved by the Regional Administrator. The auditor
should qualify his report to the extent that he has not audited the ICR system but will at a later
date.
f. Operation and maintenance (O&M) manual
No more than 50 percent of the Federal share may be paid until the grantee submits a draft
operation and maintenance manual, and no more than 90 percent may be paid until the manual
is approved by the Regional Administrator (40 CFR 35.935-12).
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g. Sewer use ordinance
No more than 80 percent of the Federal share may be paid until the sewer use
ordinance(s) has been submitted by the grantee and approved by the Regional Administrator
(40 CFR 35.935-16).
h. Operation of facility
An important step of the field work will be a tour of the waste-water treatment plant. The
objective of this portion of the audit is to discuss operation of the plant with operating
personnel. The auditor will be alert for indications that the facility is not managed and
maintained in accordance with grant objectives.
During this phase of the audit, the auditor should:
(1) Determine whether the grantee has established a permanent record file
which includes:
(a) The operation and maintenance manual;
(b) A complete set of as-built drawings;
(c) Plans, specifications, drawings, and manufacturers' specifications
for operation and maintenance of each unit.
(2) Determine whether the grantee has employed the number of qualified
treatment plant operators indicated in its operation and maintenance manual.
(a) Has the grantee established institutional arrangements for
personnel training and development leading to certification?
(b) Do key supervisory personnel meet the state's minimum
certification requirements?
(c) Obtain and review copies of Federal, state, and/or local agency
inspection reports. Identify any major deficiencies reported and determine the status of
corrective action being taken.
(d) Review the engineer's daily inspection reports, punch lists, and
deficiency lists to ascertain construction deficiencies which required correction. Determine
whether the deficiencies were corrected. Request technical assistance as required.
(3) Determine that the plant has a laboratory capability and that it is being
utilized. Review effluent testing procedures for consistency with requirements in the O&M
manual.
(4) Discuss the overall operation of the plant with several levels of operating
personnel, including the plant superintendent:
(a) Are there problems which impair the plant's ability to properly
treat sewage? If so, review the plant's:
Equipment;
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Process design; and
Facility design.
Obtain operating peronnel's suggestions for remedial measures.
(b) Do any overflows occur, or is it necessary to bypass any units?
Frequency and cause?
(c) What' are the frequency and nature of contacts by regulatory
agency personnel (local, state, or Federal)?
(d) Has an adequately funded preventive maintenance system been
established?
(e) Is the plant successful in meeting effluent limitations under its
discharge permits?
(f) Are any items of equipment or sections of the plant not in use?
Why? Costs of unnecessary or inoperable equipment should be questioned or suspended.
i. Value engineering
VE is required for all Step 2 grants on or after October 26, 1976, having a projected Step 3
grant-eligible construction cost of $ 10 million (see page 2-1).
(1) As a minimum, the VE proposal should include, as per 40 CFR 35.936
and Program Requirements Memorandum (PRM) No. 75-36, a description of the:
(a) Scope of VE analysis;
(b) VE team and qualifications;
(c) Level of VE effort;
(d) VE cost estimate; and
(e) VE schedule in relation to project schedule.
(2) VE Summary Reports-Upon completion of the VE analysis, a
preliminary report summarizing the VE findings and a final report describing implementation
of VE recommendations must be submitted to the project officer on a time schedule approved
by him.
(3) Grant Eligibility-The grant eligibility of the VE fee is limited to the
actual VE analysis of the project. The applicant may incorporate training as part of the
proposed VE workshop. However, the intention must be so stated in the proposal, and all costs
associated with such training must be computed separately. For example, the cost for a VE
instructor, additional time and room space, etc., must be itemized and separately identified for
training. These additional costs for training are not grant eligible (PRM 75-36, Section VII,
Paragraph 2).
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(4) The audit approach should include:
(a) Discussion with the project officer on the adequacy of the VE
proposal regarding the requirements listed above.
(b) Review of the Step 2 grant application to determine that the
application includes the minimum required information set forth above.
(5) Audit steps should include, but are not limited to:
(a) Verification that the required VE team qualifications have been
met.
(b) Determination that a firm independent of the design firm is
conducting the VE review. If not, determine that the VE team members had not been involved
in any part of the proposed project design except for VE analysis. The audit report should
comment that the VE analysis was performed in-house.
(c) Review of the preliminary and final VE reports.
(d) Determination that the VE recommendations were implemented
to the maximum extent feasible.
(6) For further information and guidance, see:
(a) "Federal Register," Vol. 41, No. 186 (September 23, 1976), pages
41690-41691.
(b) "Value Engineering Workbook for Construction Grant Projects,"
US Government Printing Office, MDC-29, and US Environmental Protection Agency, EPA-
430/9-76-008 (July 1976).
(c) "Value Engineering in the EPA Construction Grants Program,"
PRM No. 75-36 (January 20, 1976).
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CHAPTER 5: EXIT CONFERENCES
Throughout the course of the audit, the auditor is expected to discuss deficiencies disclosed
during audit, their effect, and possible corrective actions, with responsible officials of the
audited party. The primary purpose of these disussions is to ensure that audited parties have an
opportunity to provide additional data with respect to the problem areas identified during
audit.
5.1 AUDITS WITH NO FINDINGS
For audits with no findings or audits without significant findings, the auditor should notify
the Division Audit Director and then hold a preliminary exit conference with the audited party
at the site. When the audited party is a subcontractor, a separate or joint exit conference may be
held with the grantee and the subcontractor. If the audited parties desire to provide written
comments with respect to matters raised in the audit, they should be furnished a copy of the
draft report and afforded the opportunity to provide written comments. It is not necessary to
return to the job site for a formal exit conference.
5.2 AUDITS WITH SIGNIFICANT FINDINGS
For audits with significant findings, the auditor should initially discuss the findings with
the Division Audit Director by telephone. The auditor should then hold a preliminary exit
conference with the audited party to discuss the factual information disclosed during the audit.
He should emphasize that the audit results and findings are tentative at that point, and that they
will be included in a draft report forwarded to the audited party for written comment.
The auditor should prepare his draft audit report, highlighting the costs considered
unallowable and other deficiencies disclosed during the audit. The Division Audit Director
should be promptly furnished a preliminary copy of the draft report. If, after reviewing the draft
report, the Division Audit Director agrees that the deficiencies are significant, he will meet with
the responsible EPA program officials to brief them on the situation. In addition, he shall
require that the grantee and other audited parties (such as those performing under
subagreements) be furnished a copy of the draft audit findings and conclusions to enable review
and written comment prior to the formal exit conference.
After he receives written comments from the audited parties, the auditor will conduct an
exit conference with each of the responsible parties involved (i.e., the grantee and other parties
having subagreements whose operations and/or costs were audited).
5.3 DOCUMENTATION
The auditor's workpapers shall contain the name of the auditor who conducted the exit
conference, the names and positions of those in attendance, details of the matters discussed, and
a summary of the reactions of the audited parties.
A synopsis of the audited parties' comments will be included in the section of the audit
report entitled "Comments on Compliance, Performance, and Internal Controls." When
written comments are of reasonable length, they will be included as an attachment to the report.
The auditor may also include any rebuttal considered appropriate in light of the audited parties'
comments.
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CHAPTER 6: THE AUDIT REPORT
6.1 INTRODUCTION
Audits of EPA construction grants may result in findings and recommendations
concerning costs questioned or deficiencies in the administration of the grant. For effective
administration of the construction grant program, audit reports must contain all findings,
observations, conclusions, and recommendations resulting from the audit.
6.2 CONTENT AND FORMAT OF AUDIT REPORT
The audit report will be prepared in accordance with the following instructions and in the
formats shown in the Example Audit Reports (with exhibits and schedules) on pages 6-3
through 6-24.
6.2.1 Scope Paragraph
a. The scope paragraph will identify the grant audited and the period audited.
For final audits, the period audited will normally be from the date of grant offer to date of final
inspection or the designated cutoff date. For interim audits, the period audited will normally be
from the date of grant offer to the date audited costs were incurred or claimed.
b. The scope paragraph will also include a statement that the examination was
made in accordance with the EPA "Audit Guide for Construction Grant Program" and the
GAO "Standards for Audit of Governmental Organizations, Programs, Activities, and
Functions." If conditions were encountered which preclude the inclusion of such a statement,
an appropriate statement will be prepared explaining the nature of conditions which required
the deviation.
6.2.2 Opinion
The report will contain an opinion as to the costs incurred/claimed and costs eligible under
the EPA grant. Based on the review of the reasonableness, allowability, and allocability of costs
claimed in conjunction with grant terms and conditions and applicable Federal regulations, the
auditor will classify costs as "accepted," "questioned," or "suspended" in a separate schedule
referenced in the report.
6.2.3 Comments on Compliance, Performance, and Internal Controls
The report will include a separate section relating to the compliance, performance, and
internal control reviews made during the examination. The report should include a discussion
of any deficiencies identified during the course of the audit. In addition, the interim report must
contain comments as to the adequacy of the accounting system and procurement systemTA
final audit report must contain those comments only if the grantee has other active EPA grants.
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6.3 PRESENTING THE FINDINGS
Audit findings, whether they relate to costs questioned or grant administration
procedures, will be presented in sufficient written detail to ensure that report recipients may
readily:
a. Understand the finding;
b. Understand the basis for the finding; and
c. Grasp the significance of findings not directly related to the costs questioned.
The discussion of an audit finding should conclude with management improvement
recommendations, if applicable.
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6.4 EXAMPLE AUDIT REPORT NO. 1
Division Audit Director
Office of Audit
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs incurred/claimed* and EPA-eligible costs
(Exhibit A) for the City of Anywhere, U.S.A., under EPA Grant No. XXXX for the period
(month, day, year) to (month, day, year). Our examination was made in accordance with
generally accepted auditing standards and the "Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions." The audit included tests of the
accounting records and other auditing procedures we considered necessary in the
circumstances. The Environmental Protection Agency's "Audit Guide for Construction Grant g
Program," revised January 1978, was also used as a guide in our examination.
As part of our examination, we determined the allowability of costs incurred/claimed
under the project in accordance with the provisions of the grant and applicable Federal
regulations. Schedule A-l sets forth the costs which we questioned in this regard and includes
an explanation of the reasons such costs were questioned.
In our opinion, subject to the effects on Exhibit A of EPA's ultimate resolution of the o
questionable expenditures referred to in the preceding paragraph, Exhibit A fairly presents the .§
financial information in accordance with generally accepted accounting principles and financial
provisions of the grant.
In addition, in connection with our examination of the statement of costs g
incurred/claimed and eligible EPA costs, we have reviewed the grantee's (1) system of internal
control (based on criteria established by EPA and set forth in the aforementioned EPA audit c
guide) and (2) compliance with provisions of the grant and applicable Federal regulations. Our
report thereon appears as Exhibit B.
This report is intended for use in connection with the grant to which it refers and should
not be used for any other purpose.
DATE SIGNATURE
*The audit report will normally address costs claimed. However, on interim audits there
may be instances where the grantee's claim is not current. In these instances, the audit report
will address cost incurred.
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EXAMPLE AUDIT EXHIBIT A
REPORT NO. 1
City of Anywhere, U.S.A.
Secondary Sewage Treatment Plant
Statement of Grantee's Costs Incurred/Claimed and EPA-Eligible Costs
for the Period (Month, Day, Year) to (Month, Day, Year)
Description* Total Costs Costs Claimed
Incurred as EPA-Eligible
Construction Costs $2,780,000 $731,715
Project Inspection
Fees 133,537 26,707
Total Costs $2,913,537 $758,422
Grant No. XXXX was awarded to the City of Anywhere, U.S.A., under Public Law 84-660.
The grant was awarded on (month, day, year) and provides for 55-percent Federal participation
in the construction of a secondary sewage treatment plant and interceptor sewers, with a
maximum Federal share of $1,100,000. At the time of completion of the audit field work
(month, year), construction was approximately 40-percent complete on two contracts. The
third construction contract under the grant had been recently awarded, but construction had
not started at (month, year).
See Schedule A-l for a statement of costs accepted and questioned during the audit.
The cost categories listed on the Outlay Report and Request for Reimbursement for
Construction Programs (SF 271) should conform to the Description column.
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EXAMPLE AUDIT
REPORT NO. 1
SCHEDULE A-l
City of Anywhere, U.S.A
Secondary Sewage Treatment Plant
Statement of Cost Incurred, Accepted, and Questioned
for the Period (Month, Day, Year) to (Month, Day, Year)
Description
Construction Cost
Project Inspecton Fees
Total Costs
Determination of amount
due grantee or EPA
based on audit
Federal share (55%) of
accepted eligible cost
EPA-Eligible Costs
Incurred
$731,715
26,707
$758,422
Accepted
$551,348
9,787
$561,135
Questioned
$180,367
16,920
$197,287
Notes
1
2
$417,132
$308,624*
$108,508
Less EPA payments made
through (month, day, year)
Balance due Grantee
This amount should not be construed as being the final determination of the Federal share
of accepted eligible costs. The amount may vary depending upon the resolution by EPA of
questioned costs totaling $197,287.
