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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF THE INSPECTOR GENERAL
NORTHERN DIVISION 905R94027
77 WEST JACKSON BOULEVARD
CHICAGO, IL 60604-3590
August 15, 1994
MEMORANDUM
SUBJECT: Audit Report No. E5FGF4-05-0138-4100488
Minnesota Superfund Cooperative- Agreement
Ritari Post and Pole ^. / /
X" /
FROM: Anthony C. Carrollo ^^ /
Divisional Inspector general for Audits
Northern Division //
TO: Valdas V. Adamkus
Regional Administrator
Region 5
This report contains findings and recommendations from our
interim audit of Minnesota Pollution Control Agency's internal
controls over costs at the Ritari Post and Pole site.
This audit report contains findings that describe problems
the Office of Inspector General (OIG) has identified and
recommendations for corrective action. This audit report
represents the opinion of the OIG. Final determinations on
matters in the audit report will be made by EPA managers in
accordance with established EPA audit resolution procedures.
Accordingly, the findings described in the audit report do not
necessarily represent the final EPA position.
Action Required
In accordance with EPA Order 2750, you, as the action
official, are required to provide this office a written response
to the audit report within 90 days of the final report date. For
corrective actions planned but not completed by your response
date, please include specific milestones for when corrective
action will be completed.
We have no objections to further release of this report to
the public.
Should you or your staff have any questions or need
additional information, please contact Audit Manager Charles
Allberry at 353-4222.
cc: Howard Levin (MF-10J)
James Warner, Division Manager
MPCA Ground Water and Solid Waste Division
Printed on Recycled Paper
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Minnesota Superfund Cooperative Agreement
EXECUTIVE SUMMARY
PURPOSE
The Office of Inspector General (DIG) has performed an
interim audit of the internal controls over costs for the
Ritari Post and Pole site (Ritari), under Multi-Site
Cooperative Agreement (MSCA) No. V005794-01. The objectives
of our review were to determine whether the state:
• exercised adequate controls over costs through its
financial management, accounting, procurement, contract
administration, and property management systems; and
• complied with Federal regulations and cooperative
agreement requirements.
BACKGROUND
The Superfund program was established by the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA) of 1980. The program was revised and expanded in
1986 by the Superfund Amendments and Reauthorization Act.
Under Superfund, the Environmental Protection Agency (EPA) is
responsible for managing the cleanup of hazardous waste sites
that threaten human health and the environment.
CERCLA authorizes EPA to delegate remedial response
activities at hazardous waste sites to individual states.
When a state elects to manage the remedial response at a
site, it enters into a cooperative agreement with EPA. The
cooperative agreement (1) documents the division of
responsibilities between the state and EPA, and (2) defines
the Federal funding available to the state and its costshare.
The Minnesota Pollution Control Agency (MPCA) is responsible
for administering the State of Minnesota's environmental
protection programs. This includes managing remedial
activities at selected Superfund sites under EPA's CERCLA
authority. MPCA was awarded MSCA No. V005794-01 on September
29, 1984. The total funds awarded as of April 30, 1994,
under the cooperative agreement and its amendments were
$20,286,037 for 13 sites, of which $942,959 was for Ritari.
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RESULTS OF AUDIT
We found significant weaknesses in MPCA's internal controls
and compliance with laws and regulations. These weaknesses
affected MPCA's ability to ensure that all costs claimed
under the cooperative agreement were allowable, and resulted
in $227,584 in questioned costs. MPCA needs to improve its
internal controls to ensure that all future costs are claimed
in accordance with laws and regulations.
Report on Internal Controls
MPCA had weaknesses in internal controls that affected its
ability to ensure that all costs claimed were allowable,
allocable, and reasonable. Our review noted weaknesses in
internal controls in the following areas:
• allocation of employee leave costs,
• approval of contractor rate increases,
• review of contractor indirect cost rates,
• submission of documentation supporting contractor
invoices, and
• review of contractor employee timesheets.
Report on Compliance
MPCA did not comply with applicable Federal regulations and
cooperative agreement conditions in its (1) procurement of
contracts, and (2) management of site activities.
Specifically, MPCA awarded a contract for full scope RI/FS
work to a company that did not submit a proposal for that
type of contract. MPCA also did not receive approval from
EPA prior to performing work outside the scope of the
cooperative agreement. In our opinion, MPCA's performance of
work outside the scope of the cooperative agreement was
significant enough for us to question $227,584 as ineligible
costs.
MPCA COMMENTS AND ACTIONS
MPCA agreed to take corrective action for all weaknesses in
internal controls we identified. However, MPCA did not agree
with the report on compliance and costs questioned. A
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summary of MPCA's comments, and our evaluation of the
comments, is included in Chapters 2 and 3.
RECOMMENDATIONS
We recommend that Region 5:
1. ensure MPCA implements its planned corrective actions to
improve internal controls,
2. clarify with MPCA that all workplans and reports are to
be submitted to the EPA project officer, and
3. recover the ineligible costs of $227,584 associated with
the work outside the scope of the contract.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY i
CHAPTERS
1 INTRODUCTION 1
PURPOSE 1
BACKGROUND 1
SCOPE AND METHODOLOGY 2
2 REPORT ON INTERNAL CONTROLS 5
EMPLOYEE LEAVE COSTS WERE NOT ALLOCATE
EQUITABLY 5
DIRECT LABOR RATE INCREASES EXCEEDED
CONTRACT LIMITS 6
MPCA NEEDS TO MORE THOROUGHLY REVIEW
DELTA'S INDIRECT COST RATES 7
SUPPORTING DOCUMENTATION FOR CONTRACTOR
INVOICES WAS NOT SUBMITTED CONSISTENTLY ... 9
MPCA SHOULD REVIEW CONTRACTOR EMPLOYEE
TIMESHEETS 9
MPCA COMMENTS AND ACTIONS 10
DIG EVALUATION/RECOMMENDATION 10
3 REPORT ON COMPLIANCE 11
PROCUREMENT REGULATIONS NOT MET 11
WORK OUTSIDE APPROVED SCOPE 13
MPCA COMMENTS AND ACTIONS 15
OIG EVALUATION 15
RECOMMENDATION 17
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TABLE OF CONTENTS
APPENDICES
1 MPCA RESPONSE TO DRAFT REPORT 19
2 ABBREVIATIONS 39
3 DISTRIBUTION 40
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CHAPTER 1
INTRODUCTION
PURPOSE
The Office of Inspector General (OIG) has performed an
interim audit of the internal controls and costs claimed for
the Ritari Post and Pole site (Ritari), under Multi-Site
Cooperative Agreement (MSCA) No. V005794-01. The objectives
of our review were to determine whether the state:
• exercised adequate controls over costs through its
financial management, accounting, procurement, contract
administration, and property management systems; and
• complied with Federal regulations and cooperative
agreement requirements.
BACKGROUND
The Superfund program was established by the Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA) of 1980. The program was revised and expanded in
1986 by the Superfund Amendments and Reauthorization Act.
Under Superfund, EPA is responsible for managing the cleanup
of hazardous waste sites that threaten human health and the
environment.
CERCLA authorizes EPA to delegate remedial response
activities at hazardous waste sites to individual states.
When a state elects to manage the remedial response at a
site, it enters into a cooperative agreement with EPA. The
cooperative agreement (1) documents the division of
responsibilities between the state and EPA, and (2) defines
the Federal funding available to the state and its cost-
share.
The MPCA is responsible for administering the State of
Minnesota's environmental protection programs. This includes
managing remedial activities at selected Superfund sites
under EPA's CERCLA authority. MPCA was awarded MSCA No.
V005794-01 on September 29, 1984. The total funds awarded as
of April 30, 1994, under the cooperative agreement and its
amendments were $20,286,037 for 13 sites.
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For our detailed review, we judgmentally selected Ritari,
because of concerns about the site expressed by Region 5
officials. Region 5 amended the MSCA on June 30, 1987, to
provide funding of $234,005 for Ritari. The cooperative
agreement provided for a RI/FS to be 100 percent EPA funded.
The original budget and project periods for the award were
July 1987 to July 1989. There were six additional amendments
to the cooperative agreement which increased the total award
amount to $942,963 and extended the project and budget
periods to September 30, 1995. As of December 31, 1994, MPCA
had claimed costs for Ritari of $942,959.
Cost Category Costs
Contractual $ 817,243
Salaries 77,284
Fringe benefits 15,505
Indirect costs 28,952
Travel 3,705
Supplies 18
Other expenses 249
Total costs $ 942.959
As of the completion of our fieldwork, EPA had approved the
RI/FS and proposed plan, and MPCA was preparing the Record of
Decision.
SCOPE AND METHODOLOGY
We performed our audit in accordance with the Government
Auditing Standards issued by the Comptroller General of the
United States (1988 revision), and included tests of the
accounting records and other auditing procedures as we
considered necessary. Our fieldwork was conducted between
February 7 and May 12, 1994.
In planning and performing our audit, we considered relevant
aspects of the internal control structure in order to
determine our auditing procedures. Our purpose was to
determine whether the costs claimed complied with the
applicable Federal laws and regulations and conditions of the
cooperative agreement, and not to provide assurance on the
internal control structure.
For purposes of this report, we have classified the
significant internal control structure policies and
procedures in the following categories:
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• accounting
• contract procurement
• contract management
For these internal control structure categories, we obtained
an understanding of the relevant policies and procedures and
whether they had been placed into operation. We also relied
upon the single audit report, prepared by the Minnesota
Legislative Auditor, for the State of Minnesota, for the year
ending June 30, 1992, to the extent that it was applicable to
MPCA.
We tested MPCA's internal controls by reviewing the selected
costs claimed for Ritari from the date of the first award,
June 30, 1987, to December 31, 1993. To review selected
categories of costs, we audited samples of those costs. We
randomly selected a payroll sample of 51 employee payroll
payments out of a universe of 504. The sample represented
10.4 percent of the total dollar amount of claimed salaries
and fringes. We judgmentally selected a sample of the five
largest contractor invoices that represented 38 percent of
the total dollar amount of contract costs. We did not sample
the other cost categories, as the amounts claimed for those
categories were not material to the total amount claimed.
Since we did not select a statistical sample, our results
were not projectable to the universe.