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Notes to Schedule A-l
Note 1 Construction Contracts
a. The grantee contracted for the erection of 198,422 feet of wooden fence around the
construction site of the treatment plant at a cost of $1.50 a linear foot, for a total price of
$297,633. The contractor submitted invoices totaling $325,000 for the 198,422 feet of fence
installed. The consulting engineer approved and the grantee paid the overpayment
requested. The overpayment was $27,367. $27,367
b. The grantee awarded a $550,000 construction contract for repair, maintenance, and
construction of the collection system. Upon reviewing the scope of the contract, the EPA
project engineer stated that it should not have been deemed eligible for Federal participation
because it relates to the collection system, not to necessary interceptors. Therefore, we question
the entire contract because P.L. 84-660 excludes collection systems from Federal
participation. The total cost incurred to date is $ 150,000 150,000
c. The grantee contracted for a protective wooden fence to be completed by September
15, 1974. The fence was not completed until September 18, 1974. This delay required another
contractor under the grant to defer the start of excavation to September 20, 1974. The
contractor incurred $3,000 in equipment rental costs during the three-day delay. Chapter VII of
the Handbook of Procedures states that increased costs resulting from lack of performance by
the construction contractor are unallowable for participation, even if the grantee elects not to
exercise its right to recover liquidated damages. The cost incurred during the three-day overrun
is $3,000. 3,000
Total Costs Questioned $180,367
Grantee's Comments
The grantee agrees with the above questioned costs.
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Note 2 Project Inspection Fees
A summary of audit recommendations follows:
Description
Subagreement Costs*
Personnel
Fringe Benefits
Overhead
Travel
Subcontracts
Total Costs
Fee
Total Subagreement Costs
plus Fixed Fee
Force Account Costs
Total Project Inspection
Fees
Eligible Costs
Incurred
$32,000
6,000
32,000
2,537
23,000
$95,537
8,000
Costs
$10,000
1,886
10,000
2,537
- 0 -
$24,423
8,000
Questioned Reference
$22,000
4,114
22,000
- 0 -
23,000
*In this example audit report, engineering fees were considered to be compensated under a cost-plus-fixed-fee
contract; thus, an audit of actual cost was performed. In cases where engineering services are compensated under a
multiplier, fee curve, or FFP contract awarded prior to July 1,1975, the procedures outlined in section 4.3.2.b of this
guide should be included in this schedule and referenced to technical service costs incurred/claimed, accepted, and
questioned.
a. Engineering firm's records do not accurately record project cost--$22,000: The
consulting engineer was unable to support charges totaling $22,000 for project supervision and
inspection. The project was charged for the full time of the project engineer and one-half time
for another engineer whose identity we could not determine. The engineering firm's payroll
records did not identify the projects to which the inspectors were assigned, and the firm was
unable to provide the weekly time sheets which, a representative of the firm stated, contain
project identification. We are questioning all charges except the salary of the project engineer.
b. The amount questioned represents the application of the firm's fringe benefit
rate of 18.7 percent to personnel costs questioned in Note 2a above (18.7 percent x $22,000 =
$4,114).
c. The amount questioned represents the application of the firm's overhead rate
of 100 percent to personnel costs questioned in Note 2a above (100% x $22,000 = $22,000).
d. Approval of engineer subcontracts~$23,000: The consulting engineer, without
the Icnowledge or approval of the grantee or EPA, awarded a fixed-price subcontract for the
design of the settlement basins. EPA regulations require prior approval of subcontracts and a
determination that such subcontracts are reasonably priced. Further, the consulting
engineering firm could not demonstrate that the subcontract was awarded at a reasonable price.
Consequently, we have questioned this subcontract of $20,000 plus a 15-percent management
fee of $3,000, or $23,000.
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e. The grantee incurred personnel costs of $30,000 for force account work, of
which $6,000 was claimed as EPA-eligible costs. Since the grantee's records did not identify
eligible costs, the grantee used the percentage of eligibility identified in the grant application
(20% of $30,000 $6,000). An in-depth analysis of the force account costs revealed that
$ 13,490 was related to another project. The remaining $ 16,510 is accepted as eligible costs.
f. The approved grant application estimates eligible construction costs which,
when taken over total construction costs, result in an eligibility factor of 20 percent. To arrive at
the total eligible project cost, a ratio based on actual costs will be applied to all other acceptable
costs at the time of the final audit.*
Engineering Firm's Comments
(a thru c) The engineering firm's representative agreed that records were not available to
support all salary charges, but contended that the staff had performed sufficient work to earn
the cost claimed.
d. The engineering firm's representative stated that they were not aware of these
requirements. Based upon the performance of the subcontractor, they considered this to be a
reasonable price.
Grantee's Comments
The grantee concurred with the facts in Note e.
*See page 45 of this guide.
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EXAMPLE AUDIT REPORT NO.l EXHIBIT B
CITY OF ANYWHERE, U.S.A
SECONDARY SEWAGE TREATMENT PLANT
CONSTRUCTION GRANT XXXX
COMMENTS ON COMPLIANCE, PERFORMANCE, AND INTERNAL CONTROLS
As a part of our examination, we reviewed and tested the grantee's system of internal
accounting controls to the extent we considered necessary to evaluate the system as required by
generally accepted auditing standards. This evaluation established a basis for reliance on the
grantee's accounting control system in determining the nature, timing, and extent of other
auditing procedures necessary for expressing an opinion on the financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance that the (1) assets are safeguarded against loss from unauthorized use or disposition
and (2) financial records are reliable for preparing financial statements and maintaining
accountability for assets. The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the benefits derived and also
recognizes that the evaluation of these factors necessarily requires estimates and judgments by
management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most control
procedures, errors can result from misunderstanding of instructions, mistakes of judgment,
carelessness, or other personal factors. Control procedures whose effectiveness depends upon
segregation of duties can be circumvented by collusion. Similarly, control procedures can be
circumvented intentionally by management, either with respect to the execution and recording
of transactions or with respect to the estimates and judgments required in the preparation of
financial statements. Further, projection of any evaluation of internal accounting control to
future periods is subject to the risks that the procedures may become inadequate because of
changes in conditions and that the degree of compliance with the procedures may deteriorate.
The EPA "Audit Guide for Construction Grant Program," revised January 1978, requires
a review and evaluation of the adequacy of the accounting system and internal controls of the
grantee to (1) safeguard its assets; (2) check the accuracy and reliability of the accounting data;
(3) promote operating efficiency; and (4) encourage compliance with prescribed management
policies and such additional fiscal, accounting, and administrative requirements as EPA may
establish. We understand that EPA considers procedures conforming to the criteria in its audit
guide to be adequate for EPA purposes. Procedures that are not in conformity with the audit
guide indicate some inadequacy for EPA purposes. Based on this understanding and on our
study, we believe that the City's procedures were adequate (inadequate) for EPA purposes
except for (because of) the conditions described below, which we believe are material
weaknesses in relation to the grant to which this report refers. In addition to such weaknesses,
other conditions which we believe are not in conformity with the criteria referred to above are
described on the following pages.
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GRANTEE'S ACCOUNTING SYSTEM (Interim Report)*
The grantee's general accounting system is considered adequate to record and accumulate
financial information. However, the grantee's cost accounting system is not considered
adequate to identify and accumulate costs under the subject grant. The grantee maintains a
general accounting system controlled by a general ledger and supported by various accounting
journals. However, the grantee does not maintain cost or project accounting records to identify
EPA-eligible project costs. The general ledger consists of one construction account which
includes the costs of all construction projects undertaken by the City. As a result, we could not
determine the amount of EPA-eligible expenditures incurred.
EPA general grant conditions provide "the grantee shall maintain books, records,
documents, and other evidence and accounting procedures and practices sufficient to reflect (1)
the amount, receipt, and disposition by the grantee of all assistance received for the project,
including both Federal assistance and any matching share or cost sharing, and (2) the total cost
of the project, including all direct and indirect costs of whatever nature incurred for the
performance of the project for which the EPA grant has been awarded...."
During the course of our audit, the accounting system deficiency was discussed with the
City Controller, who made arrangements for a public accounting firm to identify and
accumulate, from the City's records, costs incurred under the grant project. At the completion
of our audit, project costs incurred by the City from inception of the grant through June 30,
1975, had been identified and summarized. However, costs incurred since July 1, 1975, have not
been analyzed, and a system to provide the identification and accumulation of future grant
expenditures has not been implemented.
Recommendation
We recommend that EPA require the City to take immediate action to implement
accounting procedures adequate to reflect EPA-eligible and allowable project costs.
Grantee's Comments
The grantee concurred and indicated that necessary corrective action would be taken.
GRANTEE'S PROCUREMENT SYSTEM
The grantee's procurement system for construction and engineering services was generally
adequate except for procedures relating to pricing change orders.
The grantee has not established effective procedures for controlling the change orders to
assure that: (1) a review of the reasonableness of change order costs is made, (2) responsibility is
assigned for final acceptance of the change order work prior to approving payment on the
change orders, and (3) responsibilities of City officials authorized to sign and approve the
change orders are defined. The grantee, on the recommendation of the consulting engineer,
approved three contract change orders, valued at $100,000, under contract number XXXX.
The change orders extended the construction period for nine months and provided for extensive
substitution of equipment.
*For final audits, statements regarding the accounting systems are necessary only if the
grantee has other active EPA grants.
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Our review of the consulting engineer's records disclosed that the engineer had not
performed a cost analysis or taken other measures to assure the reasonableness of the change
order price. In addition, neither the grantee nor the consulting engineer had approved the
change order work prior to payment for the change order. We also noted that the changes have
not been submitted to EPA for approval. We do not take a position concerning the merits of the
changes, but we believe that changes altering the scope of the project are subject to prior
approval before they are binding on EPA.
Recommendation
We recommend that the grantee be required to establish effective procedures for
controlling change orders which will, as a minimum, provide for reasonable costs, acceptable
work, and properly defined responsibilities for City officials approving the change orders. In
addition, prior EPA approval should be obtained whenever the change orders alter the scope of
the project and/or when cost changes exceed $100,000.
Grantee's Comments
The grantee and the engineering firm concurred with the auditor's findings and
recommendations.
CORRECTION OF CONSTRUCTION PROBLEMS
Our review disclosed that construction deficiencies noted in the inspection reports were
not adequately controlled to assure correction. The current inspection system does not provide
a mechanism for assuring that deficiencies identified in the inspection process are corrected.
For example, we identified 25 construction deficiencies (from inspectors' diaries and daily
inspection reports) which had not been corrected at the time of completion of the audit field
work. These deficiencies were recorded over a six-month period ending in June 1974. As of June
1975, when we discussed these deficiencies with the resident inspector and project engineer, no
action had been taken to correct the deficiencies. The project engineer indicated that some of
the deficiencies represented major structural defects.
Recommendation
We recommend that EPA take appropriate action to ensure that the grantee requires its
consulting engineering firm to adequately control and document followup action on all
construction problems included in the inspection reports or other records. The grantee should
ensure it is fully informed of the status of construction and operational problems identified by
the consulting engineering firm. We also recommend that EPA perform an inspection to
determine the seriousness of the construction deficiencies and the appropriateness of proposed
corrective action.
Engineering Firm's Comments
Representatives of the engineering firm indicated that they would take prompt action to
follow up on deficiencies and get the contractors to take necessary corrective action.
Grantee's Comments
The grantee stated that it would take the necessary action to get deficiencies corrected.
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CONFLICTING CONTRACT TERMS
The grantee has relied on the consulting engineer to determine whether the contractors
have performed the work in accordance with the plans and specifications approved by EPA.
The contract between the grantee and consulting engineering firm is not clearly defined as to the
firm's responsibility for inspecting the work of construction contractors and its authority to
interpret the plans and specifications. However, the contracts between the grantee and three of
its contractors contain specific language that states the consulting engineer is the grantee's
representative on all matters concerning interpretation of plans and specifications, inspections,
and obtaining rework of work not meeting those plans and specifications. Thus, the grantee
appears to rely on the consulting engineer to obtain satisfactory completion of the project when
in fact the contract does not provide that assurance.
Recommendation
We recommend that the grantee be required to amend its consulting engineering contract
to specifically state the engineer's authority and responsibility.
Engineering Firm's Comments
Representatives of the engineering firm stated that they see no problem with the present
wording of the contracts.
Grantee's Comments
The grantee concurred with the audit finding and stated that the consulting engineering
contract would be appropriately amended.
ENGINEERING FIRM'S ACCOUNTING SYSTEM
The engineering firm's accounting system is not considered adequate to identify and
accumulate costs under the subject contract. Adequate documentation is not maintained to
support all costs charged to the project. Payroll records did not identify the projects to which
inspectors were assigned. As a result, we questioned $22,000 of personnel costs charged to the
project. (See Schedule A-l, Note 2 (a).)
Recommendation
We recommend that the engineering firm be required to maintain records which properly
document salary charged. This should include, as a minimum, weekly time sheets which are
signed by the employee and his supervisor and which identify all projects on which the
employee is working. In addition, appropriate reconciliations should be made between labor
distribution and payroll records.
Engineering Firm's Comments
The engineering firm stated that immediate action was being taken to correct deficiencies
in its accounting system.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
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ENGINEERING FIRM'S PROCUREMENT SYSTEM
The engineering firm's procurement system is considered generally adequate to protect the
interests of the grantee and EPA with the following exception: the engineering firm awarded a
subcontract for a portion of the work under its contract with the grantee. However, in awarding
such a contract, the engineer did not perform an adequate cost or price analysis to ensure a
reasonable price for the subcontracted work.
Recommendation
We recommend that future subcontract procurements by the engineering firm under cost-
plus-fixed-fee contracts be subjected to a cost or price analysis to assure reasonable prices.
Engineering Firm's Comments
The engineering firm's representatives were not aware of this requirement, but will
consider it in subcontracting for future work.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
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6.5 EXAMPLE AUDIT REPORT NO.2
Division Audit Director
Office of Audit
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs incurred/claimed* and EPA-eligible costs
(Exhibit A) for the City of Anywhere, U.S.A., under EPA Grant No. XXXX for the period
(month, day, year) to (month, day, year). Our examination was made in accordance with
generally accepted auditing standards and the "Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions." The audit included tests of the
accounting records and other auditing procedures we considered necessary in the
circumstances. The Environmental Protection Agency's "Audit Guide for Construction Grant
Program," revised January 1978, was also used as a guide for our examination.
As part of our examination, we determined the allowability of costs incurred/claimed
under the project in accordance with the provisions of the grant and applicable Federal
regulations. Schedule A-l sets forth the costs which we questioned in this regard and includes
an explanation of the reason such costs were questioned.
In our opinion, subject to the effects on Exhibit A of EPA's ultimate resolution of the
questionable expenditures referred to in the preceding paragraph, Exhibit A fairly presents the
financial information in accordance with generally accepted accounting principles and financial
provisions of the grant.
In addition, in connection with our examination of the statement of costs incurred/
claimed and eligible EPA costs, we have reviewed the grantee's (1) system of internal control
(based on criteria established by EPA and set forth in the aforementioned EPA audit guide) and
(2) compliance with provisions of the grant and applicable Federal regulations. Our report
thereon appears as Exhibit B.
This report is intended for use in connection with the grant to which it refers and should
not be used for any other purpose.
DATE SIGNATURE
*The audit report will normally address costs claimed. However, on interim audits there
may be instances where the grantee's claim is not current. In these instances, the audit report
will address costs incurred.
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EXAMPLE AUDIT
REPORT NO. 2
EXHIBIT A
City of Anywhere, U.S.A.
Statement of Costs Incurred/Claimed and EPA-Eligible Costs
for the Period (Month, Day, Year) to (Month, Day, Year)
Description* Total Costs Costs Claimed
Incurred as EPA-Eligible
Administration $87,000 $ 65,000
Preliminary Expense 200,000 70,000
Land, Structures, Rights-of-Way 127,530
Architectural Engineering Basic Fees 700,000 600,000
Other Architectural Engineering Fees 95,000 87,000
Project Inspection Fees 115,000 103,000
Construction and Project
Improvement Cost 4,150,000 3,760,000
Total Claimed $5,474,530 $4,685,000
Grant No. XXXX was awarded to the City of Anywhere, U.S.A., under Public Law 92-500.
The grant was awarded on (month, day, year) and provides for 75-percent Federal participation
in the construction of a secondary sewage treatment plant and interceptor sewers, with a
maximum Federal share of $13.5 million. At the time of completion of the audit field work
(month, year), construction was approximately 30-percent complete on ten contracts.
See Schedule A-l for a statement of costs accepted and questioned during the audit.
The cost categories listed on the Outlay Report and Request for Reimbursement for
Construction Programs (SF 271) should conform to the Description column.
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EXAMPLE AUDIT
REPORT NO. 2
SCHEDULE A-l
City of Anywhere, U.S.A.
Statement of Costs Claimed, Accepted, Suspended, and Questioned
for the Period (Month, Day, Year) to (Month, Day, Year)
Description
Administration
Preliminary Expense
Architectural Engineering
Basic Fees
Other
Project Inspection Fees
Construction
Total Costs
Determination of amount
due grantee or EPA
based on audit
Federal Share (75% of
accepted eligible costs)
EPA-Eligible Costs
Claimed
$65,000
70,000
600,000
87,000
103,000
3,760,000
Accepted
$47,258
70,000
570,400
76,492
31,743
3,711,700
Suspended
$63,363
40,067
Questioned
$17,742
29,600
10,508
7,894
8,233
$4,685,000
$4,507,593
$103,430
$73.977
Notes
$3,513,750 $3,380,695*
$77.572
$55.483
Less EPA payments
made through
(month, day, year)
Balance due EPA
3,750,000
$369.305
"This amount should not be construed as being the final determination of the Federal share
of accepted eligible costs. The amount may vary depending upon the resolution by EPA of
questioned and suspended costs of $177,407.
6-16
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Notes to Schedule A-l
Notel
Of the total costs claimed by the grantee under the Administration cost category, we have
questioned $17,742 for the following reasons:
(a) The grantee claimed costs incurred by a city employee whose salary was totally
reimbursed with Federal funds under the Public Service Program. $ 1,242
(b) The sale of plans and specifications to prospective bidders cost $100 per copy. Each
bidder then received a refund of 100 percent of the cost of one copy, but additional copies taken
by the same bidder were only refunded at 50 percent of the original cost. The results of our test
performed on one contract indicated that where 18 bids were received, the grantee's gross
receipts totaled $23,500; $10,050 was returned to bidders, and $13,450 was credited to general
revenue. This $13,450 should have been used to reduce the reimbursable costs for the
preparation of the plans and specifications. 13,450
(c) The grantee claimed costs for printing and legal fees related to the sale of bonds. Costs
associated with the approval, preparation, issuance, and sale of bonds are not eligible for grant
participation in accordance with EPA's "Construction Grants Handbook of Procedures,"
Chapter VII (formerly Program Guidance Memorandum No. 64). 3,050
Total Costs Questioned $17,742
Grantee's Comments
The grantee concurred with the above findings and has indicated that it will compute the
amount of miscellaneous revenue for each contract and offset this revenue to the cost of the
project.
Note 2
We noted that compensation for engineering services was based upon the fee curve and
multiplier methods of contracting. The use of the fee curve and multiplier and profit resulting
solely therefrom have been accepted because, at the time the contractual arrangement was
made, these methods of contracting were not prohibited and were in accordance with accepted
industry practice. The fee curve and multiplier methods of contracting are now prohibited by 40
CFR 35, Subpart E, Appendix D, dated December 17, 1975.
In addition, the grantee's claim of $600,000 for the design services was computed by
applying the fee suggested by curve A of the American Society of Civil Engineers to the total
actual construction costs, including change orders and overruns on estimated quantities in the
plans and specifications for completed contracts 1 through 4. However, paragraph B.5.a of
Appendix D to 40 CFR 35 limits EPA participation to the amount based upon the low bid for
construction. Accordingly, we computed the accepted amount based upon curve A and the low
bids of $13,100,000 for both the eligible and ineligible portions of the construction contract.
This resulted in a fee of 5.9 percent. Application of the accepted rate to the low bid for eligible
construction work of $11,790,000 resulted in a fee of $695,610. This fee was reduced by the
applicable portion ($125,210) of the $139,122 credit for preliminary work and construction
phase, for an accepted cost of $570,400.
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Grantee's Comments
The grantee concurred with the above finding.
Engineer's Comments
The engineer agreed with the above finding and calculations.
NoteS
We have questioned $10,508 of other architectural engineering fees as not being eligible for
EPA participation per Chapter VII of the EPA "Construction Grants Handbook of
Procedures" (formerly Program Guidance Memorandum No. 64).
(a) Processing and coordinating the grant application as reported on employee time sheets. $3,420
(b) Cost incurred for easement preparation. 2 870
(c) Al5-percent service charge was applied to all direct nonsalary costs excluding mileage.
This service charge could not be supported by the accounting records. 4,218
Total Costs Questioned $10,508
Grantee's Comments
The grantee agreed with the above questioned costs.
Engineer's Comments
(a) The firm stated that the majority of the grant application costs were incurred because
the grantee requested supplemental information and analyses
(b) No Comment.
(c) The firm stated that the service charge was provided for in the engineering agreement
and was used to compensate for overhead costs and risks involved in the use of outside
consultants.
Note 4
Of the total costs claimed by the grantee under the Project Inspection Fees cost category,
we have suspended $63,363 and questioned $7,894 for the following reasons:
Amounts
Reference
a
b
Suspended
$63,363
- 0 -
Questioned
$5,742
2,152
Total $63,363 $7,894
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(a) The grantee had claimed $69,105 for force account work representing resident
inspection services. The use of force account work had not been approved by EPA. Program
Requirements Memorandum 75-15 provides for a deviation from the provisions of 40 CFR
35.935-2(a) relating to the use of force account work on construction projects. The effect of this
deviation is to allow the use offeree accounts for any Step 1,2, or 3 work for which the Regional
Administrator has given prior written approval. Although the grantee had requested approval
for the force account work in a letter dated June 8,1976, the Regional Administrator had not, at
the time of our audit, responded to the grantee's request. Of the total amount claimed for force
account work, $63,363 is supported by the grantee's accounting records; the remaining $5,742
is unsupported. Therefore, if retroactive approval of the force account work is granted, Federal
participation should be limited to the amount of supported costs.
(b) Questioned costs of $2,152 are inspection fees billed on Contract No. 2 invoices 17
through 20 for services after the contract completion date (June 18, 1976). Chapter VII of the
Handbook of Procedures states that increased costs resulting from lack of performance by the
construction contractor are unallowable for participation, even if the grantee elects not to
exercise its right to recover liquidated damages. No liquidated damages were assessed, although
the contract was not completed until September 19,1976.
Grantee's Comments
(a) The grantee expressed the view that all of the force account inspection costs are
proper, and stated, "I think that we can explain these charges such that they can be determined
to be eligible."
(b) The grantee did not concur with our position on resident inspection costs incurred
after the contract completion date.
Engineer's Comment
(a) No comment.
(b) The engineer stated that a request for an extension of the contract completion date
had been submitted to EPA through the State Department of Natural Resources, but approval
has not been received. The engineer also contended that inspection costs have not been and will
not be increased due to delayed construction. The engineer stated that inspection services were
not provided during the time the contractor was not working. Therefore, inspection costs
incurred after the scheduled completion date are not added costs but costs that would have been
incurred if the project had proceeded in a normal manner.
Auditor's Comments
We believe the construction contractor will overrun the scheduled completion date even if
a time extension is granted. There is merit to the engineer's contention that no added cost will be
incurred since he did not perform during the "down period." We believe these facts should be
documented and considered at the time of final inspection. Until that time, unless the scheduled
completion date is revised, we recommend no payment for inspection services performed after
the scheduled contract completion date.
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NoteS
We have questioned or suspended the following amounts of construction costs as being
ineligible for Federal participation.
(a) Although eligible costs for construction were not questioned, we determined
that the Region had reimbursed the grantee for the Federal share of retained construction
payments. The grantee did not record or claim the retainage. The reimbursement of the Federal
share produced a temporary overpayment to the grantee. The Region should adjust for any
overpayments. Retainage should be deducted in all future partial payments.
(b) The amount suspended includes the following change orders which have not
been approved by EPA.
Change Order 3, Contract 1 $ 3,429
Change Order 5, Contract 1 4,142
Change Order 1, Contract 3 20,541
Change Order 1, Contract 5 11,955
Total $40,067
(c) Construction costs claimed also included sales tax not paid by the grantee and
ineligible construction. The details are as follows:
Contract Sales Tax Ineligible Construction
Not Paid
1 $ 837
2 300 $2,150*
3 250
4 310 4,000*
5 215
6 171
Total $2,083 $6,150
*Represents the cost of construction declared ineligible by EPA.
Grantee's Comments
The grantee stated that it will no longer claim construction retainage or unpaid sales tax.
Regarding the suspended change orders, the grantee stated that the change orders have been
submitted to the state agency and are awaiting approval.
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EXAMPLE AUDIT EXHIBIT B
REPORT NO. 2
CITY OF ANYWHERE, U.S.A
SECONDARY SEWAGE TREATMENT PLANT
CONSTRUCTION GRANT XXXX
COMMENTS ON COMPLIANCE, PERFORMANCE, AND INTERNAL CONTROLS
As a part of our examination, we reviewed and tested the grantee's system of internal
accounting controls to the extent we considered necessary to evaluate the system as required by
generally accepted auditing standards. This evaluation established a basis for reliance on the
grantee's accounting control system in determining the nature, timing, and extent of other
auditing procedures necessary for expressing an opinion on the financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance that the (1) assets are safeguarded against loss from unauthorized use or disposition
and (2) financial records are reliable for preparing financial statements and maintaining
accountability for assets. The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the benefits derived and also
recognizes that the evaluation of these factors necessarily requires estimates and judgments by
management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most control
procedures, errors can result from misunderstanding of instructions, mistakes of judgment,
carelessness, or other personal factors. Control procedures whose effectiveness depends upon
segregation of duties can be circumvented by collusion. Similarly, control procedures can be
circumvented intentionally by management, either with respect to the execution and recording
of transactions or with respect to the estimates and judgments required in the preparation of
financial statements. Further, projection of any evaluation of internal accounting control to
future periods is subject to the risks that the procedures may become inadequate because of
changes in conditions and that the degree of compliance with the procedures may deteriorate.
The EPA "Audit Guide for Construction Grant Program," revised January 1978, requires
a review and evaluation of the adequacy of the accounting system and internal controls of the
grantee to (1) safeguard its assets; (2) check the accuracy and reliability of the accounting data;
(3) promote operating efficiency; and (4) encourage compliance with prescribed management
policies and such additional fiscal, accounting, and administrative requirements as EPA may
establish. We understand that EPA considers procedures conforming to the criteria in its audit
guide to be adequate for EPA purposes. Procedures that are not in conformity with the audit
guide indicate some inadequacy for EPA purposes. Based on this understanding and on our
study, we believe that the City's procedures were adequate (inadequate) for EPA purposes
except for (because of) the conditions described below, which we believe are material
weaknesses in relation to the grant to which this report refers. In addition to such weaknesses,
other conditions which we believe are not in conformity with the criteria referred to above are
described on the following pages.