For all sampled items, we examined the source documents and
performed other audit procedures that we considered necessary
to determine the allowability of the costs. As criteria, we
used the Code of Federal Regulations (CFR) Title 40, Parts
30, 31, 33, and 35; Office of Management and Budget (OMB)
Circular A-87; and the general and special conditions
contained in the cooperative agreement.
Weaknesses in internal controls and compliance with laws and
regulations are discussed in Chapters 2 and 3, respectively.
Nothing else came to our attention in connection with our
review which caused us to believe that MPCA was not in
compliance with any of the terms and conditions of the
cooperative agreement, laws, and regulations for those
transactions not tested.
The draft report was issued to MPCA on May 26, 1994. MPCA
responded to the draft report on June 28, 1994. After
reviewing the response and discussing it with Region 5, the
report was reformatted to emphasize internal control issues.
However, we did not change the nature of our findings.
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MPCA's response was incorporated into the report and is
included as Appendix A.
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CHAPTER 2
REPORT ON INTERNAL CONTROLS
MPCA had weaknesses in internal controls that affected its
ability to ensure that all costs claimed were allowable,
allocable, and reasonable. Our review noted weaknesses in
internal controls in the following areas:
• allocation of employee leave costs,
• approval of contractor rate increases,
• review of contractor indirect cost rates,
• submission of documentation supporting contractor
invoices, and
• review of contractor employee timesheets.
MPCA management is responsible for establishing and
maintaining an internal control structure. The objective of
an internal control structure is to provide management with
reasonable, but not absolute, assurance that Federal
financial assistance programs are managed in compliance with
applicable laws and regulations.
EMPLOYEE LEAVE COSTS WERE NOT ALLOCATED EQUITABLY
MPCA's procedures for allocating the costs of employee leave
(vacation, holiday, and sick time) to project sites did not
provide an equitable distribution to Federal and state
projects. In addition, MPCA was not following its own
procedures for allocating leave time to Federal projects.
OMB Circular A-87 states that leave costs are allowable if
they are (1) provided pursuant to an approved leave system;
and (2) equitably allocated to all related activities,
including grant programs.
MPCA's procedures were to charge leave time directly to
Federal or state projects based upon the percentage of time
spent on Federal projects. If at least 50 percent of an
employee's time during a pay period was spent on Federal
projects, a portion of the leave time taken during the pay
period was to be allocated to Federal projects. The
allocation of leave hours was based on the percentage of
quarterly budgeted time for Federal and state projects. If
less than 50 percent of an employee's time during a pay
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period was spent on Federal projects, all leave time was
charged to state projects.
The leave allocation procedures do not provide an equitable
distribution of leave time. Leave time was not charged to
projects in the same proportion as the direct time was
charged. Also, the quarterly budgeted time may not
accurately reflect the actual time spent on Federal and state
projects.
We also found that MPCA employees were not consistently
following the leave allocation procedures, and leave time was
not always properly allocated to Federal projects. For
example, during one pay period, an employee charged 40 hours
of leave time to Ritari and 40 hours to another Federal
project. This did not conform to the MPCA leave policy
because (1) no time was spent on Federal projects that pay
period, since the individual was on leave the entire pay
period, and (2) the leave was not charged in the proportion
of budgeted hours, as the employee also worked on state
projects, and leave was not charged to any state projects.
At our request, MPCA computed the amount of actual leave time
that was charged to Ritari from its inception on June 30,
1987, to December 31, 1993. Of the 4,452 labor hours charged
to Ritari, only 138 hours, or 3.1 percent, were for leave
time. In comparison, for fiscal year 1993, MPCA's total
leave time was 14 percent of its total regular hours. MPCA's
computation indicated that the charges to Ritari were not
excessive, and may have been less than the proper amount that
should have been charged. However, we have no assurance that
MPCA charges for leave costs were not excessive at other
Federal sites. MPCA's Chief Financial Officer agreed to work
with EPA to establish an equitable leave allocation system.
DIRECT LABOR RATE INCREASES EXCEEDED CONTRACT LIMITS
MPCA approved direct labor rate increases for 1990 that were
in excess of the limits allowed in the contract. MPCA
approved the rate increases without obtaining supporting cost
documentation or performing a thorough cost analysis. With a
cost reimbursement type contract, the recipient should ensure
that sufficient supporting documentation is obtained before
rate increases are approved.
The contract provisions allowed an increase of 10.8 percent,
which included an increase of 6 percent plus the increase in
the Consumer Price Index of 4.8 percent. Delta Environmental
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Consultants, Inc. (Delta), the contractor on the Ritari site,
explained to MPCA that its direct labor increases were 12.15
percent and its equipment and material costs did not
increase. Delta stated that these rate changes represented
an average increase of 9.72 percent in its direct labor and
materials costs, which was within the 10.8 percent allowed in
the contract. The contract did not allow the use of an
average percentage increase in direct labor and material
costs. The rates for each separate direct labor category and
each item of material were subject to a maximum escalation
factor of 10.8 percent.
MPCA approved the rate increase without obtaining supporting
cost documentation or performing a thorough cost analysis.
As a result, MPCA approved rate increases for several
individual labor categories that were in excess of the
allowed increase of 10.8 percent. Most of the Delta's billed
labor hours were in categories that increased from 8.9
percent to 42 percent. We were unable to determine how Delta
arrived at its calculation of a 12.15 percent increase; our
calculation of the average labor rate increase was 15.1
percent. The direct labor rate increases resulted in
additional direct labor costs, as well as related charges for
indirect costs and profit.
MPCA NEEDS TO MORE THOROUGHLY REVIEW
DELTA'S INDIRECT COST RATES
MPCA approved indirect rate increases based on accountant's
and auditor's reports which Delta provided. While it is a
good practice to require such reports, MPCA did not have a
person, knowledgeable about Federal cost principles, review
the reports submitted. We have some concerns over the
appropriateness of Delta's indirect rates based on (1) our
limited review of these reports and (2) problems found during
an audit of a cost proposal from another Delta office. Due
to our concerns, we do not believe that MPCA has adequate
assurance that Delta's indirect rates include only costs
allowable under Federal cost principles. Thus, EPA may have
been overcharged if Delta's indirect rates include
unallowable costs.
The contract allowed Delta to request a rate increase each
year. Along with each proposed change, Delta was required to
submit documentation to support its request. The
documentation could be either (1) an audit report and
projected budget adjustments or (2) a letter from a reputable
accounting/auditing firm certifying that the audit upon which
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the change is based was performed in accordance with Federal
Acquisition Regulations (FAR) cost principles.
Delta submitted an independent accountant's report which
supported an indirect rate of 240 percent for 1989. However,
MPCA negotiated an indirect rate of 140 percent for 1989. In
1990, Delta requested an increase to 160 percent, which MPCA
approved. MPCA did not provide us with an additional report
to support this rate increase, but stated that the increase
was not very large and seemed reasonable.
In 1991, Delta requested an increase to 240 percent. Delta
submitted to MPCA an independent auditor's report for the
year ended December 31, 1990, which supported an indirect
rate of 240 percent. MPCA approved the rate increase based
on this report and on the fact that it believed that Delta's
actual indirect rate had been higher than what it had been
charging MPCA for the previous two years. Delta's indirect
rate remained at 240 percent for the remainder of the
contract.
We have some concerns whether the indirect rates Delta
charged were accurate and whether they included unallowable
costs. The first of the reports Delta provided to MPCA was
not an audit report. From reading the report, it appears
that the scope of the review was not sufficient to determine
if the indirect cost rate was calculated in accordance with
the FAR cost principles. The second report was an audit of
Delta's 1990 indirect cost rate, which was reported as 240
percent. The auditor expressed an opinion that the
computation fairly represented the overhead rate. The
Minnesota Department of Transportation, with also has a
contract with Delta, did review the auditor's report and
accepted the 1990 indirect cost rate. However, the
Department of Transportation did not review any of Delta's
records to verify the information in the auditor's report.
There was not sufficient information in the auditor's report
for us to make complete determination whether unallowable
costs were included in Delta's indirect cost rate.
Our concern about Delta's indirect cost rate is also based on
a U.S. Postal Inspector's report on the audit of a price
proposal submitted by Delta's Sacramento office. The
indirect cost rate in the proposal was based on the audited
financial statements, and the allowability of costs was
determined by the same Certified Public Accounting firm which
prepared the reports submitted to MPCA. The Postal
Inspector's audit determined that the proposed indirect cost
rate was higher than should have been allowed. When we
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compared the rates proposed for the Sacramento office to the
amounts in the reports presented to MPCA, we found some
similarities. Thus, we are concerned that some of the items
questioned by the Postal Inspector could also be included in
the rate charged to MPCA.
With a cost reimbursement type contract, MPCA needs to have
strong internal controls to ensure that indirect cost rates
are accurate and allowable, and that requested rate increases
are justified. While MPCA did take steps to ensure the
reasonableness of Delta's rates, by requiring Delta's
submission of audit reports, we believe that further steps
are necessary. MPCA should arrange an independent audit of
Delta's rates if possible.
SUPPORTING DOCUMENTATION FOR CONTRACTOR INVOICES
WAS NOT SUBMITTED CONSISTENTLY
Delta generally included supporting documents with its
invoices, but did not submit them on a consistent basis. In
some cases Delta did not provide the backup documents for the
cost of meals, lodging, mileage, and supplies. The contract
between MPCA and Delta required that supporting documents be
submitted for reimbursable expenses in excess of $25. Since
Delta had a cost reimbursement type contract, it was
important that MPCA only reimburse Delta for its actual
costs. To ensure this, MPCA should have required Delta to
submit all supporting documents required by the contract.
For future cost reimbursement type contracts, MPCA should
require all contractors to adhere to the contract terms and
submit supporting documentation as proof that expenses billed
were actually incurred.
MPCA SHOULD REVIEW CONTRACTOR EMPLOYEE TIMESHEETS
Although Delta's contract was a cost reimbursable type
contract, MPCA never examined Delta's timesheets supporting
its direct labor charges. MPCA's contract with Delta did not
require Delta to provide employee timesheets in support of
direct labor charges, and MPCA never requested timesheets.
MPCA also never audited Delta. We believe that this was an
internal control weakness, as MPCA had no way of knowing
whether the hours Delta billed truly represented hours worked
on MPCA projects. Requesting and reviewing timesheets from
Delta, even on a periodic basis, would have provided some
level of assurance that the labor charges were appropriate.