GRANTEE'S ACCOUNTING SYSTEM
The grantee's accounting system did not provide for (1) segregation of eligible and
ineligible costs; (2) time and effort reports to support costs of construction inspection services;
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(3) adequate internal controls over cash receipts; (4) reconciliation between the General Ledger
Account, the Construction In Progress-Sewer Plant Account, and the Outlay Report and
Request for Reimbursement for Construction Programs; and (5) acquiring supporting
documentation of consulting engineer billings.
SEGREGATION OF COSTS
All costs, whether eligible or ineligible for EPA participation, were accumulated in the
Construction In Progress-Sewer Plant Account. This method of accounting makes it difficult
to determine eligible project costs for EPA participation.
Accounting systems under Federal grants must provide for segregation of costs in order to
permit grantees and EPA to determine in which costs the government will participate.
TIME AND EFFORT REPORTS
At the time of audit, time and effort reports were not used by the grantee to support costs
incurred for construction inspection by force account.
EPA requires time and effort reports to support direct salary costs to the grant project.
This enables EPA to adequately identify those costs applicable to the project.
INTERNAL CONTROLS
The grantee's internal control over cash receipts was considered inadequate. We were
advised that the accountant is solely responsible for preparing the deposits, recording to the
cash receipts journal and general ledger, and performing bank reconciliations of the various
funds maintained by the grantee. Adequate physical safeguards and separation of duties are
essential for proper internal control.
RECONCILIATION OF GENERAL LEDGER ACCOUNT AND OUTLAY REPORT
The costs recorded in the Construction In Progress-Sewer Plant Account did not agree
with the costs reported in the Outlay Report. Our analysis of the cash disbursements journal
showed that two engineering invoices totaling $13,125.89 and grantee travel costs for $836 were
paid out of another fund. We determined that these amounts were chargeable to the
construction fund. In addition, we found that a transfer of charges for $21,840.94 to the
construction fund had been recorded twice. We were able to reconcile the Construction Fund
Account and the Outlay Report after taking these and other transactions into account.
SUPPORTING DOCUMENTATION FOR SUBAGREEMENTS
The grantee was not requiring supporting data such as names of personnel, hours worked,
rates of pay, in-house cost tickets, travel expense reports, vendor invoices, or other applicable
support to be provided by the consulting engineer for direct costs billed to the grantee. Such
support would enable the grantee to determine if the direct costs are appropriate and valid to
the grant project.
During the course of our audit, the grantee established a procedure for segregating eligible
and ineligible costs and began using time and effort reports to support force account work.
Consequently, no further recommendations on these items are made at this time.
Recommmendations on the other items are made in the Recommendations section that follows.
6-22
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For the most part, costs were not questioned in this report due to inadequacies in the
grantee's accounting system. We were able, through other audit techniques, to make
determinations on costs impacted by the accounting system deficiences listed above.
Recommendations
We recommend that EPA ensure that the grantee:
(1) Improve its internal controls over cash receipts by segregating the duties that are now
performed by the accountant.
(2) Make the necessary adjusting entries in order that the Construction In
Progress-Sewer Plant Account will reconcile with the Outlay Report.
(3) Require the consulting engineer to submit supporting documentation for direct
charges billed.
Grantee's Comments
The grantee agreed to implement the above recommendations.
GRANTEE'S PROCUREMENT SYSTEM
We found that the grantee had not adequately solicited bids for the construction work as
required by the EPA regulations. Title 40 CFR 35.938-4(a) provides that when the estimated
cost of Step 3 construction is $10 million or more, notice for solicitation must generally be
published in trade journals of nationwide distribution. The estimated construction cost
exceeded $10 million for this grant, but the bids were solicited only through "The City
Bulletin." Although the grantee did receive at least four bids for each contract under the
project, solicitation of bids appears to be something less than nationwide as prescribed by
regulations. In addition, we noted that the grantee failed to allow 30 days between the date of
first announcement of the call for bids and the date by which the construction bids were to be
submitted. Under 40 CFR 35.938^-(b), generally not less than 30 days' notice must be given to
assure adequate time for bid preparation.
Recommendation
We recommend that the Region require the grantee to comply with the provisions of 40
CFR 35.938^- mentioned above.
Grantee's Comments
The grantee stated that it was unaware of these requirements, but it will comply with these
provisions on future grants.
GRANTEE'S PROPERTY MANAGEMENT SYSTEM
The grantee did not maintain a property management system that meets the requirements
of 40 CFR 30.810, which in essence states that property records shall be maintained accurately
and provide for: a description of the property; manufacturer's serial number or other
identification numbers; acquisition date and cost; source of the property; location, use, and
condition of the property; and ultimate disposition data including sales price or the method
used to determine fair market value if the grantee compensates EPA for its share.
6-23
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Although only a few items of equipment have been purchased, as part of the construction
contract the grantee will receive laboratory equipment and office furniture that will require
property accountability.
Recommentation
We recommend that EPA ensure that the grantee establishes a property management
system, in accordance with 40 CFR 30.810, to account for equipment and property purchased
under the grant.
Grantee's Comments
The grantee stated that it will install a property management system that meets the criteria
of 40 CFR 30.810.
Engineer's Accounting System
The engineering firm's accounting system is considered adequate to identify and
accumulate costs under the subject contract.
Engineer's Procurement System
Since there were no major procurements under the engineering subagreement, our audit of
the engineer's procurement system was limited to a cursory review. In the areas we did examine,
there were no deficiencies noted.
6-24
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APPENDIX A
SURVEY OF GRANTEE'S ACCOUNTING,
PROCUREMENT, AND PROPERTY MANAGEMENT
SYSTEMS
INTRODUCTION
This survey should be considered as a starting point to gain a quick, preliminary
understanding of the auditee's operating system. It supplements but does not replace the
normal audit review. The normal audit review must still be performed using the detailed audit
guide, a core audit program, and the auditor's judgment.
This survey should be performed in all interim audits and all final audits except where a
final audit is performed on an auditee that has no active in-house grants. The survey is intended
to be used to analyze the grantee's accounting records and systems that pertain to the EPA
grant. It should not be applied to those systems that are not affected by the grant.
Depending on the audit, some questions may be more relevant than others. The matter of
relevancy should be settled between the field auditor and his supervisor prior to completion of
this survey.
Questions that may pertain to both the grantee and the engineer are marked with a double
asterisk. Questions that are applicable to the grantee only are not coded. Questions that pertain
to the engineer only are marked by a single asterisk.
Negative responses generally will indicate a potential problem. The degree of seriousness of
each negative answer should be discussed between the field auditor and his supervisor before
further audit action is taken.
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Survey of Grantee's Management System
Yes
No
N/A
W/P Ref.
ACCOUNTING SYSTEM
* * 1. Is the accounting routine set forth in accounting manuals?
** 2. Do we have copies of such manuals in our files?
** 3. Does the auditee main tain:
a. An accrual accounting system?
b. A cash basis system? If so, are adjustments made to properly reflect the
auditee's overhead and G&A submissions on the accrual basis?
* * 4. Does the auditee have an internal audit staff? If so,
a. Do they render written reports on the results of their examinations?
b. Have we reviewed their reports?
c. Are they directly responsible (and do they report) to an executive officer
other than the chief accounting officer?
** 5. Are the auditee's accounting records subjected to an independent audit at least
every two years?
** 6. Has the auditee established project accounting records to record the costs
applicable to EPA work?
** 7. Are all incurred costs of a project recorded on these records on a current basis?
** 8. Does the auditee propose and accumulate costs on all projects in a consistent and
compatible manner?
* * 9. Is appropriate documentation maintained to support direct charges of:
a. Personnel?
b. Consultants?
c. Fringe benefits?
d. Materials, supplies, and equipment?
e. Travel?
f. Other costs (subcontract charges, long-distance telephone calls, etc.)?
** 10. Are costs contained in the project accounting records segregated as to their
eligibility, allowability, and allocability to the respective EPA projects?
* * 11. Are controls established to ensure that:
a. Grantee costs incurred and recorded prior to or subsequent to the
established Federal grant period are segregated and not claimed for reimbursement unless
approved?
b. Engineer costs incurred and recorded prior to or subsequent to the
established contract period are segregated and not claimed for reimbursement unless
approved?
A-2
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Survey of Grantee's Management System
Yes
No
N/A
W/P Ref.
** 12. Is change order work separately identified in the respective project cost records?
** 13. Are project costs summarized and reconciled with control accounts contained in
the auditee's general ledger?
** 14. Are the project cost records used as the basis for:
a. The grantee's financial status reports and "Request for Reimbursement"
vouchers?
b. The engineer's request for reimbursement?
** 15. Are frequent comparisons made between expended and budgeted costs to
provide timely indications of potential project overruns?
16. Are approvals requested for significant deviations from amounts contained in
the grant or contractual agreement?
** 17. Is there an established policy to maintain consistent treatment and control of
direct and indirect cost distributions to avoid duplicate recoveries of cost?
** 18. Are separate cost centers established to accumulate and distribute such items as:
a. Computer usage?
b. Reproduction charges?
** 19. Are administrative service charges or material handling rates based on uniform
policies and supported by the accounting records?
** 20. Has the auditee developed indirect cost rates in accordance with Federal
requirements?
* 21. Are separate offsite indirect cost rates applied to job site labor?
** 22. Are overhead expenses distributed between the various indirect cost pools in a
systematic manner?
** 23. Does the auditee post credits for rebates, returns, and allowances as a reduction
to expenditures?
Automated Data Processing (ADP)
** 1. Is the accounting system automated? (If "no," omit questions 2 through 10.)
** 2. Are the ADP aspects of the auditee's financial accounting system documented?
** 3. Are audit trails provided that permit the tracing of any transaction back to the
original source document and forward to summary records?
** 4. Are source documents controlled from the point of origin to the point of
conversion to machine-readable media?
** 5. Is the access to machine-readable computer facilities and records (tapes, cards,
etc.) controlled?
** 6. Are rejected and erroneous data controlled until corrections are made?
A-3
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Survey of Grantee's Management System
** 7. Are positive processing controls (e.g., controls which make tests against
established criteria before processing action is taken, such as tests to determine whether
updates have been made, validity checks, limit tests, compatibility tests, field completeness
tests) programmed into the automated system?
** 8. Are provisions made for:
a. Safeguarding computer programs and data files,
b. Backup or emergency operation, and
c. Reconstruction of data files in case of catastrophe?
* * 9. Does the system provide controls over the distribution of reports?
** 10. Does the auditee's internal audit staff periodically review the ADP function with
respect to:
a. Software and hardware utilization?
b. Budgeted versus actual operating costs?
Obligations
1 . Does the system include accounting for obligations/encumbrances/commitments
(legally binding agreements)?
2. Does the system limit obligations to the amount approved for each respective
budget category?
3. Are procedures established to assure that obligations reported are supported by
appropriate purchase orders, contracts, etc.?
4. Do these procedures provide for a periodic validation of recorded obligations?
5. Are obligations entered on accounting records when the legal commitment is
made (e.g., approval and issuance of subgrant or contract)?
6. Does the system require the timely liquidation of obligations?
7. Are obligations reclassified as expenditures when the goods or services are
received or constructive receipt occurs?
Cash controls
** 1. Are details of vouchers payable or accounts payable balanced monthly with
general ledger controls?
** 2. Are bank accounts reconciled monthly by employees who do not prepare or
approve checks and who do not have access to ledgers?
** 3. Are supporting data attached to and filed with vouchers?
** 4. Are supporting data controlled and cancelled to minimize the possibility of
improper or duplicate payment?
5. Are records maintained to identify and support in-kind contributions applicable
to specific projects?
Yes
No
N/A
W/P Ref.
A-4
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Survey of Grantee's Management System
6. Are excess grant funds invested for interest by the auditee where permitted?
Personnel
* * 1 . Does the auditee maintain an organizational chart?
** 2. Are organizational functions and duties structured to segregate as much as
possible responsibilites such as approving financial transactions, entering transactions,
keeping control records, and maintaining custody of funds and property?
** 3. Are employee time distribution records maintained to reflect the actual time
spent on each activity, including leave?
** 4. Are the individual time distribution records prepared and certified by each
employee and approved by his supervisor?
** 5. Are labor costs distributed in accordance with the time reflected on time
distribution records?
** 6. Are such labor distribution costs periodically reconciled with the actual payroll
register?
** 7. Does the auditee have written policies for overtime payments?
** 8. Are such overtime policies acceptable under the terms of the grant and
applicable Federal regulations?
* * 9.1s unpaid overtime for exempt employees properly accounted for?
** 10. Are labor rates consistently applied (e.g., individual, category averages,
departmental averages)?
* 11. Are employees working under Federal grants/contracts paid' at rates
comparable to the rates paid employees working on other projects?
* 12. Has the auditee established reasonable and consistent labor rates to cover the
time spent by top executives?
* 13. Are formal policies in effect with respect to bonuses, retirement plans, and/or
profit sharing?
PROCUREMENT SYSTEM
** 1. Do the procurement personnel have independent and final authority over the
award and administration of purchase contracts?
** 2. Do procurement policies and procedures require requisitioners to affirm that:
a. The items/services are really needed and not otherwise available?
b. The specifications and quality requested are actually needed?
** 3. Does the formal selection process attempt to restrict the use of sole-source
contracts and promote competitive bidding to the maximum extent possible?
a. Is written justification required when noncompetitive selection is used in
lieu of formal public advertising on major procurements?
Yes
No
N/A
W/P Ref.
A-5
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Survey of Grantee's Management System
Yes
No
N/A
W/P Ref.
b. Are all responsible bidders allowed a reasonable time in which to submit
their offers?
* * 4. Wherever possible, do major procurements require the use of:
a. Source lists and catalogues?
b. Vendor files which cover:
(1) Technical and financial capabilities?