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MPCA has entered into additional cost reimbursement type
contracts with Delta as well as other contractors. Labor
hours are generally a significant portion of costs for RI/FS
work, so it is important that the contractors' billings
accurately reflect their costs. MPCA should require its
contractors to provide additional support for labor charges,
and ideally should try to conduct some type of audit or spot
check periodically.
MPCA COMMENTS AND ACTIONS
MPCA agreed to take action to address each of the weaknesses
in internal controls. In regards to the allocation of leave
costs, MPCA received additional guidance from EPA on how to
allocate leave. MPCA is waiting for an example of an
equitable leave distribution method. Upon receiving the
example, MPCA will apply the leave allocation plan to one
Federally funded site and send the information to EPA and OIG
for approval. After approval is received, MPCA staff will be
trained to follow the new system.
Concerning contractor rate increases, MPCA obtained
information from Delta subsequent to our fieldwork to support
the 1990 labor rate increases. MPCA agreed to require
contractors to submit documentation of personnel rate
increases in the future, and for any increases approved since
January 1, 1994.
MPCA intends to either hire an auditor or contract with an
independent auditor for indirect cost determinations. This
will ensure that audit reports contractor submit are complete
and indirect cost rates do not contain any unallowable costs.
MPCA's corrective action concerning review of contractor
invoices and timesheets is to have the procurement specialist
conduct periodic reviews of invoices. These reviews will
include examination of contractor timesheets. Also,
mandatory training is scheduled for all project officers on
proper invoice submittal and review.
OIG EVALUATION/RECOMMENDATION
MPCA's proposed corrective actions, when implemented, should
address the internal control weaknesses.
We recommend that Region 5 ensure MPCA implements the
corrective actions.
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CHAPTER 3
REPORT ON COMPLIANCE
MPCA did not comply with applicable Federal regulations and
cooperative agreement conditions in its (1) procurement of
contracts, and (2) management of site activities.
Specifically, MPCA awarded a contract for full scope RI/FS
work to a company that did not submit a proposal for that
type of contract. MPCA also did not receive approval from
EPA prior to performing work outside the scope of the
cooperative agreement. In our opinion, MPCA's performance of
work outside the scope of the cooperative agreement was
significant enough for us to question $227,584 as ineligible
costs.
PROCUREMENT REGULATIONS NOT MET
EPA procurement regulations for cooperative agreements
require that recipients determine qualified offerers solely
on the basis of the evaluation criteria in the request for
proposals (RFP). The RFP for the Multi-Site II contracts
stated that those contractors submitting a limited scope
proposal would only be evaluated for a contract for limited
scope work. However, MPCA awarded a full scope contract to a
company which submitted only a limited scope proposal. As a
result, MPCA did not comply with the RFP or EPA procurement
regulations.
MPCA issued the RFP in May 1988 for contractors to conduct
both full and limited scope work at hazardous waste sites
located in Minnesota. According to the RFP, full scope work
would meet all EPA requirements, and would be conducted at
Federally funded sites. Full scope work included RI/FS. The
purpose of an RI was to identify the type and sources of
contamination, and the effects of the contamination on public
health, welfare, and the environment. An FS was to identify,
investigate, and recommend alternative response actions for
sites. In contrast, the limited scope work would be
conducted only at state funded sites. Limited scope work
included limited remedial investigations and focused
feasibility studies (LRI/FFS). The purpose of the LRI was to
generate data only to the extent it was necessary to identify
and design an interim or early response action, including a
limited source removal. Similarly, the FFS was to identify,
investigate, and recommend alternative permanent water supply
systems and/or limited source removal methods.
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The RFP requested the proposers to submit one of two types of
proposals: either limited scope or full scope. The RFP
clearly stated that those contractors submitting a limited
scope proposal would only be evaluated for a contract for
limited scope work. The RFP requirements for the limited
scope option were less stringent and less information was
required than for the full scope option. The RFP included
two different sets of assumptions. Those contractors
submitting proposals for full scope work were required to
address both sets of assumptions, and prepare cost estimates
for each. Those submitting proposals for limited scope work
only had to address one set of assumptions and prepare one
cost estimate. Thus, much more work was required of a
contractor to prepare a proposal for full scope work than
limited scope work.
MPCA received eight proposals in response to the RFP. Seven
proposals were full scope and only one, submitted by Delta,
was a limited scope proposal. MPCA awarded Delta a full
scope contract in April 1989, even though it had only
proposed to do limited scope work. The MPCA selection team
did not disqualify Delta from consideration for a full scope
contract even though it had submitted only a limited scope
proposal. Delta was subsequently assigned to do full scope
work on Ritari, a Federally-funded site.
MPCA did not comply with the terms of the RFP when it awarded
Delta a contract to perform full scope work. The
regulations, 40 CFR 33.510, require the recipient to
publicize RFPs and evaluation factors and to identify their
relative importance. The RFP indicated that proposers of the
limited scope proposal option would be evaluated only for a
limited scope contract. Title 40 CFR 33.515 states that
recipients must base their determination of qualified
offerers solely on the evaluation criteria in the request for
proposal. MPCA, in awarding a full scope contract to Delta,
did not comply with the evaluation criteria in the RFP.
MPCA's award of a full scope contract to Delta did not
conform to 40 CFR 33.230, which requires the recipient to
conduct all procurement transactions in a manner that
provides open and free competition. Any arbitrary action in
the procurement process would be an inappropriate restriction
on competition. Awarding a full scope contract to Delta, who
submitted a limited scope proposal, was an arbitrary action
that restricted open and free competition.
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A state is required by 40 CFR Part 35, Subpart O1, to either
(1) certify that its procurement system meets the intent of
the requirements in Subpart O or (2) allow EPA preaward
review of proposed procurement actions. MPCA has not
complied with either of these options. The last MPCA
certification was in 1988. It was the understanding of MPCA
officials that they were not required to certify the
procurement system after 1988. We informed Region 5
officials of this situation in a flash report (Report No.
4400061) on May 13, 1994. We recommended that Region 5
require MPCA to certify its procurement system meets the
requirements of 40 CFR Part 35, Subpart O. MPCA submitted a
certification for its procurement system on July 27, 1994.
WORK OUTSIDE APPROVED SCOPE
MPCA did not request a change in the scope of the cooperative
agreement when additional tasks were added at Ritari. States
are required to request an amendment to the cooperative
agreement when there are changes to the scope of the project.
Since MPCA did not request an amendment, the tasks were
outside the scope of the cooperative agreement.
EPA must approve changes to the scope of work before costs
can be incurred for the changes. Changes to the scope of
work are generally outlined in workplans. One of the
assurances in the cooperative agreement between EPA and MPCA
is that MPCA agreed to submit all plans and reports,
including workplans, to the EPA project officer for review
and concurrence prior to implementation. The Superfund
Memorandum of Agreement also states that the project officer
will coordinate reviews of all work products.
Delta's original workplan, approved by EPA, included tasks 1-
13. Tasks 14 and 15 were for activities that EPA had
separately approved and added to the scope of the cooperative
agreement, but were not formally added to the workplan.
During the remedial investigation, MPCA instructed Delta to
submit a workplan amendment because new developments at the
site required revision of the work schedule and tasks. Delta
submitted a workplan amendment, which revised the budgets for
several existing tasks, and added tasks 16-19, which were for
1 While 40 CFR Part 33 was the regulation in place at the
time MPCA procured the MSII contract, the current regulations on
procurement for Superfund cooperative agreements are found in 40
CFR Part 35, Subpart 0.
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new activities. However, MPCA did not request an amendment
to the cooperative agreement for the additional tasks.
Therefore, these new tasks were outside the original
cooperative agreement scope.
Task Task
Number Task Description Amount
16 PGP matrix study $ 2,436
17 Phase II well drilling 91,151
18 Groundwater sampling,
4th & 5th rounds 98,482
19 Dioxin exposure survey 6,054
S 198.123
The cooperative agreement requires that all workplans be
submitted to the EPA project officer for review and
concurrence prior to implementation. MPCA completed these
tasks with the apparent knowledge of the EPA remedial project
manager, but without the knowledge or approval of the EPA
project officer. While the remedial project manager was
MPCA's contact for technical changes to the work at the site,
project officer approval is needed before costs are incurred
for the changes to the scope of work.
MPCA's performance of activities outside the scope of the
contract resulted in costs being incurred which were contrary
to the regulations and cooperative agreement conditions. As
a result, we have questioned as ineligible the $198,123 MPCA
paid to Delta for tasks 16 through 19. We have also
questioned as ineligible MPCA's labor, fringe benefits, and
indirect costs that were related to the unapproved tasks.
MPCA's accounting system does not track project costs by
tasks, so we were not able to directly match the MPCA's costs
with the project tasks. Therefore, we used a ratio to
calculate the portion of the MPCA's costs allocable to the
work completed outside the scope of the cooperative
agreement. The ratio of questioned contractual costs
($198,123) to total contractual costs ($817,243) was 24.2
percent. We applied that percent to MPCA's costs:
14
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Cost Category
Salaries
Fringe benefits
Indirect costs
Contractual costs
Total questioned costs
Costs
Claimed
$ 77,284
15,505
28.952
$121.741
Percent
Ineligible
24.2%
24 .2%
24.2%
Costs
Questioned
Ineligible
$
$
$
18,
3,
7,
29,
198,
227,
703
752
006
461
123
584
MPCA COMMENTS AND ACTIONS
MPCA disagreed with our conclusions. MPCA's position was
that it did follow the state contractual procurement
requirements in obtaining the contract with Delta. The
request for proposal did not contain any language precluding
MPCA from exercising its discretion and extending full scope
contracts to an otherwise qualified proposer that submitted
only a limited scope proposal. All interested companies had
the same opportunity to submit proposals for either limited
or full scope contracts and to be subsequently evaluated by
MPCA. MPCA also stated that the audit did not contain any
allegations that the services Delta provided were deficient
in any way.
In regards to the work outside the scope of the cooperative
agreement, MPCA's position was that cooperative agreement
amendment no. 35, dated March 6, 1991, with a value of
$149,489, was for additional soil and ground water samples
for the presence of dioxin. Also, copies of all documents
relating to the tasks were submitted to the remedial project
manager, and the Superfund Memorandum of Agreement (SMOA)
requires the project manager is to coordinate with the
project officer in reviewing and approving tasks.