(2) Quality and delivery experience?
** 5. Is documentation maintained to support the costs or prices negotiated on all
major purchases and contracts?
** 6. Are procedures in effect to assure that required conditions stipulated in the grant
general provisions and appropriate clauses outlined in EPA regulations are incorporated
into procurement aggreements?
** 7. Are procedures established to ensure that the type of purchase contract utilized is
appropriate for the procurement being undertaken and acceptable to the Federal
government?
PROPERTY MANAGEMENT SYSTEM
1. Does the auditee maintain property records for all government-furnished
property and equipment which show:
a. A description of the item?
b. The date acquired?
c. A property tag I.D. number or manufacturer's serial number?
d. The location of the property?
e. The cost or value?
f. The condition of the item?
g. The percent of Federal participation?
2. Are periodic inventories made to validate government property information?
3. Are differences between physical and book inventories analyzed, and are the
resulting adjustments approved?
4. Does the auditee follow different accounting policies with respect to major and
minor equipment expenditures?
5. Are procedures established to assure that required EPA approval is obtained for
purchases or any changes in use or disposition of grant/contract property?
6. Do the procedures require that EPA receive its appropriate share of any proceeds
from disposition of the property?
7. Has the auditee established procedures for classifying and recording property
improvements, major repairs, and the rearrangement of machinery and equipment?
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APPENDIX B
BOND CALCULATION GUIDANCE
Bond issue costs are allowable if incurred under Public Law 84-660, but are unallowable
under Public Law 92-500.
The primary guidance for eligible bond cost for construction grants is included in
Construction Grant Memorandum 70-5, dated February 13,1970, which is quoted below:
Subject: Uniform Determination of Bond Issue Costs for Construction Grants
It has been noted that some differences exist between Regions in the method of
determining bond charges eligible for grant participation. Therefore, in order to provide
for uniformity, the following procedures are to be followed in computing such costs.
Bond costs eligible for Federal participation are those associated with the bond funds
actually needed to finance the applicant's share of the eligible costs. Bond funds used in
computing bond costs, then, will normally include the total eligible cost of the project less
any funds from Federal and State sources. If a portion of the grantee's contribution comes
from sources other than a bond issue, a further deduction would be necessary. In those
cases where State grants consist of annual payments over an extended period and it is
necessary to "issue bonds to prefinance the State grant, the eligible cost for computing
allowable bonding costs need not be reduced by the amount of the ultimate State grant.
Eligible bond issue costs include those costs associated with printing, advertising, issuing,
and other costs subsequent to the bond election.
Federal and State grant amounts, plus any funds from other sources, will be computed on a
percentage basis, based on the funds expended for construction of the project. If a project
has proceeded on a reimbursable basis, bond costs based on all bonds used during the
construction are eligible, even though reimbursement is made at a later date.
After determining the percentage of Federal and state grants to be considered (plus any
local funds from sources other than bonds), the eligible bond issue costs are determined by use
of the formula explained in Example 1.
Examples 2 and 3 cover some of the problem areas which may arise. In addition, the
following comments should clarify most of the situations encountered.
COMMENTS ON SPECIAL SITUATIONS
1. If the bond issue is increased during the project period, all bonds issued and all related
eligible costs are used in the bond formula.
2. If other Federal agencies participate in the eligible cost, the percentage reduction from
"K" is increased as shown in Example 1. A HUD grant is usually applicable to the ineligible
portion of the project; in such cases, this step is disregarded.
3. Where there is an increase in the Federal grant subsequent to the bond transaction and
the grantee is legally bound to pay bond costs relative to the original grant amount, no
adjustment of the K factor is required. The same applies to state participation. In essence, the K
B-l
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factor should be based on funds available (Federal, state, and other) at the time the grantee
negotiated for the bonds.
4. Studies for determining water or sewage rates are sometimes included in reported legal
or bonding cost and not identified. Such studies are considered general administration of the
municipality and thus not eligible for Federal grant participation.
5. Immaterial differences in the bond cost calculation should be disregarded.
B-2
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BOND COST CALCULATIONS
EXAMPLE #1 - NORMAL BOND CALCULATION
F =
KC
F = Eligible bond issue costs to be calculated
S = Total eligible project costs, exclusive of bond issue costs--$180,029
K = 100% less percentage of Federal grants, state grants, other
financing, and grantee cash. For this example, K=45% (100%-(30+ 15+10)).
B = Amount of bond issue--$192,000
C = Total bond issue costs--$4,500
$180,029
r =
-1
$192,000
45% x $4,500
F _ $180,029
~ $192,000 .
$2,025
F _ $180,029
93.81
F - $1,919
NOTE: In rare instances, an amount slightly greater than C, allowable bond costs, will be
obtained for F. In such cases, use C.
B-3
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BOND COST CALCULATIONS
EXAMPLE #2 - APPLICATION OF GRANTEE CASH TO INELIGIBLE COSTS
S = $81,145
C = $972
B = $60,000
F = Eligible bond issue costs to be calculated
Determination of Ineligible Costs
Total Project Costs $82,145
Eligible Project Costs $81,145
Ineligible Project Costs $1,000
Source of Funds
Federal Grant 55%
Grantee Cash $5,000
Determination of Percentage of Grantee Cash
$5,000 - $1,000 (Ineligible) = $4,000 = cash available for eligible project costs*
C c
°f S
Computation of K
K = (100% less 55% grant less 4.9% grantee cash) = 40.1%
Computation of F
S
F =
-5--i
KC
-1
$81,145
$60,000
.401 x $972
F = $531
* Local funding should be applied to the ineligible project costs first, and the remainder
should be used to reduce K.
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BOND COST CALCULATIONS
EXAMPLE #3 - SIGNIFICANCE OF SOURCE OF FUNDS
Computation of S
Construction Cost
Technical Service
Administrative
Bond Cost
$120,220
13,310
600
(Omitted)
Source of Funds
Federal Grant
Bond issue
Balance unaccounted" for*
Amount
$44,260
75,000
$119,260
14,870
S = $134,130
S = $134,130
Percent of
Total
33
56
Jl
100
Computation of K
K = 100% less 33% (Federal) less 11% (local) = 56%
Computation of C
Legal Costs
Printing Costs
Advertising Costs
C =
$1,500
500
187
$2,187
Computation of F
$134,130
F =
$ 75,000
$2,187 x .56
F = $2,227
Since F is greater than C, use $2,187 as eligible bond cost.
*The balance unaccounted for is assumed to come from local funds unless the funds were
obtained by means of a loan, in which case the percentage obtained by loan would not be
deducted from the K factor. In the example above, if the $14,870 had been obtained by loan, K
would be 100% less 33%, or 67%.
B-5
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APPENDIX C
SUPPLEMENTAL AUDIT PROCEDURES FOR RELOCATION COSTS
APPLICATION OF AUDIT PROCEDURES
These audit procedures supplement the "Audit Guide for Construction Grant Program."
EPA Division Audit Directors will authorize independent public accountants and EPA
auditors to use these supplemental procedures whenever a construction project includes
relocation costs. The procedures must be followed explicitly because they are the audit
application of EPA regulations, 40 CFR, Part 4, that pertain to payments made to displaced
persons.
People who are displaced or whose realty is acquired after January 1, 1971, due to an EPA-
assisted project are entitled to compensation as provided by the Uniform Relocation Assistance
and Real Property Acquisition Policies Act of 1970. Auditors shall use the following checklist
when examining relocation costs. Applications for benefits must be filed within 18 months from
the date the displaced person moves from the acquired real property or the date of final
payment for such property, whichever is later, unless this time period is extended by the EPA
Administrator.
ALLOWABLE COSTS
A. Dwelling and Personal Property
1. Transportation of people and personal property to a replacement site, not to exceed 50
miles unless justified.
2. Packing, crating, unpacking, and uncrating of personal property, and the cost of
advertising for such services.
3. Storage of personal property, generally up to 12 months.
4. Insurance premiums covering loss or damage of personal property in transit or storage.
5. Lost, stolen, and damaged property; removal, reinstallation, and modification of
property.
6. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move unless approved by the EPA Administrator.
7. In lieu of actual reasonable moving and related expense, payments to each occupant of a
dwelling of (a) a $200 dislocation allowance and (b) a moving expense allowance not to exceed
$300 based on state highway department or Federal Highway Administration allowance
schedules.
8. A replacement housing payment not to exceed $15,000, provided the displaced owner-
occupant actually owned and occupied the dwelling not less than 180 days prior to initiation of
negotiations, and the displaced owner-occupant purchases and occupies a replacement
dwelling. The $15,000 allowance is the lower of (a) $15,000 less payment for any increased
mortgages, interest costs, or incidental closing costs, (b) the difference between the acquisition
price of the acquired dwelling and the estimated cost of a replacement dwelling, or (c) the
difference between the acquisition price of the acquired dwelling and the actual price of the
replacement dwelling.
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9. A replacement housing payment not to exceed $4,000 is payable to a displaced tenant or
a displaced owner-occupant of a dwelling for less than 180 days, provided he occupied the
dwelling for not less than 90 days and is not eligible for the $15,000 replacement housing
allowance. A displaced owner-occupant is entitled to the $4,000 payment, rather than the
$ 15,000 payment, if he elects to rent, rather than buy, a replacement dwelling.
Computation of the $4,000 payment is as follows:
a. Displaced tenant. 48 times the reasonable monthly rent for a comparable
replacement dwelling less 48 times the average month's rent paid by the displaced tenant for the
three months preceding the initiation of negotiation.
b. Displaced tenant by displacing agency. 48 times the reasonable monthly rent tor
a comparable replacement dwelling less 48 times the monthly economic rent, but no more than
would be received under the $ 15,000 payment provision.
c. Displaced homeowners. 48 times the reasonable monthly rent for a comparable
replacement dwelling less 48 times the monthly economic rent, but no more than would be
received under the $ 15,000 payment provision.
In no event shall the rental payment, plus the monthly average rental or economic rent,
exceed the rental of the replacement dwelling.
Monthly economic rent is either the result of an analysis of the available private rental
market, an analysis of at least three comparable replacement dwellings available on the private
market, or any method approved by the EPA Administrator.
10. Should a tenant elect to purchase a house within one year from displacement, the
replacement housing payment shall be the down payment, plus incident settlement costs, using
a conventional loan, and shall include points or a loan service fee. The maximum payment is
$4,000; if more than $2,000, the tenant must match the excess dollar for dollar up to the $4,000
maximum Federal payment.
11. The rules for determining the cost of a replacement dwelling are the same as those used
to set monthly economic rent (Item 9).
12. Land values associated with the replacement housing payment shall be determined as
follows:
a. A dwelling located on a tract typical for the area-probable selling price of a
comparable replacement dwelling less the acquisition price of the acquired property.
b. A dwelling located on a tract larger than typical for the area-probable selling
price of a comparable replacement dwelling on a typical tract less the estimated value of the
dwelling on a tract typical for the area.
c. A dwelling located on a tract having a fair market value higher than residential
use-probable selling price of a comparable replacement dwelling on a typical tract less the
estimated value of the dwelling assuming it was located on a tract typical for the area.
13. No part of a replacement housing payment may be made for any portion of a dwelling
used in connection with a business or farm.
C-2
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14. Each individual or family occupying a multiple dwelling is entitled to separately
calculated replacement housing payments.
15. Displaced homeowners of a multifamily building are entitled to payment based on the
cost of a comparable one-family unit in a multifamily or single-family structure.
B. Business or Farm
1. Packing, unpacking, crating, and uncrating of personal property, the advertising for
such services, and storage of personal property (generally up to 12 months).
2. Insurance premiums covering loss or damage while in transit or storage.
3. Lost, stolen, and damaged property; removal, reinstallation, and modification of
personal property.
4. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move unless approved by the EPA Administrator.
5. Should the cost of moving the property be disproportionate to its value, reimbursement
will be the difference between liquidated value of the property to be moved and the replacement
cost at the relocated site. This is applicable to junkyards, stockpiled sand, gravel, minerals,
metals, etc.
6. Should the cost of moving outdoor advertising displays equal or exceed their in-place
value, such displays may be acquired along with the realty, unless prohibited by state law.
7. The expenses of searching for a replacement farm or business (limited to $500 unless
approved by the EPA Administrator):
a. Travel cost.
b. Extra cost of meals and lodging.
c. Time spent in search at the displaced person's salary rate, not to exceed $10
hourly.
d. Necessary brokers' fees to locate a replacement business or farm if approved by
the displacing agency.
8. Actual direct loss of tangible personal property as a result of relocation:
a. Business or farm operation discontinued-fair market value of personal property
for continued use at the displaced location, or estimated cost to move same up to 50 miles,
whichever is less.
b. Personal property abandoned-reimbursement same as 8a above.
The cost of removal of personal property will not be offset against any payments due
displaced persons. The displaced person must make a bona fide effort to sell property not
moved.
9. A displaced person in business may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net income of the business if that
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business: substantially contributes to the displaced person's income and cannot be relocated
without substantial loss of income; is not part of a firm engaged in similar business having one
other location; is not being acquired by a state or Federal agency; and is not an outdoor
advertising business.
10. A displaced person in farming may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net earnings. Should the
acquisition be partial, payment can be made only if the remaining property is not an economic
unit.
11. A displaced nonprofit organization may elect, in lieu of reimbursement for moving
and related expenses, a fixed amount equal to the average annual net income, provided (a) the
organization cannot be relocated without a substantial loss in existing patronage and (b) the
organization is not part of a commercial enterprise having one other location, engaged in
similar activity, which is not in itself being displaced.