PIG EVALUATION
The OIG continues to believe the procurement of the contract
with Delta was not in compliance with Federal procurement
regulations. We did not cite violations of state procurement
regulations because MPCA is to follow Federal regulations
when procuring contracts to be used in conjunction with
Federal monies. Federal regulations, 40 CFR Part 33.515,
require that states base their determinations of qualified
offerers solely on the evaluation criteria in the RFP. The
RFP stated that contractors submitting limited scope
15
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proposals would only be evaluated for a contract for limited
scope work. In exercising its discretion, MPCA deviated from
the evaluation criteria in the RFP. While all companies were
given the opportunity to submit proposals, all companies were
not given an opportunity to submit a limited scope proposal
and be considered for a full scope contract.
In its response, MPCA stated that the report did not contain
any allegations that the services Delta provide were
deficient. The purpose of the audit was to review MPCA's
internal controls over costs and not the technical quality of
the work performed. Notwithstanding, it should be noted that
MPCA removed Delta from further working on the project
because of Delta's difficulty in producing the remedial
investigation report.
In regards to the work outside the scope of the cooperative
agreement, amendment no. 35 was for more tasks than dioxin
sampling: additional soil and ground water sampling and a
remedial action. The contractual costs associated with each
of he tasks were $64,500 for the sampling and $69,500 for
the remedial action. MPCA later determined that the remedial
action was not needed, but did not have approval from EPA to
use the $69,500 on other site activities.
The $64,500 of contractual costs EPA awarded to MPCA in
amendment no. 35 was for task 14, a dioxin survey, and not
tasks 16 through 19. MPCA files indicated that MPCA and
Delta had estimated the cost of task 14 to be $64,500, the
same amount MPCA included in its application for additional
funds. As a result, tasks 16 through 19 were not what was
intended by amendment no. 35, or any subsequent cooperative
agreement amendment. We continue to believe that tasks 16
through 19 were outside the scope of the cooperative
agreement.
MPCA has always been required to submit plans and report to
the project officer, and not the remedial project manager,
for review and approval. The SMOA does state that the EPA
project officer and remedial project manager are to
coordinate their reviews of plans and reports, but the
ultimate responsibility is with the project officer. While
the SMOA mentions that EPA is to coordinate its review, the
cooperative agreement specifically states that the plans and
reports are to be submitted to the project officer.
16
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RE COMMENDATION
We recommend that Region 5:
• clarify the requirement that MPCA submit all workplans
and reports to the EPA project officer, and
• recover the questioned costs of $227,584.
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18
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APPENDIX 1
Page 1 of 19
Minnesota Pollution Control Agency
June 28, 1994
Mr Anthony C Carrollo
Divisional Inspector General for Audits
O S Environmental Protection Agency
Office of Inspector General
Northern Division
77 West Jackson Boulevard
Chicago, Illinois £0604
Dear Mr Carrollo
Enclosed please find the Minnesota Pollution Control Agency (MPCA) response to
the draft Audit Report E5BGL4-05-0138 . In accordance with a telephone
conversation on June 27, 1994, between Juline Holleran of my staff and
Janet Kasper of the Office of Inspector General, this response is provided
within 30 days of MPCA receipt of the draft Audit Report (Hay 31, 1994). The
MPCA staff has reviewed the draft report and has provided comments which
reflect MPCA's position on the audit findings, as you requested The comments
to follow are organized in order of the issues raised in the draft report.
In addition to the MPCA staff's comments, documentation is provided from the
MPCA files which supports MPCA's position on the audit. Most of the
supporting documentation has had the relevant passages highlighted to focus
attention on those issues as referenced
MPCA appreciates the opportunity to review and comment on the draft report I
hope you will find the information provided in this response clearly
demonstrates MPCA's competent performance as the lead agency on the Ritari
Post I Pole Site (Site) Remedial Investigation/Feasibility Study (RI/FS), and
that the expenditure of federal funds has been in accordance with all
applicable federal and state policies, regulations and procedures. In the
absence of any allegation that services rendered were inadequately performed,
MPCA anticipates full resolution of this audit with no questioned costs.
This response begins by addressing the issue of procurement requirements not
being net State of Minnesota Attorney General's staff has cited state and
federal statutes and laws which support the argument that the MPCA did in fact
follow all applicable contract law, policy, and regulation in hiring the
Multi-Site contractors.
The next section of the response covers the question of the appropriate
expenditure of funds for tasks completed during the Remedial Investigation.
The MPCA staff has supplied numerous documents to show continual involvement
by the D S. Environmental Protection Agency (EPA) through >.t the process and
documents appropriate EPA approval of funds and revision of scope
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19
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APPENDIX 1
Page 2 of 19
Mr Anthony C Carrollo
Page 2
June 28. 1994
The last section of the response addresses the issues raised regarding MPCA
compliance and internal controls This section demonstrates internal
improvements and represents HPCA's commitment to resolve any problems which
may have occurred in the past and corrective action being implemented to
prevent future problems.
COMPLIANCE KITH PROCUREMENT REQUIREMENTS
In the Office of the Inspector General's (DIG) draft Audit Report regarding
Multi-Site Cooperative Agreement No V005794, you state that in the course of
conducting their review, significant weaknesses in the internal controls in
the area of contract procurement were found, which resulted in the questioned
costs As a consequence of these findings, DIG recommends that Region 5
recover costs in the amount of $785,121.00 from MPCA as ineligible costs. Of
that amount, OIG has identified 5755,660.00 of contractual costs paid by MPCA
to Delta Environmental Consultants, Inc. (Delta) as ineligible because the
MPCA did not properly follow contract procurement requirements. It IB the
position of MPCA that it indeed did properly follow state of Minnesota's
(State) contractual procurement requirements, and that the reportedly
ineligible costs have improperly been determined to be ineligible The basis
for MPCA's position is explained and discussed below and is supported by
Attachment A to this letter Further, MPCA notes that the OIG audit contains
no allegations that the services provided by Delta were inadequately
performed, substandard, or otherwise deficient in any way. In the absence of
any such allegations, a request for reimbursement of $755,660 00 paid to Delta
is unconscionable and contrary to established principles of contract law.
The Multi-Site II (MSII) procurement process started in January of 1988, and
culminated in April 1989 with Che execution of four (4) MSII contracts,
including the MSII contract with Delta. On February 8, 1988, MPCA initiated
the process whereby requests for proposals for the Multi-Site contract would
be solicited with the intention of procuring two to four contractors. The
procurement planning process started with the establishment of the MSII
procurement team (MSII Team). The MSII Team was composed of Barb Jackson,
Barb Gnabasik, Dave Douglas, Mike Convery, Orbbie Webber, and team leader,
Mike Vennewitz from MPCA. The MSII Team also included two EPA staff,
Fred Bartman, remedial project manager, and Dr. Cheng-Hen Tsai, a laboratory
quality assurance/quality control specialist. Debra McGovern and Doug Day of
MPCA were the State's Authorised Agents, and assisted Mr. Vennewitz in
contract negotiations. Drafting of the MSII request for proposal/request for
qualifications (RFP) began in February of 1988. On March 25, 1988, the draft
RFP was sent to EPA Region 5 office for review. On April 15, 1988, MPCA sent
a request for authority to negotiate to the State Department of Administration
(MDA) which was subsequently granted. Later that month, April 26, 1988, EPA's
comments on the draft RFP were received and incorporated. RFP notification
was published in the State Register on May 30, 1988, in the June 8, 1988,
edition of Business Commercial Daily, and in the Hazardous Haste News and
Superfund Report. Further, notice was sent to all parties on the consultant's
list and on the Minority Business Enterprise/Women's Business Enterprise
(MBE/WBE) consultant's list. The deadline for receipt of proposals was
June 27, 1988. A pre-proposal meeting vas held on June 8, 1988, and was
attended by more than 50 people.
20
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APPENDIX 1
Page 3 of 19
Mr Anthony C Carrollo
Page 3
June 28. 1994
While the RFP was on notice, the MSII Team drafted two proposal review forms
from criteria listed in the RFP The cost review form was designed to assure
that cost data submitted with each proposal was in sufficient detail and
proper format to allow the review team to perform a cost and price analysis
The second form was the technical review form which contained the following
criteria, personnel, qualifications, staffing capabilities, past appropriate
experience, management capability, financial capability, and quality of a
technical analysis of a theoretical problem present in the RFP
From the pool of more than 50 attendees at the pre-proposal meeting came a
total of eight proposals received on June 2~>. 1988 Proposals were received
from Malcolm Pirnie, Inc IMP), Barr Engineering Company (Barr), Ecology and
Environment (E&E), Woodward-Clyde (WCi, weston, Camp Dresser & McKee, Inc.
(CDM), Delta and Lee Wan and Associates. The proposal from
Lee Wan and Associates was considered completely inadequate. It did not pass
the 'Pass Fail* requirements outlined in the RFP upon receipt, and, therefore,
was not reviewed by the MSII Team. Six of the qualified proposals received
were full scope proposals and one qualified proposal, from Delta, was a
limited scope proposal.
Proposal review was conducted in July of 1988, utilising the formal criteria
as advertised in the RFP and the proposal review forms Two team members,
Orbbie Webber and Dr. Tsai, reviewed only the Quality Assurance Project Plan
portions of each proposal. The MSII Team scored and ranked the proposals
based on the technical, business, and cost/price analyses. Using the scoring
method established during the RFP planning process, proposals were scored as
follows
Company Pull Scope Limited Scope
Barr 386 370
EtE 344 334
Delta H/A 340
HP 336 326
CDM 331 331
Weston 287 288
WC Not Scored Not Scored
The proposal submitted by WC was not scored because xts proposal was deemed
inadequate and its experience insufficient. EtE, CDM, HP, and Barr were
determined to be qualified for full scope contracts. These four proposers and
Delta were determined to be qualified for limited scope contracts. Weston and
WC were determined to be less qualified or unqualified, and were not invited
to the next phase of proposal review, interviews with the MSII Team.
Interviews were held on July 19-21, 1988. Based upon the interview score
sheets and interview answers, a short list of finalists was selected to
advance on to the negotiation phase for the MSII contracts. BtE was
eliminated from further consideration at this stage based upon poor
performance in the interview process, lack of State experience, weak
subcontractors, limited RI/FS work and a technically weak hydrologist. This
resulted in a determination that IU was not technically competent for either
21
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APPENDIX 1
Page 4 of 19
Mr Anthony C Carrollo
Page 4
June 28, 1994
full scope or limited scope work CDM, MP, Barr, and Delta were determined to
be the most technically competent and price competitive and, therefore, more
suitable to enter into contract negotiations
The contract negotiation process began in August of 198B, when the four
finalists were introduced to the negotiation team of Debra McGovern, Doug Day.
Mike Vennewitz, and Robert Einweck On January 10, 1989, draft contracts
based on language outlined in the RFP were sent to the four firms for comment.
Their comments were received in February and incorporated as appropriate
Contract negotiations were then held on February 24 and 25, 1989. As a result
of negotiation sessions, certain changes were made to the contracts for each
of the four firms Best and final offers were received from the four firms
and final contracts drafted between February 16 and March 20, 1988 Final
contracts were signed and executed by the contractors and the State Department
of Finance in April of 1989.
Although the RFP solicited proposals for limited scope work, no limited scope
work was forecast at the time of contract negotiations. Full scope work was
projected to be the MPCA's workload for the foreseeable future, and MPCA
management determined that the workload was beyond the capability of three
contractors Given the strong interest on the part of the MPCA to have four
contractors available for the anticipated workload, Delta, having clearly
demonstrated to the RFF review team that it was fully qualified for full scope
work, was included in contract negotiations Delta's broad range of
experience in performing full scope RI/FS's was reviewed by the team of MPCA
staff and supervisors during the interview stage of the procurement process
MPCA acknowledged a concern that Delta did not have the same breadth of
organization possessed by the other three contractors Consequently, the
initial site assignments made to Delta were of a scope determined Co be
commensurate with their organization's capabilities. The Union Scrap Site was
tasked to Delta on May 24, 1989, for development of an RI/FS support document
work plan. A work order to perform the RI/FS was issued to Delta on July 28,
1989, for the Union Scrap Site. Delta performed this project competently and
demonstrated its expertise in performing full scope RI/FS's. Consequently,
the work assignment for the Ritari Post and Pole Site (Site) Project was
issued to Delta on September 5, 1989. The OIG Audit Report, contains no
allegations or findings contrary to performance.
OIG states in the draft Audit Report that MPCA did not properly follow
procurement requirements; but OIG has not identified any procurement
requirement in State statute or rule with which MPCA failed to conply.
The State's statutory requirements for issuance of State contracts are found
in Minn. Stat. ch. 16B. Generally and specifically relevant statutory
sections are Minn. Stat. $$ 16B.01 through 16B.102, and S 16B.17. Aa a general
rule, all State contracts for construction or repairs and all purchases of and
all contracts for supplies, materials, purchase or rental of equipment and
utility services are required to be based upon competitive bids (Minn. Stat.
S 16B.cn, Subd. 1) . However, this general rule does not apply if Minn. Stat.
22
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APPENDIX 1
Page 5 of 19
Mr Anthony C Carrollo
Page 5
June 28, 1994
ch x£B otherwise provides for alternative procurement methods (Mann. Scat
5 i6B.cn, Subd l) RequestB for proposal are expressly provided for as an
alternative to sealed competitive bids.
Subd 3 Publication of Notice, Expenditures Over
SIS,000 00 and Requests for Proposals If the amount of
an expenditure or sale is estimated to exceed
$15,000.00, sealed bids or requests for proposals
provided in Section 16B.08, Subd 4, clause (b1, must be
solicited by public notice . . .
Minn Stat 5 16B 0"?, Subd 3 Subdivision 4 (b) of Section 16B 08 provides
In lieu of the requirement for competitive bidding in
Section 16B 01. Subd 1. purchases and contracts may be
negotiated in those circumstances determined by the
Commissioner, and in any of those circumstances the
Commissioner shall advertise for a request for proposal
as a basis for negotiation.
Chapter 16B contains only the two above-quoted references with respect to
requests for proposal, requiring publication of notice and expressly
authorizing contract negotiation by requests for proposal.
As noted above in the discussion of the procurement process, authorization to
negotiate was granted by the Commissioner of the MDA and the request for
proposal was public noticed for more than seven days before the final
proposals were due. The requirements of the two above-cited statutory
provisions were net.
The State's regulatory requirements for State contracts are found in Minnesota
Rules Chapter 1230. Generally relevant sections of Chapter 1230 are sections
1230 0100 through 1230.1300. Minnesota contract procurement rules do not
provide or contain any specific requirements relative to requests for
proposals and negotiation of contract
In the absence of statutory or regulatory requirements or restrictions upon
the request for proposal process, a contracting agency has considerable
discretion in the negotiation process. That discretion, though not controlled
by, may be guided by the general principles of openness and fairness embodied
in the State contracting laws and regulations.
The RFP procurement process was conducted consistent with those general
principles, and was open and fair. The RFP was public noticed and a
pre-proposal meeting was held. Fifty prospective proposers attended, of which
eight submitted proposals. Proposals meeting "Pass Fail* requirements were
reviewed, scored and ranked by the MSII Team. Interviews were conducted
leading to contract negotiations and ultimately to execution of CODtracts with
qualified contractors.
23
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APPENDIX I
Page 6 of 19
Mr Anthony C C»rrollo
Page 6
June 28. 1994
The RFP cransmittal letter did indicate that one of two types of proposals may
be submitted in response to the RFP, a limited scope proposal or a full scope
proposal, and indicates that at page 37 of the RFP a description of the two
types of proposals is provided Ae noted in the draft Audit Report, the RFP
stated that those contractors submitting a limited scope proposal would only
be evaluated for a contract for limited scope The request for proposal does
not contain any language precluding MPCA from exercising its discretion and
extending full scope contracts to an otherwise qualified proposer that
submitted only a limited scope proposal
The difference in the two types of proposals was only in the hypothetical
problem that a proposer must address The purpose of the hypothetical and
other evaluation criteria is to identify the most qualified proposers
Evaluation criteria are identified at page 48 of the RFP. The Evaluation of
Proposal section of the RFP specifically states, "The number and scope of
contracts entered into will be a function of the proposer's qualifications and
capabilities." Ultimately, it is the proposers' qualifications and
capabilities that determine the scope of contract for which they are eligible.
Further, the RFP at page 51 expressly states- "The MPCA authorized agents
shall have authority to issue work orders or contract(8) to the contractor
best meeting specifications and conditions " The RFP contained only one model
contract with no indication that two different contracts, one for limited
scope, another for full scope, would be written or entered into. The sane
contract was contemplated for all qualified proposers.
Although proposal review vaa for both full and limited scope, questions during
the interview process dealt with both limited and full scope work abilities
Delta answered questions for both full scope and limited scope RI/FS work.
Their answers indicated that they had considerable experience with RI/FS,
worked with EPA in Illinois and Wisconsin, and that they had personnel on
staff with prior MPCA experience working on full scope RI/FS's. Through the
course of the evaluation process. Delta demonstrated that it had extensive
experience with full scope work and was qualified for such work.
OIG's entire position rests upon a single statement in the RFP: "Proposers
choosing this option will be evaluated on proposal development for the Limited
Scope Proposal Option only.* This was a statement of intent and not a
requirement imposed upon any potential proposer. The statement did not
preclude the MPCA from considering a proposer that chose this option for a
full scope contract if subsequently determined to be qualified through any
stage of the procurement process. Procurement by RFP if different than
procurement by competitive bid. For the latter, there are statutory and
regulatory requirements that prescribe the steps of the process and impose
specific requirements upon the contracting agency. This is not true for
procurement by RFP which is a procurement by negotiation. The purpose of the
RFP is to identify qualified contractors. This purpose was not compromised
Rather, it was served by including Delta in MSII contract negotiations.
24
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APPENDIX 1
Page 7 of 19
Mi Anthony C Carrollo
Page 7
June 26, 1994
OIG cites to 40 CFR 35 6555, 35 6565, and 31-36 as further support for its
position First, it is important to note chat 40 CFR Part 35, subp 0 was not
in place at the time the contract with Delta was awarded and contains no
indication of retroactive application It is the MPCA's position that the
requirements of Sections 35 6555 and 35.6565 are, therefore, improperly cited
and inapplicable Further, even though inapplicable, the actions of MPCA
otherwise fully complied with the provisions of these sections.
With respect to 40 CFR 35.6565, OIG states, "The regulations, . , require
the recipient to publicize RFPs and evaluation factors and to identify their
relative importance " The draft report goes on to conclude without support
that the award to Delta did not comply witn the terms of the RFP The RFP was
public noticed and evaluation criteria were identified and relative importance
indicated See RFP at pages 48-51 MPCA was alsc in compliance with Section
35 6565, which states, "The recipient must honor any response to publicized
requests for proposals to the maximum extent practical,* as MPCA considered
Delta for a full scope contract subsequent to Delta's demonstration of
extensive experience and qualifications.
Contrary to OIG's characterization, the RFP process that resulted in an award
of a full scope contract to Delta did provide full and open competition.
Again, with respect to Section 35.6555, OIG merely states a conclusion without
support OIG has not identified any unfairness in the process or any company
harmed or disadvantaged by the process All interested companies had the sane
opportunity to submit proposals for either limited or full scope contracts and
to be subsequently evaluated by the MSII Team.
Citing to Section 31.36, OIG states that, 'recipients are required to make
awards only to responsible contractors who possess the ability to perform
successfully under the terms and conditions of a proposed procurement.' MPCA
did award a contract to a 'responsible contractor' as the term is generally
understood. (The term is not defined. State rules do provide a definition of
•responsible bidder.' Minn. Rules 1230.0150, subp. 20. Delta would have
qualified under State rules as a responsible bidder.) Contrary to OIG's
assertion, MPCA was able to and did evaluate Delta's qualifications and
ability to perform successfully. The extent of the evaluation process and of
Delta's qualifications have been discussed above and in supporting documents
in Attachment A to this letter Review of the evaluation process and
supporting documentation should clearly demonstrate MPCA's compliance with
this requirement.