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APPENDIX D
CRITERIA FOR ELIGIBIITY AND ALLOWABILITY OF SELECTED
ITEMS OF COSTS
INDIRECT COSTS
Indirect costs are those incurred for a common or joint purpose, benefiting more than one
project or cost objective, and not specifically identifiable to the particular project or cost
objective benefited. Indirect costs consist of items of a general overhead nature such as office
space, utilities, and telephone. The costs are allowable only if determined on the basis of a
negotiated indirect cost agreement and incorporated in the grant agreement. (See 40 CFR
30.715-2.)
TRAVEL COSTS
Grantee travel costs-allowable travel costs include travel considered necessary and
directly related to accomplishing project objectives. Travel not directly related to construction
and/or startup of the facility, including trips to professional meetings, symposia, lectures, etc.,
is not allowable as a direct charge to the project. Travel not directly related to a specific project
may, however, be recovered under an indirect cost agreement (FMC 744).
Consulting engineer travel costsallowable travel costs include travel considered necessary
and project related, including on-site travel costs. Costs of relocation of employees and their
families may be considered allowable when such travel is justified and approved by the grantee.
The cost of transportation between living quarters and the construction site is normally
unallowable. In unusual circumstances, where job sites are located in isolated areas and living
quarters are not available within 30 miles, travel costs between living quarters and the job site
are considered allowable (FPR 1-15.2 and FPR 1-15.4).
BOND COSTS
All costs under P.L. 92-500 grants associated with the approval, preparation, issuance,
and sale of bonds (including bond counsel and underwriters' fees) are ineligible for grant
participation. Interest on bonds or any other form of indebtedness is unallowable (FMC 74-4).
LIQUIDATED DAMAGES
Monies received by grantees in the form of liquidated damages shall have no effect on the
determination of allowable costs of grant projects. However, any additional costs-construction,
engineering, legal, or administrative-generated because of a contractor's lack of performance
should be covered by the liquidated damages received. Thus, any such increase in cost as a
result of lack of performance is unallowable for participation even if the grantee elects not to
exercise its right to recover liquidated damages.
BID BOND FORFEITURE
All bid bond forfeitures should be treated as a reduction to project construction costs.
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STUDIES, REPORTS, AND FEDERAL REQUIREMENTS
Rate Studies
Such studies are eligible if required for the establishment of user charge or industrial cost
recovery systems in order to comply with 40 CFR 35.925-11 and 35.925-12. Such studies
require prior approval either in the grant agreement or an amendment thereto. Allowable costs
may include legal, CPA, and engineering fees related to the studies. (In order to avoid double
payment, care must be exercised to assure that such work is not incident to a general
contractual obligation.)
Financial Reports and Studies
To the extent that such reports constitute "rate studies" for user charges and/or industrial
cost recovery procedures, the costs are allowable, provided that such studies are approved in
advance by the Regional Office and that the results of such studies are acceptable to EPA.
Financial reports which constitute studies of, for example, the local tax base or tax structure, to
determine the financial capabilities of the applicant or the financial feasibility of the proposed
undertaking, are similarly allowable. The costs of all other financial reports and studies should
generally be considered unallowable because such studies constitute a normal function of
government.
In this regard, the Regional Office should adhere to a strict interpretation of the term
"studies." Generally, "studies" refers to preliminary reviews, examinations, analyses, etc. The
interpretation must not be extended to include preparing procedures, designing implementation
schemes, drafting statutes or regulations, delineating boundaries relating to finances, issuing
bonds, adjusting tax rates, establishing assessment districts, or performing other activities
which are a normal function of government and as such are unallowable.
Establishment of Special Assessment Districts
The "mechanics" of establishing special assessment districts developed, for example, on
the basis of rate studies, are a normal function of government, and as such their associated costs
are unallowable. Included in this restriction are legal, administrative, and engineering costs
associated with activities such as (1) drafting and reviewing statutes/ordinances, (2) preparing
regulations, (3) delineating district boundaries, and (4) holding elections.
This policy extends equally to the establishment of any "special districts" such as election,
service, or rate districts (including Regional Authorities) related to the grant project.
Public Liaison Services
Such services are generally unallowable since they constitute a type of public information
service and as such are not directly related to or necessary for the construction of the treatment
works.
Public Participation in Step 1
EPA Regulation 40 CFR 35.917-5 states that "...the facilities planning process (Step 1)
shall be consistent with 40 CFR 105-Public Participation in Water Pollution Control...one or
more public hearings or meetings should be held within the area to obtain public advice...."
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In some cases, these minimum requirements can be met without expense. However, in
instances where the plan will be extensive, public interest is significant, or the chance of serious
public controversy is high, the expenses of meeting these minimum requirements may be
increased. In such instances:
(1) Additional public participation efforts may also be appropriate.
(2) The consulting engineer may have to allocate staff time for preparing mailing
lists, fact sheets, summaries of technical reports, maps, graphics, and questionnaires for the
public meetings. Staff time may also have to be spent writing and distributing news releases,
meeting summaries, and reports. In addition to the required meetings and hearings, other
meetings and workshops might be necessary, and the staff might have to appear before local
boards, civic groups, and other interested organizations.
(3) The municipality may set up a task force or advisory committee to assist in the
planning process.
The above services are grant eligible, and the determination of their remuneration is
subject to the terms and scope of the particular subagreement between the grantee and its
engineer. If additional public participation services not covered in the basic engineering firm
contract scope are required by the grantee, state, or EPA offices, then EPA should participate
in such amended contract scope costs.
Administrative costs of the grantee relating to participation are reimbursed as outlined in
the grant agreement.
Any costs (travel, per diem, etc.) of the citizen groups or other interested parties are not
grant eligible.
Assistance with State and Federal Regulations
The cost of assistance associated with addressing state and Federal regulations and
procedures which are basic to the functions of general government (such as preparation of
applications and related documents or obtaining state construction and discharge permits) are
unallowable. Costs growing out of meeting specific Federal statutory requirements such as
public hearings and other activities related to the user charge study, facilities planning,
National Environmental Policy Act (NEPA), Uniform Relocation Assistance and Real
Property Acquisition Policies Act, etc., are allowable.
If such costs entail assistance which is readily available through Federal or state offices,
such as interpretation of regulations or explanation of grant procedures, they should be
disallowed. (In order to avoid double payment, care must be exercised to assure that such work
is not incident to a general contractual obligation.)
Redesign/Replanning Costs Resulting from Changes in Federal Requirements
In those cases in which an applicant's completed or partially completed planning and/or
designs are rendered invalid or unacceptable by changes in Federal requirements, both the
original cost plus the redesign or replanning costs are allowable. The Regional Office must
assure itself that the planning and/or design thus invalidated was undertaken in good faith by
the applicant and was not the result of a disregard for existing Federal directives by either the
applicant or his agent.
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Costs of Implementing the Uniform Relocation Assistance and Real Property Acquisition
Policies Act of 1970 (P.L. 91-646)
Four basic categories of costs associated with this Act may be considered allowable:
(1) Moving and related expenses;
(2) Replacement housing;
(3) Relocation assistance advisory services (entailing direct services of the grantee in
assisting the displaced person(s)); and
(4) Acquisition of real property.
Documented allowable costs from these categories incurred on or after July 1, 1972, will be
treated as other allowable project costs and reimbursed at the same percentage rate. In the case
of costs resulting from acquisition or displacement occurring before July 1,1972, EPA shall pay
the full amount of the first $25,000 of such costs for each displaced person. Allowable costs
should be determined in accordance with 40 CFR 4 and guidelines which will be issued
pursuant thereto. (See Appendix C of this guide for audit procedures.)
Field Surveys to Identify Cultural Resources
Reasooable costs incident to field surveys to identify historical, architectural,
archeological, and cultural resources in the primary impact area of grant projects are allowable.
Allowable costs must be determined on a case-by-case basis and may include the cost of on-site
inspections, review of pertinent documents, photographic reconnaissance, services of
archeologists or historians, etc.
Such costs should receive prior approval and delineation by the EPA Regional Office.
Survey costs associated solely with the examination of the National Register of Historic Places
are unallowable. EPA may participate in the cost of intensive surveys (e.g., "digging") only
when a sufficient amount of information exists to indicate that there is a reasonably high
probability of discovering important cultural resources.
See PRM 75-27, dated November 2, 1975, for additional guidance on this subject.
Industrial Planning
Step 1 related costs of industrial planning conducted and paid for by an industry whose
wastes will be treated in a municipal system are not allowable. (See 40 CFR 35.925-15.)
Facilities Serving Communities and Federal Facilities
Whenever a planned treatment works will jointly serve a municipality and a Federal
facility, that portion of construction cost allocable to the Federal facility will not be allowable
for 75-percent construction grant funding, subject to the following exceptions:
(1) Facility planning (Step 1) costs.
(2) Cost of Step 2 work if a Step 2 grant has been certified by the state for funding
to EPA prior to the December 29, 1975, issuance of Program Guidance Memorandum 62 (now
PRM 75-35).
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(3) Design and construction costs allocable to a Federal facility producing less than
250,000 gallons per day, or five percent of the total design flow of waste treatment works,
whichever is less.
That portion of the construction costs allocable to the Federal facility shall be based on all
factors which significantly influence the cost of the treatment works. Factors such as strength,
volume, and delivery flow rate characteristics will be considered and included to ensure a
proportional allocation of costs to the Federal facility.
As a minimum, the portion of construction cost allocable to the Federal facility should be
based on the ratio of its total hydraulic requirements, including allowances for future needs, to
the total design flow of the treatment works. The portion (percentage) allocable to the Federal
facility must be agreed upon by the municipality and Federal agency, and approved by EPA,
prior to award of a Step 2 or Step 3 grant, whichever is applicable, for the works or any portion
thereof. See PRM 75-35 for additional detail.
FACILITIES' SITE-RELATED COSTS
Site Acquisition Versus Site Preparation Costs
All costs associated either directly or indirectly with the acquisition of any land used for or
incidental to the construction of treatment plants, lagoons, force mains, gravity sewers, outfall
lines, appurtenant piping and structures, and pumping stationswhether by purchase, rental,
lease, or easement-are ineligible. Similarly, all legal, realty, engineering, and grantee costs
associated with such ineligible acquisition are unallowable, as are the costs of easements, rights-
of-way, non-construction-related surveying, plat preparation, meetings, etc.
NOTE: The cost of land used as an integral part of the treatment process, such as spray
irrigation sites (PRM 75-25, dated July 18, 1975), may be eligible if approved and in
accordance with pertinent regulations and/or guidelines. Legal, administrative, and
engineering costs associated with the acquisition of grant-eligible land are allowable for grant
participation.
Costs associated with the preparation of the treatment works site (including appurtenant
features) before, during, and (to the extent agreed upon in the grant agreement or amendment
thereto) after construction are generally eligible. These costs include such items as: grade and
construction-staking surveys; surveying for alignment and slope; and preparation of working
drawings and plans dealing with site preparation, locations, grades, slopes, distances, depths,
and alignments. Also eligible are costs such as fine-grading, seeding, and protective trees and
shrubs.
Costs related to reasonable site screening or other aesthetic purposes are also allowable.
Criteria for participating in aesthetics-related work include: support expressed in NEPA-
related studies, approved facility plans, and necessary screening of adjacent properties (when
the facility is in constant public view).
Certificate as to Title to Project Site
Except in the case of grant-eligible land, legal costs associated with certifying as to the
adequacy of the grantee's interest in the project site should be considered a normal function of
government incident to the project, and as such they are unallowable.
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Acquisition of Privately or Publicly Constructed Waste
Treatment Facilities
Costs incurred by a grantee or applicant associated with the purchase, lease, or acquisition
of privately or publicly constructed and owned waste treatement facilities are not allowable.
Demolition of Existing Structures
Demolition of existing structures constitutes an allowable cost provided that the structures
are on the facility site (including rights-of-way for the eligible sewer lines) and that construction
cannot be undertaken without such demolition. Offsite demolition is unallowable. Aesthetics-
related demolition is allowable only if it conforms to the criteria relating to the allowability of
site preparation outlined above.
If demolition of existing structures is required on a site not previously owned by the
grantee, the grantee must address such demolition in the cost-effective analysis and
demonstrate to the satisfaction of the Regional Office that in choosing the site appropriate
consideration was given to the cost of demolition.
Removal, Relocation, and/or Replacement of Utilities
Costs associated with the removal, relocation, and/or replacement of utilities (water,
electricity, etc.) are allowable when such activity is incident to and necessary for the
construction of the eligible facility. However, participation in the cost of replacing existing
utilities with utilities having a greater capacity than those originally in place can only be allowed
if mandated by local, state, or Federal codes, ordinances, or statutes. If a mandate for greater
capacity does not exist, any additional cost must be borne by the grantee.
The provision of new or increased utility service when required for the facility (e.g.,
construction of a new facility or increased capacity) being constructed is an allowable cost
provided that the grantee (utility customer) would ordinarily be required to pay for such
installation.
Restoration of Streets and Rights-of-Way
The cost of restoring streets and/or rights-of-way to their original condition is an allowable
cost if the need for such restoration results directly from the construction of the eligible project.
Allowable restoration may include, for example: refilling and patching of street and roadway
surfaces (generally limited to the width of the trench), fine-grading and reseeding of off-street
rights-of-way, reasonable tree plantings, and restoration of sidewalks.
EQUIPMENT, TOOLS, PARTS, AND SUPPLIES
In accordance with 40 CFR 30.810, the grantee is required to maintain property
accountability on all equipment, tools, parts, and supplies purchased under the project.