The MPCA's action in awarding a contract to Delta was reasonable and was based
upon full and complete consideration of its proposal and qualifications.
Those actions cannot properly be characterized as 'arbitrary' rather they
represent the reasoned decision of the MSII Team. As such, they were fully
consistent with the OMB Circular A-87 and applicable state and federal
policies, regulations and procedures.
MPCA submits that there was no weakness on its contract procurement process.
MPCA complied with State requirements for issuance of contracts by RFP. Delta
was a responsible contractor fully and duly qualified for rull scope work.
25
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Minnesota Buperfund Cooperative Agreement
APPENDIX 1
Page 8 of 19
Mr Anthony C. Carrollo
Page 6
June 28, 19S«
Delta fulfilled its contract responsibilities competently and professionally
In the absence of substantiated allegations to the contrary, OIG's
recommendation is improper and should not be followed
Attachment A to this letter contains all additional supportive documentation
relative to procurement
EXPENDITURE OF FUNDS
The draft Audit Report for the Site questions several practices used by the
MPCA staff in carrying out the Multi-Site Cooperative Agreement IMSCA)
No V005"794 In Exhibit A, Summary of Costs Claimed and Questioned, Note 2,
page B, DIG questioned the eligibility of "5198,123 of contractual costs for
work that was outside the approved scope of the cooperative agreement." The
report goes on to say,
"During the remedial investigation, MPCA instructed
Delta to submit a workplan amendment because new
developments at the site required revision of the work
schedule and tasks Delta submitted a workplan
amendment, which revised the budgets for several
existing tasks, and added tasks 16-19, which were for
new activities. However, BPA never approved the
amendment."
DIG points out "[tlhe EPA Project Officer is the or.ly person who has the
authority to approve a change in the scope of work " OIG then concludes.
"MPCA completed these tasks with the apparent knowledge of the EPA Remedial
Project Manager, but without the knowledge or approval of the EPA Project
Officer."
MPCA believes that OIG erred in these findings. The following paragraphs
present the factual basis for MPCA's contention that the EPA Project Officer
IPO) did in fact provide advance written approval for the revision of scope in
the form of an amendment to the MSCA. Also, the subsequent technical
approvals of the revision in scope were properly obtained in accordance with
the State Memorandum of Agreement (SMOA) between the MPCA and the BPA dated
September 20, 1989.
Enclosed please find documentation in Attachment B which shows that the PO
approved the additional work necessary at the Site in Amendment #35 to the
MSCA. On January 28, 1991, the Regional Administrator lent a letter to the
MPCA Commissioner acknowledging the submittal of the amendment application and
stating, "It is the understanding of the Regional v Office of Superfund that
the August Application was replaced by the Minnesota Pollution Control
Agency's (MPCA's) December 7, 1990, application for the same amount ($149,859)
to be used for additional soils and ground water analyses to evaluate dioxin
contamination at Ritari." The Narrative Statement of the December 9, 1990,
application clearly states "It)he need to shift focus at the Ritari Post and
26
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Minnesota Superfund cooperative Agreement
APPENDIX 1
Page 9 of 19
Mr Anthony C Carrollo
Page 9
June 28, 1994
Pole Site iSite) is caused by the discovery of dioxins in the soils " "The
5149,859 requested is needed to analyze additional soil and ground water
samples for the presence of dioxins
The approval letter dated March 6, 1991, from the Regional Administrator
approved MPCA's request for additional funds by stating, "[t]he enclosed
Assistance Amendment confirms my approval of your requests to increase and
extend the Ritari Remedial Investigation/Feasibility Study " Contrary to
OIG's finding, it is MPCA's understanding that the PO prepared this approval
letter
However, MPCA is concerned about OIG's finding which specifies that the PO is
the only person who has the authority to approve a change in the scope of
work, as 40 CFR 31 30 only specifies that the "grantee obtain the prior
written approval of the awarding agency " Such written approval was obtained
in the form of MSCft amendment *35, which revised the scope to include
investigation and analysis for dioxin
Approval of the MSCA amendment, and the language in the two documents cited
above from the Regional Administrator clearly shows the Office of Superfund
and the PO were aware of and in agreement with the need to expand the scope of
the RI/FS at the Site to evaluate the extend of dioxin contamination
Subsequent to these approval actions, MPCA commenced revision of the technical
work products to reflect the approved revision of scope.
Regarding the subsequent Work Plan Amendment which added tastes t!6-19 to the
scope of the RI/FS. MPCA contends that the actions taken to gain approval were
in accordance with the SMQA dated September 20, 1989. Copies of documents are
enclosed in Attachment B which show that, in accordance with Attachment 4 of
the SMQA, Draft RI/PS Work Plan amendments were submitted for Support Agency
"review, comment, and conditional approval.* Documents in the file show EPA
Remedial Project Manager (RPM), Tom Barounis, Kathy Warren's replacement, was
consulted throughout the planning process for revising the RI/FS Work Plan.
In accordance with the SMQA, on April 4, 1991, MPCA sent the RPM a copy of the
draft RI/FS Work Plan Amendments. On April 11, 1991, the contractor (Delta)
sent to the MPCA and EPA revised pages to the first draft RI/FS Work Plan
Amendments During this tine EPA RPM provided comments to the MPCA Project
Manager via telephone, discussing the specific direction of the amended Work
Plan. In accordance with the SMQA, on April 15, 1991 the Final RI/FS Work
Plan Amendments for the Site were mailed to EPA for file maintenance At no
time did the RPM offer any opposition to the revision of scope to address
dioxin contamination at the Site.
Again, MPCA contends that OIG's finding that the PO must approve the Work Plan
in writing is in error, as the SMQA executed by EPA specifies that the support
agency (EPA in this case) is provided with drafts for review and comment,
which was done, and the final Work Plan is submitted to EPA for file
maintenance. Page S of the SMQA states that the EPA RPM is 'the EPA point of
contact for all technical and enforcement issues.* Further, the EPA RPM is
obliged under the SMQA to *in coordination with the IPA Project Officer,
review, comment, and consult on technical aspects of submittals according the
the event schedule in Attachment 4.* MPCA complied with its obligation under
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Minnesota Suparfund Cooperative Agreement
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Page 10 of 19
Mr Anthony C CarrolIc
Page 10
June 28, 1994
the SMOA in making appropriate submittals It appears that the RPM was remiss
in fulfilling obligations ae required under the SMOA to coordinate with the PO
on the technical aspects of the revision of scope
The Site file has additional documentation which demonstrates that it has also
been EPA's past practice to have the RPM issue approvals of RI/FS Work Plans
As Attachment B shows, RPM Kathleen Warrer. issued the approval letter to the
MPCA on May 7, 19SO. for the Ritari Post and Pole RI/FS Support Document (the
initial Work Plan) The Support Document contained the original i3 tasks
which the contractor was tc complete However, as previously discussed and in
accordance with the SMOA, this approval letter was unnecessary as final Work
Plans are submitted for file maintenance
EPA knew the original RI/FS Work Plan made assumptions about the limited
amount of contamination at the Site which we later discovered were not valid.
Eased on new data to show the extent and magnitude of dioxin contamination at
the Site, all parties involved with the administration of the Site understood
the need for expanding the scope of work in order to adequately address the
remedial actions necessary to be protective of public health and Che
environment.
In summary, existing documentation clearly shows the personnel in the Office
of Superfund knew and concurred with an expansion of the scope of the RI/FS
Work Plan Discussions with EPA began in October 1990 on the need to expand
the scope of the RI/FS. The RPM attended a meeting at the MPCA office on
November 1, 1990, to discuss specific issues relating to expanding the scope
of the RI/FS. All drafts and the final Work Plan Amendments were Bent to EPA
prior to EPA's final approval of an MSCA Amendment on March 6, 1991
Subsequently, the work order to Delta to increase the scope of the RI/FS was
not issued until June 3, 1991.
Additional documentation in Attachment B shows EPA's continual involvement in
the decisions made on issues related to the RI/FS. Included in Attachment B
are monthly reports submitted by Delta entitled, 'Project Status Report" and
other specific documents. These documents show EPA's intimate involvement in
the whole process. Relevant passages have been highlighted in yellow.
Successful completion of the RI/FS would not have been possible without
completing task* 16, 17, 18, and 19. These tasks addressed issues which
needed to be answered before reasonable alternatives could be developed in the
FS.
Each task was designed to accomplish the following:
Task 16 resolved the pentachlorophenol 1PCP) matrix
problem. Data could have been under or over estimated by
a factor of three. The problem of correcting the 30-40
percent spike recovery was essential to having PCP data
that could be used with some reasonable assurance.
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Page 11 of 19
MI Anthony C Carrollo
Page li
June 26, 1994
Another important reason for resolving the PCP matrix
problem was tied directly to using PCP data as a
surrogate parameter for dioxin. During the early stages
of the RI, MPCA found dioxin never appeared in any
meaningful concentrations when PCP was not present MPCA
also found dioxin concentrations increased as PCP
concentrations increased Since PCP 11 far more soluble
than dioxin, being able to accurately identify the
presence of PCP, would provide KPCA with an excellent
surrogate for the presence of dioxin at a fraction of the
cost of doing dioxin analysis at all locations on a
regular basis
MPCA felt the resolution of the PCP matrix problem was a
critical issue which needed to be resolved in order to
establish a strong relationship between the presence of
PCP and the likely presence of dioxin Since PCP
analysis costs less than ten percent of the cost of
dioxin analysis, this relationship could represent a
significant cost savings for all future analytical work
at the Site.
Therefore, MPCA used dioxin funding to pay for the PCP
matrix study because MPCA viewed the matrix study, when
resolved, could greatly increase the number of analytical
samples at the Site for far less money The cost of
completing the PCP matrix study was less than the cost of
analyzing two water samples for dioxin. MPCA was able to
collect and analyze ten tines more water samples for the
same amount of money once the PCP matrix study was
completed. This allowed MPCA to cover more area in and
surrounding the Site to insure the PCP/dioxin
contamination had not migrated beyond the Site
boundaries.
Task 17 added the ten additional monitoring wells MPCA
needed co determine whether the contamination had
migrated into the lower aquifer or migrated off site into
the adjacent properties. Had that been the case, the
local water supply would be supplying the local residents
with dioxin or PCP contaminated drinking water and/or the
surrounding property could pose a threat to neighbors and
the local habitat. The additional wells were monitored
during task IB to determine whether the PCP and
dioxin/furan contamination had moved into the lower
aquifer and/or off site, and if so, where and at what
concentrations.
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Mr Anthony C Carrollo
Page 12
June 28, 1994
Task 16 funded additional ground water sampling During
the fourth round of sampling. 15 of the original
monitoring well* and the ten new monitoring wells were
sampled for dioxin and PCP During the fifth round of
sampling, 15 of the original monitoring wells and the ten
new monitoring wells were once again sampled, but MPCA
was able to cut the number of dioxin samples to five
The approximate cost savings realized by using PCP data
as a surrogate for dioxin data was approximately $33,000
This additional data gave MPCA the assurance needed that
the public health and environment were not in danger from
migration of these contaminants off site
Task 19 was the Dioxin Exposure survey This task was
absolutely necessary to determine whether contaminants
from the Site had migrated off site and contaminated the
surrounding lands and vegetation Preliminary data
indicated wind blown contaminants could have migrated off
site and contaminated soils and vegetation on the
adjacent property where granng cows might have ingested
contaminated plants and produced milk contaminated with
dioxin.
The risk to public health and the potential dangers from
dioxin contaminated milk getting into the public milk
supply far outweighed any other information which this RI
study developed. Data collection and analysis resolved
this issue However, at the tine the EPA, Minnesota
Department of Health (MDH), and MPCA all agreed this task
was of paramount importance
COMPLIANCE AND IHTERSA1, CONTROLS
Allocation Of Employee Leave Costa
It has been noted that the MPCA needs to establish an equitable allocation
system for employee leave costs. The existing procedures allow leave time to
be directly charged to federal or state projects based on the percentage of
time spent on federal projects. If at least 50 percent of an employee's time
was spent on federal projects during a two week pay period, the employee was
able to allocate that leave time proportionately to the budgeted time for
federal and state projects during that quarter. It has been determined that
the percentage of leave time charged to the Site was 3.1 percent which was not
considered excessive and actually was less than the allowable amount of leave
time that could have been charged.
The MPCA discussed this issue with EPA and has requested guidance in
determining an equitable allocation system for employee leave costs. It
appears that other states in Region 5 are also experiencing difficulty in
determining an equitable allocation system for employee leave costs (based on
Management Assistance Reviews in Illinois and Indiana!. The MPCA is willing
to change the current system to one that is siore equitable, however, guidance
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Minnesota 8up»rfund Cooperative Agreement
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Page 13 of 19
Mr Anthony C Carrollo
Page 13
June 28, 1994
from EPA and DIG is needed Prior to establishing a new system, the MPCA must
ensure that the system IB acceptable by both EPA and DIG The following is
guidance recently received by EPA
"OMB Circular A-87 requires distributing the cost of
employee benefits equitably to all relevant programs,
including grant programs. However, the Circular does
not define what methods ensure such an equitable
distribution. Each of the following three methods are
acceptable to the Office of Superfund for meeting this
objective
l Including leave in the indirect cost rate
2. Including leave in the fringe benefits rate
3 Distributing leave as part of a leave cost allocation plan
EPA recognizes that these methods may require a state to
charge the leave initially to a state account before
charging it to the appropriate CA account If a state
recovers leave costs through the application of a fringe
benefits rate or indirect cost rate, it would charge
leave to a State fund as it is taken and recover these
costs through the appropriate rate EPA would need to
approve inclusion of leave costs in the indirect cost
rate as part of the indirect cost proposal or inclusion
in the fringe benefits rate as part of the CA budget.
The inclusion of leave in the fringe benefits rate nay
not be the best option if a state charges CAB for actual
fringe benefits expenses and uses the fringe benefits
rate for budgeting purposes only. If a state uses a
cost allocation plan, it should ensure that it
distributes leave costs equitable based on tine worked
on all the programs the employee supports. For example,
during the first quarter of a year, the State could use
the previous fiscal year's percentages worked on various
programs to allocate costs while a new historical base
is being established. Any such allocation plan should
be documented by a State and available for EPA review.•
After receiving this information, the MPCA still was unclear as to how to
equitably allocate employee leave costs. Since leave cannot be included in
the indirect cost rate or fringe benefit rate, we sust distribute leave a>
part of a leave cost allocation plan. After additional phone conversations
and conference calls with EPA, it was agreed that EPA would send us an actual
example of a leave cost allocation plan. As soon as we receive this
information we will apply this plan to one of our federally funded Bites and
forward this information to EPA and OIG for their approval. Once this
approval is obtained, we will schedule • training session for MPCA staff and
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Minnesota 8up«rfund cooperative Agreement
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June 28, 1994
begin following the approved leave cost allocation plan The MPCA wants to
ensure that leave allocation procedures provide an equitab.e distribution of
leave time Once that is determined, the MPCA Accounting Office will assist
us in assuring that the leave allocation procedures developed are consistently
followed
Approval Of Contractor Rate Increases
It has oeen noted that direct labor rate increases were in excess of the
limits allowed in the contract and were approved without obtaining supporting
cost documentation or providing a thorough cost analysis
Delta submitted a request to increase its direct costs and indirect rate per
the MSII Contract (April 1969) on January 31, 199: The contract allows for
an escalation factor of six percent plus Che estimated annual percent increase
in the Consumer Price Index (CPU . The new rates for labor, equipment,
materials, supplies, and subcontractors as well as the new indirect rate were
to be effective as of January 1, 1990, per the contract upon approval by the
state which is the MPCA.
When the four MSII contracts were routed to the MDA for execution, a cover
memo was submitted for each of the contracts and it was stated by the
Division's RFP/contract coordinator that, "These contracts are identical
except that each contract contains a different level of profit payable to the
contractor (Part XXI) and each contract contains a different suite of
subcontractors (Attachment B-D."
After reviewing the contracts, it was determined that there were a few other
differences in the contracts. One of which was in Attachment B.I «.,
Escalation Factor were it states, "The following costs and rates are subject
to escalation. These costs and rates may be adjusted by up to 6% plus the
estimated annual percentage increase in the CPI annually and changes are
effective on January 1- a. Direct labor costs, b. Equipment, materials, and
supplies, and c. Subcontractors' costs (See Section 3.1 of this attachment) "
The contracts for Delta and Barr Engineering Company contained the above
language The contracts for CDM, Inc. and Malcolm Pirnie, Inc. contained
language that differed as follows, ".... These costs and rates may be
adjusted by up to 8% (on the average) annually and changes are effective
Since January 1990 was the first year annual increases were allowed under
MSII, the Authorized Agents and the procurement specialist discussed how these
increases would be approved equally and within the limits of the contract.
Since the contracts were considered identical except for the profit payable
and subcontractors, it was decided by the Authorised Agents and the
procurement specialist to allow the contractors to adjust their direct costs
on the average. The procurement specialist recalls discussing the issue of
allowing direct cost increases on an average for all MSII contractors, but
cannot remember if the decision was made by the MPCA's contract officer or
someone at EPA. In the future, written documentation regarding information
such as this will be sent to the file.
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APPENDIX 1
Page 15 of 19
Mr Anthony C Carrollo
Page 15
June 28. 1994
Barr requested an annual adjustment for 1990 direct costs and indirect rate on
January 4, 1990 At the time of the request, they were unaware of changes in
equipment, material, supplies or subcontractor' E costs They reserved the
right to modify these costs in the near future if they were informed of any
increases Their direct labor costs were within che allowable six percent
plus the estimated annual percent increase in the CPI
Delta requested an annual adjustment for 1990 direct costs and indirect rate
on January 31. 1990 As it was unclear by their request what the new 1990
rates were for labor, equipment, materials, supplies, and subcontractor's
costs, it was discussed at the February 16, 1990, quarterly contractor
evaluation meeting. The Authorized Agent for Delta stated that the MPCA had
received Delta's request for an increase in direct rates It was noted in the
minutes of the meeting that, "Specific numbers were received, but we need the
percentage (average increase! of the increase. The cap according to the
contract (Attachment B, page B-2i is 6% plus the estimated annual percentage
increase in the CPI annually ' Delta also mentioned at that time that they
would contact their subcontractors to see if they had any cost increases and
if so, would include this information in the direct rate follow-up letter to
the MPCA
On February 26, 1990, Delta submitted a follow-up letter to the MPCA's request
at the quarterly contractor evaluation meeting Delta's direct labor costs
had increased on the average 12 15 percent higher than the 1989 costs.
Delta's equipment and material charges remained unchanged. Historical project
billing information indicated that approximately 80 percent of Delta's billed
amounts was direct labor costs and approximately 20 percent of Delta's billed
amounts was equipment and material charges. On the average, the labor,
equipment, and materials price increases were therefore 9.72 percent (12.15
percent x 80 percent of direct labor and 0 percent x 20 percent of equipment
and material billings) . Subcontractor costs also remained unchanged.
The contract states that these costs and rates may be adjusted by up to six
percent plus the estimated annual percentage increase in the CPI annually.
The MPCA's interpretation of this contract language was that direct cost
(direct labor cost*, equipment, materials, and supplies, and subcontractor's
costs) increases on the average may not exceed six percent plus che annual
percentage increase in the CPI. This rationale was based on che fact that two
of the four contracts explicitly stated that cost and rate adjustments would
be based on the approved percentage on an average annually. The MPCA
considered all contracts identical except for the profit payable and suite of
subcontractors at the time of execution.
During the review of Delta's 1990 direct labor rate adjustments, the MPCA
recognised that a few of the direct labor rate categories had substantial rate
increases. This was discussed with Delta since the MPCA's costs for Superfund
clean-up activities would be considerably higher. Delta felt that the 1990
direct costs were fair and reasonable based on the external marketplace
conditions Delta also explained that when the consulting firm was hired
under MSII, it was a smaller firm Chat was expanding rapidly.
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Minnesota 8up«rfund Cooperative Agreeaent
APPENDIX 1
Page 16 of 19
Mr Anthony C Carrollo
Page 16
June 28, 1994
Additional staff at higher competitive pay rates was hired and a number of
existing staff vas being promoted (i.e Project Professional II at $18 47 to
Senior Professional II at $26.64)
As a part of the review process. Delta's proposed 1990 direct labor rates were
compared with the other three contractor's rates and Delta's rates were lower
in some labor categories please refer to the enclosed document titled, "MSII
Contracts Approved 199C Direct Labor Rates Comparison" in Attachment C.