Mobile Equipment
Generally, such equipment is allowable if it is identified by the grantee, approved in
advance of purchase by the Regional Office, and directly necessary for the operation and/or
maintenance of the overall waste-water treatment facility. Such equipment must be necessary
for the transmission of waste water or sludge or for the maintenance of plant grounds and/or
equipment. Allowable items include but are not limited to:
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a. Portable standby generators.
b. Large portable emergency pumps to provide "pump-around" capability in the
event of pump station failure or pipeline breaks.
c. Sludge tanks and trailers and other necessary transport and handling equipment
in those cases where the location of the ultimate sludge disposal site requires such equipment.
However, cars and trucks are unallowable except for specialized sludge-handling or transport
equipment.
d. Grounds and building maintenance apparatus. Such apparatus may include, for
example, mowers and snow removal equipment (in certain geographic areas). Regional Offices
may use such criteria as cost effectiveness, potential for abuse, and frequency of use in
considering allowability. Requests for participation based upon less than 100-percent use
should be agreed to only in special situations and prorated accordingly.
Office Equipment and Furnishings
Such items as identified by the grantee and approved in advance by the Regional Office,
when installed or located at the treatment works and necessary to the administrative and/or
technical (including training and meetings) functioning of the works, may be allowable. In
larger facilities, allowability may be extended to reasonable special-purpose rooms and
equipment related to the function of the facility. There may well be instances in which the
Regional Office will need to exercise judgment, as in the case of "luxurious furnishings,"
televisions, etc.
Shop Furnishings
Reasonable furnishings for shop areas such as shelves, bins, and workbenches are
allowable costs.
Laboratory Equipment and Supplies
Generally, laboratory items are allowable if identified by the grantee and approved prior to
procurement by the Regional Office as necessary to conduct tests required for plant operation.
In addition, the cost of a reasonable inventory of chemicals and supplies necessary to start
operation of the plant is allowable. An EPA publication, "Estimating Laboratory Needs for
Municipal Wastewater Treatment Facilities," discusses equipment needed for various size
plants.
Safety Equipment
Based upon the specific needs of individual facilities, necessary and reasonable safety
equipment is an allowable cost. Generally, such equipment should be delineated in the
operation and maintenance manual; the approval of that document may constitute the basis for
EPA's participaton.
NOTE: Such equipment should meet applicable Federal, state, local, and industry safety
regulations and standards.
Tools
Allowable tools are only those which are specified as special-purpose tools necessary for
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the repair and adjustment of specific process components by the equipment
suppliers/manufacturers or approved by the Regional Office. All other tools are unallowable.
Replacement Parts
Replacement parts identified and approved in advance by the Regional Office as necessary
to assure uninterrupted operation of the facility may be included as allowable costs. Allowable
replacement items are only those which constitute parts of major systems components and
which are: (1) not immediately available and/or whose procurement involves an extended "lead
time," (2) identified as critical by the equipment supplier(s), or (3) critical but not included in
the inventory provided by the equipment supplier(s). In those instances where adequate
"backup" components are built into the system, a reduction in replacement parts should be
made.
Items of routine "programmed" maintenance such as ordinary piping, air filters,
couplings, hoses, and bolts are unallowable. See the EPA Technical Bulletin, "Design Criteria
for Mechanical, Electric and Fluid System and Component Reliability," for additional
discussion.
Collection-System Maintenance Equipment
EPA will participate in the cost of collection-system maintenance when the grantee
demonstrates'that the equipment:
(1) Is needed frequently;
(2) Is necessary to preclude the discharge or bypassing of raw sewage; or
(3) Is necessary to provide for the health, safety, and welfare of the citizens.
Such equipment must be reasonable and approved by the Regional Office.
EPA participation in the cost of such equipment purchased in connection with a
construction grant shall be based upon a proration of the portion of the collection system in
which EPA participates to the total system. Thus, if EPA participates in 65 percent of the
grantee's total collection system, the allowable costs shall constitute 65 percent of the cost of
such equipment purchases pursuant to the grant agreement. Generally, the proration should be
based upon the relative lengths of the new to the total system rather than cost or size.
Project Inspection
Costs associated with technical inspections of the eligible project before and during
construction (including time extensions approved by change order) are allowable Such costs
must be clearly documented, and to avoid double payment, the work must not be incident to a
general contractual obligation.
Ground-Water-Monitoring Facilities
Costs associated with the construction of ground-water-monitoring equipment and
facilities may be considered allowable only in those cases in which, as a direct result of project
construction; the possibility of ground-water deterioration, depletion, or modification exists.
Allowability may not be extended to the operation, surveillance, and/or analyses associated
with these facilities. Such facilities require the prior approval of the Regional Office,
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Biological "Seeding"
Under certain conditions (climatic, geographic, nature of wastes, etc.), reasonable costs
associated with the purchase and/or transportation of biological seeding materials required for
initiating (or expediting the initiation of) the treatment process operation are allowable.
SUBAGREEMENT COSTS
The following requirements are mandated under P.L. 84660, P.L. 92-500, and EPA
regulations 40 CFR 30.800 and 30.805.
Service Charges
Service charges are defined as any supplemental charges added to other direct costs
(nonsalary) which are claimed on an actual cost basis. Regardless of contract terms, the actual
cost of service charges must be supported by accounting records. If the service charges are not
supported or if the actual cost is less than the amount claimed, the total or the difference is
unallowable for Federal participation. This is in accordance with the ASCE manual, which
states that the service charge is for expenses to be reimbursed by the client.
Fringe Benefits
Regardless of contract terms, the actual cost of fringe benefits must be supported by
accounting records when they are claimed as a direct charge. If the charges are not supported or
if the actual cost is less than the amount claimed, the total or the difference is unallowable for
Federal participation. Where the fringe benefits are claimed as a direct charge and also included
in the multiplier, the duplicate direct charge is unallowable for Federal participation.
Labor Charges and Related Costs
Regardless of contract terms, where charges have been made to the grant and there was no
cost incurred, the charges should be questioned. Labor charges and related costs for straight
time or overtime hours which are billed but for which cost has not been incurred will be
unallowable for Federal participation. (Compensatory time will be considered in determining
actual labor costs incurred. However, compensatory time is allowable only if it is incurred in
accordance with established company policy, if it is properly controlled and accounted for, and
if it is used within an annual accounting period.)
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APPENDIX E
CONSULTING ENGINEER SUBAGREEMENTS--RECORDS
SUBJECT TO AUDIT
Method of Compensation (1)
Percent of Salary Time and Cost Plus Firm
Type of Records Construction Cost Cost Plus Materials Fixed Fixed
(ASCE Curve) Multiplier (Per Diem) Fee Price
(2) (3) (4) (5) (6) (7)
Category A: Technical
and professional
project records Yes Yes Yes Yes Yes
Category B: Financial
records of direct
costs for the
services performed No Yes Yes Yes No
Category C: Financial
records pertaining to
profit and overhead No No No Yes No
Notes:
(1) An engineering subagreement may provide for more than one method of
compensation based on the different services provided. Records under each method of
compensation under a subagreement are subject to audit individually in accordance with the
guidance provided in Appendix D to Subpart E of 40 CFR 35, paragraph A.2.d. In addition,
under agreements covering both grant-eligible and ineligible work, access to records will be
exercised to the extent necessary to allocate contract work or costs between work eligible for
Title II construction grant assistance and work or costs which are ineligible (Appendix D,
paragraph A.2.c).
(2) Where there is an indication of fraud, gross abuse, or corrupt practices, EPA will
exercise its right of access to records in all categories (Appendix D, paragraph A.2.b).
(3) Agreements based upon a percentage of construction cost. Category B and C
records will not be audited. However, terms of the agreement, including the total amount of
compensation, will be evaluated for fairness, reasonableness, and consistency with historical
and advisory guidelines in general use and acceptable locally (such as ASCE Manual 45 or other
analyses or data relied upon or utilized by the contracting parties in negotiation of the
agreement). Such evaluation shall also consider comparable contracts for which EPA grants
have been awarded (Appendix D, paragraph A.2.b(l)).
Total allowable fees under percentage-of-construction-cost type contracts are conditioned
by the following (Appendix D, paragraph B.5):
(a) Applying the accepted fee rate to the low bid where design work
(Step 2) is essentially continuous from start of design to bid opening (Step 3) and bid opening
occurs within a year of design completion;
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(b) Where design work is not continuous from start of design to
bidding or one year or more elapses between substantial Step 2 completion and bid opening, the
total allowable contract costs may not exceed the lower of:
1. The consulting engineer's construction cost estimate provided
at the time of such substantial completion plus an escalation of this construction cost estimate
of up to five percent, but not to exceed the consulting engineer's total compensation based on
the low bid for construction; or
2. The consulting engineer's construction cost estimate provided
at the time of such substantial completion plus a consulting engineer's compensation escalation
not to exceed either $50,000 or the consulting engineer's total compensation based upon the low
bid for construction.
(c) Where the low bid for construction would have resulted in a higher
consulting engineer's total compensation than provided in paragraph B.S.b of Appendix D, the
Regional Administrator may also consider a reasonable additional compensation for updating
the plans and specifications, revising cost estimates, or similar services.
(4) Agreements based upon salary cost times a multiplier, including profit. Category
A and B records will be audited. Category C records will not be audited. However, terms of the
agreement, including the total amount of compensation and the multiplier, will be evaluated for
fairness, reasonableness, and consistency with historical and advisory guidelines in general use
and acceptable locally (such as ASCE Manual 45 or other analyses or data relied upon or
utilized by the contracting parties in negotiation of the agreement). Such evaluation shall also
consider comparable contracts for which EPA grants gave been awarded. Items of overhead or
other indirect costs will only be audited to the extent necessary to assure that types of costs
found both in overhead and reimbursable direct costs, if any, are properly charged (Appendix
D, paragraph A.2.b(2)).
(5) Time and materials (per diem) agreements. Category C records will not be
audited. Category A and B records will be audited to the extent necessary to determine that
hours claimed and classes or personnel used were properly supported. The per diem rates will
be evaluated in accordance with appropriate portions of paragraphs A.2.b(l) and (2) of
Appendix D. (See Appendix D, paragraph A.2.b(3).)
(6) Cost plus a fixed fee (profit). All direct costs and overhead and other indirect
costs claimed will be audited to determine that they are reasonable, allowable, and properly
supported by the consulting engineer's records. The amount of fixed fee will not be questioned
unless the total compensation appears unreasonable when evaluated in accordance with
paragraphs A.2.b(l) and (2) of Appendix D. (See Appendix D, paragraph A.2.b(4).)
(7) Firm-fixed-price (lump sum) contracts. Category B and C records will not be
audited. The contract amount will not be questioned unless the total compensation appears
unreasonable when evaluated in accordance with appropriate portions of paragraphs A.2.b(l)
and (2) of Appendix D. (See Appendix D, paragraph A.2.b(5).)
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APPENDIX F
CONSULTING ENGINEER SUBAGREEMENTS--ALLOWABLE
METHODS OF COMPENSATION
Method of Compensation
Percent of Salary Time and Cost Plus Firm
Date of Grant Construction Cost Cost Plus Materials Fixed Fixed
Award (ASCE Curve) Multiplier (Per Diem) Fee Price
Prior to July 1, 1975--all
grant steps Yes Yes Yes Yes Yes
July 1, 1975, through
March 1, 1976
Step 1
Step 2
Step 3
After March 1, 1976
Step 1
Step I
Step 3
No (1)
No (2)
Yes (3)
No (1)
No (2)
No (4)
No (1)
No (2)
Yes (3)
No (1)
No (2)
No (4)
Yes
Yes
Yes
Yes (5)
Yes (5)
Yes (5)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Notes:
(1) This method of compensation is unallowable unless "work was initiated"
before July 1, 1975 (Appendix D, paragraph B.I). The definition of "work initiated" for Step 1
is as follows (40 CFR 35.905-4):
(a) Prior to November 1, 1974: the execution of a subagreement for any
element of Step 1 project work; issuance of a notice to proceed; or a work order for Step 1 work.
(b) Subsequent to October 31, 1974: the date of approval of a plan of study.
In addition, this method of compensation will not be questioned when remimbursed in
conjunction with a Step 3 award for work within the scope of Step 2 work "contracted for"
prior to July 1, 1975 (Appendix D, paragraph B.2.). Note the words "contracted for" as
opposed to "grant award." In this context, "contracted for" relates to the engineering
subagreement.
(2) This method of compensation is unallowable unless "work was initiated"
before July 1, 1975. The definition of "work initiated" for Step 2 is as follows:
(a) Prior to November 1, 1974: the execution of a subagreement for plans and
specifications; issuance of a notice to proceed; or a work order for Step 2 work.
(b) Subsequent to October 31, 1974: the date of approval of facilities plans.
In addition, this method of compensation will not be questioned when reimbursed in
conjunction with a Step 3 award for work within the scope of Step 1 and 2 work contracted for
prior to July 1, 1975.
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(3) Although Appendix D is silent on Step 3 grants awarded during this period, the
Headquarters Grants Administration Division (GAD), in a memorandum to Region IX dated
August 18, 1976, provided the following guidance:
Neither PG 53 nor Appendix D requires the renegotiation of Step 3 engineering
agreements, even if they are of the types prohibited under 35.937-1.
While EPA does not require this renegotiation, there is nothing to prevent a grantee or
state from requiring renegotiation if it desires to do so.