Delta's direct labor races were substantially lower in the upper ranges
iceilings) of each labor category Alsc taken into consideration was Delta's
1990 indirect rate. An increase of 0 2C U 40 to I 60) was requested and
approved With General and Administrative expenses included, Delta's indirect
rate was actually calculated as 2.304. Again. Delta only requested an
indirect increase of 0.20 as it was their interpretation of a competitive rate
within the industry at that time.
When calculating direct labor rates. Delta taXes the average of all direct
rates of personnel within a labor category d e. Project Professional II.
Averages were based on direct labor rates This was considered most cost
effective and reasonable at that time since the consulting firm was expanding
rapidly and labor rates were constantly changing due to additional staff being
hired at various labor rates compared to market rates and the uncertainty of
what staff would be working on Superfund projects. A comparison was Bade of
the direct rates versus the average rates charged by Delta on a Site invoice
and it was determined that the total average labor rates charged for that
invoice were less than the total direct labor rates provided by Delta. Please
see the enclosed documentation in Attachment C (August 1990 invoice and
direct versus average labor rate* for the three staff listed in the invoice).
The MPCA wanted to be fair and equitable in its approval of Multi-Site
Contract direct cost and indirect rate escalations It was understood and
made clear that these approvals must be within the guidelines of the contract.
All contractors were reminded during quarterly evaluation meetings and
telephone conversations what the contract allows as an escalation factor
according to the MSII Contract. He felt that our review of these cost and
rate escalations were allowable based on reasonableness, allocability, and
generally accepted accounting principles and procedures.
The MPCA felt that Delta's request for a 9.72 percent (average) increase in
1990 direct costs (approximately SO percent direct labor and 20 percent
equipment and materials) was reasonable and within the escalation factor
guidelines of the contract. A direct labor rate comparison among the
contractors was made at that time to ensure the rates were reasonable.
Discussions and additional information was also requested from Delta in order
to better understand the direct labor rate increases. In addition, review of
Delta's August 1990 invoice has proven that the MPCA actually paid less for
average direct labor rates than the direct labor rates.
To avoid confusion and standardize contract compensation, the Multi-Site III
(MSIII) contracts effective April 2, 1993, list individual salaries for each
staff person. The contract also allows the Contractor's Corporate Policy to
34
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Minnesota suparfund Cooperative Agreement
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Page 17 of 19
Mr Anthony C Carrollo
Page l">
June 28, 1994
dictate allowable increases based on promotion tc a higher class This new
contract eliminates individual labor categories and average annual increases
for labor, equipment, and subcontractor costs
To ensure that the appropriate supporting cost documentation is submitted for
future direct labor rate increases, MSIII contractors were informed at their
March 1994 Quarterly Evaluation meetings with the MPCA of the need to submit
documentation of personnel rate increases when revising contractual labor
rates. Documentation could be in the form of a pay or status form, current
company salary listing or individual personnel raise authorization
memorandums. This documentation must be in order before the MPCA will approve
future labor rate increase requests and is also required to be submitted for
January l, 1994, increases already received
Review Of Contractor Indirect Cost Rates
It was noted that there were concerns over approved indirect rate increases
for Delta. It was questioned whether the MPCA has adequate assurance that
Delta's indirect rates include only costs allowable under federal cost
principles. Per the MSII contract, MPCA approves indirect rates based on
either an audit report or a letter from a reputable accounting/auditing firm
certifying that the audit was performed in conformance with the cost
principles contained in Federal Acquisition Principles regulations. Concerns
were raised regarding the MPCA's limited review of these reports and problems
found during an audit of a cost proposal from another Delta office
Delta submitted an independent accountant's report supporting an indirect rate
of 240 percent for 1989 Delta's negotiated indirect rate for 19B9 (original
contract I was 140 percent. In 1990, Delta requested an increase from 140
percent to 160 percent which was approved by the MPCA. Delta's indirect rate
was higher than 140 percent for 1989 and 160 percent for 1990, according to
independent audit reports submitted by Delta.
Delta submitted an independent accountant's report supporting an indirect rate
of 240 percent for 1991. The report indicated that the computation fairly
represented Delta's overhead rate. It was noted in the MPCA's audit report
that sone of the indirect costs listed were considered to be unallowable (i.e.
overtime premium). Also, there was concern over a O.S. Postal Inspector's
report on the audit of a price proposal submitted by Delta's Sacramento
office Indirect cost rates from the Sacramento office were similar to those
submitted to the MPCA.
The MPCA does not have an auditor on staff The Minnesota Department of
Transportation (MnDOT) does a large amount of highway work with federal funds
and we contacted them to see if they have contracted Delta in the past five
years and if so, did they have an approved (audited) indirect rate for Delta
Information we received was that they had contracted Delta, however, they did
not have an approved indirect rate for 1991 The approved indirect rate for
1990 was 239.62 percent (document enclosed in Attachment C), proposed indirect
rate for 1991 was 267.90 percent (but not approved), and the approved indirect
rate for 1992 was 259.00 percent.
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Page 18 of 19
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Page 18
June 28, 1994
In comparison. MnDOT's approved indirect cost rate for Delta (1990) was the
same as MPCA's approved indirect cost rate for Delta (1991). KnOOT requires
consulting firms to submit an independent auditor's report and also has staff
that conduct desk audits of these indirect cost rates
The MPCA will arrange to have an independent audit of Delta's 1991 indirect
rate by an auditor if requested. The MPCA intends to either hire an auditor
or contract with an independent auditor (to include the State Legislative
Auditor) for specific needs such as indirect cost determinations This will
ensure the audit reports are complete and indirect rates do not contain any
unallowable costs
Submission Of Documentation Supporting Contractor Invoices And Review Of
Contractor Employee Time Sheets
It was noted that Delta did not submit supporting documents with its invoices
on a consistent basis. The MSII contract requires supporting documents to be
submitted for reimbursable expenses in excess of $25.00. MPCA also needs to
examine Delta's tune sheets to ensure direct labor charges are accurate. In
addition, MPCA must ensure that hours billed by Delta are actual hours worked
on MPCA projects.
The MPCA is currently addressing the concern over invoice reviews To assure
proper documentation the procurement specialist will be conducting periodic
audits of invoices received from the MSIII contractors. Supporting documents
for reimbursable expenses in excess of $25.00 will be required to be submitted
with all invoices. These audits will also include a detailed review of the
contractor's direct labor charges in comparison to personnel time sheets which
will be requested from the contractors prior to the periodic audit. Direct
labor and equipment charges will also be compared to the approved rates in the
contract.
In order to improve the internal controls of contract management, a mandatory
project manager and Authorized Agents training session is scheduled for July 21.
1994, at the MPCA to address proper invoicing subnittals and reviews (this
portion will be open to MSIII contractors to attend also). The training session
will also focus on a policy for charging/allocating leave time to federally
funded sites and the need for documentation of all BPA decisions and approvals
in writing. Please see the enclosed project manager training session agenda for
details on topics to be discussed.
In addition to the above training, additional training and/or guidance will soon
be available to MPCA staff regarding contractor performance evaluations, code of
ethics/conflict of interest, statement of work models, cost and price analysis
of Independent Government Cost Estimates, and overall contract management. The
Office of Superfund in Region 5 has formed a work group including states to look
at these contract management issues. This work group is currently developing
guidance in these contract management areas. One of the main areas of concern
is the cost and price analysis requirement under federal procurement
regulations, 40 CFK Part 35. States need clarification a.)>J guidance on what the
requirements are for a thorough cost and price analysis. The MPCA Superfund
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Minnesota Buperfund Cooperative Agreeaent
APPENDIX 1
Page 19 of 19
Mr Anthony C Carrollo
Page 19
June 28, 1994
Cooperative Agreement/Contract Administrator IB a member of this work group and
will be providing guidance to MPCA staff once the work group finalizes the
guidance documents
In closing, MPCA appreciates the opportunity to review and comment on the draft
Audit Report MPCA has expended a very significant level of effort to represent
in this letter to EPA that MPCA has in fact followed all applicable contract
law, policy and regulations in hiring contractors and expenditure of funds
awarded through cooperative agreements Additionally, enhancements to internal
controls are being made to provide for continuous quality improvement in
contract administration MPCA expects EPA to incorporate its expressed interest
in partnering with states by acknowledging the information presented in this
letter and making a final determination that all costs claimed shall be
allowable Please contact me at (612) 296-7333 to discuss this matter as you
see fit
/James L Warner, P.E.
Division Manager
Ground Water and Solid Waste Division
JLW pk
Enclosures
cc: Howard Levin, Chief, Financial Analysis Section, EPA, Region 5
JoLynn Traub, Acting Associate Division Director, Office of Superfund,
EPA, Region 5
Karen Yeates, Chief, State Relations Section, SPA, Region 5
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APPENDIX 2
Page 1 of 1
ABBREVIATIONS
CERCLA Comprehensive Environmental Response, Compensation,
and Liability Act
CFR Code of Federal Regulations
EPA Environmental Protection Agency
FAR Federal Acquisition Regulations
LRI/FFS Limited Remedial Investigation and Focused
Feasibility Study
MPCA Minnesota Pollution Control Agency
MSCA Multi-Site Cooperative Agreement
RFP Request for Proposal
RI Remedial Investigation
RI/FS Remedial Investigation and Feasibility Study
SMOA Superfund Memorandum of Agreement
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APPENDIX 3
Page 1 of 1
DISTRIBUTION
Inspector General (A-109)
Regional Administrator Region 5
Region 5, Office of Superfund
Region 5 Followup Coordinator (Chief, FAS) (MFA-10J)
Region 5 Public Affairs (P-19J)
Region 5 Intergovernmental Relations Officer (R-19J)
Region 5 Library
Agency Followup Coordinator (PM-208);
Attention: Assistant Administrator for the Office of
Administration and Resources Management
Agency Followup Coordinator (H-3304);
Attention: Director, Resources Management
Associate Administrator for Regional Operations
and State/Local Relations (H-1501)
Headquarters Library (PM-211A)
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