(4) Multiplier agreements are not allowable except for subagreements executed prior
to March 1, 1976, which cover more than one step (40 CFR 35.937-11). However, such
agreements are subject to the requirement that the subagreements may have to be renegotiated
to either the cost-plus-fixed-fee or firm-fixed-price method of compensation prior to the grant
award action for the next step (Appendix D, paragraph B.6). Headquarters GAD's
memorandum to Region IX dated August 18, 1976, provided further guidance in this regard:
Under the provisions of 35.937-11, Appendix D is applicable to all existing engineering
agreements for which grants are awarded on or after March 1, 1976. Therefore, for Step 3
grants awarded after March 1, renegotiation of such contracts is not required (presuming
of course that the Step 2 work was initiated before June 30, 1975).
The definition of "initiation of work" is provided in Note 2 above.
(5) 40 CFR 35.937-1 (e) provides certain restrictions on the use of time and material
subagreements when the amount is expected to exceed $10,000.
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APPENDIX G
CONSULTING ENGINEER SUBAGREEMENTS
<=1TRTECT TO 40 CFR 35.937-5, -6. AND -7
(NEGOTIATION AND SUBMISSION OF EPA FORM 5700-41)
Date of Grant Award Applicability
Prior to March 1, 1976 No
March 1, 1976, to June 30, 1976 Yes (1) and (2)
After June 30, 1976 Yes (1)
Notes:
(1) Subagreements executed prior to March 1, 1976, which cover more than one
step may be exempted until the next step is awarded (40 CFR 35.937-11). The exemption does
not apply to Step 2 work initiated after June 30, 1975 (40 CFR 35, Subpart E, Appendix D,
paragraphs B.3 and B.6). Nor does it apply to Step 3 grants where the Step 2 work was initiated
after June 30, 1975. (See Headquarters Grants Administration Division's memorandum dated
August 18,1976.)
(2) For grant applications submitted between December 17, 1975, and February
28, 1976, the subagreements are not exempted subject to Note 1 above. Grant applications
submitted prior to December 17, 1975, may be exempted. (See Alm/Breidenbach Class
Deviation dated May 11,1976.)
G-l
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APPENDIX H
INTERPOLATION OF FEE PERCENTAGE
When construction costs, or other bases of compensation, fall between two known points on the fee curve, it is
necessary to use interpolation to arrive at the applicable fee percentage. Most engineering agreements specify the use
of straight-line interpolation between points.,In the absence of a specified method of interpolation, the use of the
straight-line method will result in a slightly higher, but insignificantly different, amount of allowable costs. An
explanation of straight-line interpolation follows:
Audit Question: What percent design fee corresponds to construction costs of $9,750,000?
Construction Cost Fee Percentage
Lower Limit $5,000,000 6.42%
Upper Limit 10,000,000 6.03%
Absolute Difference $5.000.000 .39%
(Above data based on ASCE 1972 Curve "A" (page H-2).)
The interpolation can be made in either of two directions (from the "bottom up" or from the "top down").
Thus, there are two ways to compute the "incremental difference" (shown below). Both methods give the same
results. Whichever direction is chosen, the auditor must be sure that he is consistent in the approach.
Construction Cost $9,750,000 Upper Limit $10,000,000
Lower Limit 5,000,000 -or- Construction Cost 9,750,000
Incremental Difference $4,750,000 Incremental Difference $250,000
The interpolation may be expressed in ratio form, for each of the two methods above, as follows:
(Incremental Cost Difference) $4,750,000 = _? (Incremental Fee Difference)
(Absolute Cost Difference) $5,000,000 .39% (Absolute Fee Difference)
(Incremental Cost Difference) $250.000 = 2 (Incremental Fee Differ a)
(Absolute Cost Difference) $5,000,000 .39% (Absolute Fee Difference)
Cross multiplying, the unknown is solved as shown below:
(1) Incremental = $4.750,000 x .39% = $18.525 = ,37%
Fee difference $5,000,000 $5,000,000
6.42% - .37% = 6.05%
NOTE: When method (1) is used (from the "bottom up"), the result must be deducted from the higher fee
percentage.
(2) Incremental = $250,000 x .39% = $975 .Oj%
Fee difference $5,000,000 $5,000,000
6.03% + .02% = 6.05%
'o
NOTE: Using method (2) (from the "top down"), the result is added to the lower fee percentage.
H-l
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Figure H-l
CURVE A, MEDIAN COMPENSATION FOR
BASIC SERVICES EXPRESSED AS A PERCENTAGE OF
CONSTRUCTION COST FOR PROJECTS OF
ABOVE-AVERAGE COMPLEXITY (1971)
14
13
12
11
10
.a 8
1
\
\
\
s
\
III 1 1 1 1 Hill II
Net construction % from
cost Curve A-1971
$100,000
200,000
500,000
1,000,000
5,000,000
10,000,000
50,000,000
100,000,000
>
1
\
\
\
\
'
s
11.63
10.25
8.52
7.53
6.42
6.03
5.70
5.64
i,
^
--.
.
1 1
^
...
II
0.01 0.05 0.1 0.5 1 5 10
Net construction cost, in millions of dollars
Source: ASCE Manual No. 45.
50 100
H-2
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The total design fee in this case would be computed as follows:
$9,750,000 (total construction costs) x 6.05% = $589,875.
NOTE: The design fee percentage would be applied to eligible construcion costs to obtain accepted design costs
per audit.
H-3
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APPENDIX I
APPLICATION OF PARAGRAPH B.5
OF APPENDIX D TO 40 CFR 35, SUBPART E
The following example is intended to clarify the provisions, and to provide a working
model, of the application of paragraph B.5 (determining total allowable contract costs for grant
payment where work for the design step is not essentially continuous from start of design to
bidding, or one year or more elapses between substantial completion of Step 2 design work and
bid opening for Step 3 construction).
The provisions of Appendix D are applicable to all existing construction grants, regardless
of statutory authority or date of award. Thus, Appendix D applies to both P.L. 84660 and
92-500 grants.
1. COMPUTATION OF ALLOWABLE COST
Appendix D provides that in no event will allowable costs for a percentage-of-construction
type contract be based on an amount exceeding the low bid for construction. This specifically
excludes the cost of change orders and cost overruns from the computation basis. The method
of computing allowable cost is dependent upon the time between substantial completion
(discussed in paragraph 2 below) of plans and specifications and bid opening.
A. Less Than One Year. If less than one year elapses between substantial
completion and bid opening, paragraph B.5.a of Appendix D limits allowable cost to the
amount obtained by applying the applicable fee curve percentage to the low bid for
construction.
Example:
Facts
Substantial completion of design-May 20, 1973
Bid opening-November 27, 1973
Low bid $5,000,000
Changes orders 1,000,000
Total construction cost $6,000,000
Fee curve at $5,000,000 = 6.42%
Application
Low bid $5,000,000
Fee curve percentage x .0642
Allowable fee $321,000
1-1
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B. More Than One Year. When one year or more elapses between substantial
completion of design and bid opening, paragraph B.5.b limits allowable costs to the lowest
of:
(1) The applicable fee curve percentage applied to the total of the consulting
engineer's construction cost estimate provided at substantial completion of plans and
specifications plus an escalation of five percent nf the estimate.
(2) The applicable, fee curve percentage applied to the consulting engineer's
construction cost estimate provided at substantial completion of plans and
specifications. A consulting engineer's compensation escalation of up to $50,000 is
added to the resultant amount.
(3) The applicable fee curve percentage applied to the low bid for construction.
Examples:
Facts
Substantial completion of design-June 15, 1972
Bid opening--Nov. 27, 1973
Engineer's estimate at substantial
completion
Low bid
Total construction cost
(1) Engineer's estimate of construction
Allowable escalation
Applicable fee curve percentage
(interpolated)
(2) Engineer's estimate of construction
Applicable fee curve percentage
(interpolated)
Engineer's compensation escalation
(3) Low bid
Applicable fee curve (from curve
percentage)
$4,000,000
5,000,000
6,000,000
$4,000,000
x 1.05
$4,200,000
x .0664
$278,880
$4,000,000
x .0670
$268,000
50.000
$318,000
$5,000,000
x .0642
$321,000
Method (1) above resulted in the lowest compensation; therefore, allowable compensation
in the example would be example (1), or $278,880.
1-2
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2. SUBSTANTIAL COMPLETION
No precise definition of "substantial completion" of design has been made within EPA.
Therefore, auditors must apply their judgment to the circumstances of each grant to ascertain
the date of substantial completion. Design is normally substantially complete when no major
additions or revisions are required to complete the plans and specifications.
Evidence of substantial completion may consist of one or more of the following:
a. Dates shown on plans or specifications.
b. Transmittal of plans and specifications from the consultant to the grantee.
c. Submission of plans and specifications to the state and EPA for review.
d. Minutes of board meeting in which completed plans are accepted or discussed.
e. Grant application checklists in which completion date is annotated.
f. Engineer's billings which show percentage of completion of design.
1-3
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APPENDIX J
EPA DIVISION AUDIT OFFICES AND COGNIZANT
GEOGRAPHIC AREAS
Address of Cognizant
EPA Division Audit Office
Mr. Juan Soto, Jr., Director
Mid-Atlantic Audit Division
Environmental Protection Agency
Crystal Mall #2, Room 716
Washington, D.C. 20460
(703) 557-7700
Geographic Area
Pennsylvania, Delaware,
Maryland, Virginia,
West Virginia, and
Washington, D.C.
Mr. Kenneth A. Konz, Director
Eastern Audit Division
Environmental Protection Agency
90 Church Street, Room 802
New York, New York 10007
(212) 264-5730
Maine, Connecticut, New York,
Massachusetts, Rhode Island,
Vermont, New Hampshire,
New Jersey, Puerto Rico,
and the Virgin Islands
Mr. W. Rogers Smith, Director
Northern Audit Division
Environmental Protection Agency
1 North Wacker Drive
Chicago, Illinois 60606
(312) 353-2486
Mr. Truman R. Beeler, Director
Western Audit Division
Environmental Protection Agency
215 Fremont Street
San Francisco, California 94105
(415) 556-1954
Mr. Leslie M. Buie, Director
Southern Audit Division
Environmental Protection Agency
1371 Peachtree Street, NE
Atlanta, Georgia 30309
(404) 881-3623
Ohio, Michigan, Wisconsin,
Minnesota, Indiana, Illinois,
Iowa, Nebraska, Missouri,
and Kansas
Colorado, Utah, Nevada,
Hawaii, Washington, Oregon,
California, Idaho, Montana,
Wyoming, Arizona,
North Dakota, Alaska,
South Dakota,
Guam, American Samoa, Trust
Territories of the Pacific
Islands, and Wake Island
Alabama, North Carolina,
South Carolina, Florida,
Georgia, Mississippi, Texas,
Arkansas, Tennessee,
Kentucky, Oklahoma,
New Mexico, and Louisiana
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APPENDIX K
REFERENCES
Audit Guide for EPA Contracts, Environmental Protection Agency (Washington, D.C.:
February 1976).
Audit Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals, Environmental
Protection Agency (Washington, D.C.: Publication pending).
Audits of State and Local Governmental Units, American Institute of Certified Public
Accountants (New York: 1974).
Clean Water Act of 1977, Public Law 95-217 (December 27, 1977).
"Construction and Architect-Engineer Contracts," Public Contracts and Property
Management, Code of Federal Regulations 41, Subpart 1-15.4 (U.S. Government Printing
Office, Washington, D.C.). Also codified in the Federal Procurement Regulations, Subpart
1-15.4.
Consulting EngineeringA Guide for the Engagement of Engineering Services, American
Society of Civil Engineers, Manual No. 45 (New York: rev. 1972).
"Contracts with Commercial Organizations," Public Contracts and Property Mangement,
Code of Federal Regulations 41, Subpart 1-15.2 (U.S. Government Printing Office,
Washington, D.C.). Also codified in the Federal Procurement Regulations, Subpart 1-15.2.
"Cost Principles Applicable to Grants and Contracts with State and Local Governments,"
Federal Management Circular, FMC 74-4, General Services Administration, Office of Federal
Management Policy (July 18, 1974). Also referenced in "Project Costs," Protection of the
Environment, Code of Federal Regulations 40, Subpart F, Section 30.710(a).
Federal Water Pollution Control Act, Public Law 84-660 (July 9, 1956).
Federal Water Pollution Control Act Amendments of 1972, Public Law 92-500 (October 18,
1972).
"General Grant Regulations and Procedures; State and Local Assistance-Interim
Regulations," Federal Register, Part III, Vol. 37, No. 112 (Environmental Protection Agency,
Washington, D.C.: June 9, 1972).
"General Grant Regulations and Procedures," Protection of the Environment,, Code of Federal
Regulations 40, Subchapter B, Part 30 (U.S. Government Printing Office, Washington, D.C.).
"Grant Programs-Interim Regulations," Federal Register, Part II, Vol. 36, No. 229
(Environmental Protection Agency, Washington, D.C.: November 27, 1971).
Handbook of Procedures-Construction Grants Program for Municipal Wastewater Treatment
Works, Environmental Protection Agency (Washington, D.C.: February 1976).
Standards for Audit of Governmental Organizations, Programs, Activities, and Functions, U.S.
General Accounting Office (U.S. Government Printing Office, Washington, D.C.: 1972).
K-l
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"State and Local Assistance," Protection of the Environment, Code of Federal Regulations 40,
Subchapter B, Part 35 (U.S. Government Printing Office, Washington, D.C.).
"Uniform Administrative Requirements for Grants-in-Aid to State and Local Governments,"
Federal Management Circular, FMC 74-7, General Services Administration, Office of Federal
Management Policy (September 13, 1974).
K-2
*U.S. GOVERNMENT PRINTING OFFICE : 1978 0-720-335/6103
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