\  Office of Inspector General
     f  Report of Audit
   PROCUREMENT UNDER MICHIGAN
SUPERFUND COOPERATIVE AGREEMENTS
           E1SGF2-05-0269-4100218
              March 23, 1994

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Inspector General Division
  Conducting the Audit:             Northern Audit Division
                                   Chicago, Illinois

Region Covered:                    Region 5


Program Office Involved:             Waste Management Division

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                                                   905R94101
             UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                     OFFICE OF THE INSPECTOR GENERAL
                          NORTHERN DIVISION
                       77 WEST JACKSON BOULEVARD
                         CHICAGO, IL 60604-3590

                          March 23, 1994

MEMORANDUM

SUBJECT:  Procurement Under Michigan Superfund
          Cooperative Agreements
          Audit  Report E1SGF2-05-0269-4100218
FROM:     Anthony  C.  Carrollo
          Divisional  Inspector jZ^rleral for Audits
          Northern Division
                              f

TO:       Valdas V. Adamkus
          Regional Administrator
          Region 5

     This audit report contains  findings that describe the
results of  our review regarding  Procurement Under Michigan
Superfund Cooperative Agreements.   This audit report represents
the opinion of the OIG.   Final determinations on matters in this
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.   We appreciate the assistance
and cooperation provided to us by your staff.

Action Required

     In responding to the findings in our draft report, your
office agreed to take certain corrective actions; however, no
milestone dates were  included.   In accordance with EPA Order
2750, you,  as the  action official, are required to provide this
office a written response to this report within 90 days.  For
corrective  actions planned,  reference to specific milestone dates
will assist this office in deciding whether to close this report.

     We have no objections to the further release of this report
to the public.  Should you or your staff have any questions
regarding this report,  please contact Charles Allberry, Audit
Manager, Northern  Audit Division,  at (312)  353-4222.

Attachment
                                                         Printed on Recycled Paper

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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
                      EXECUTIVE SUMMARY
PURPOSE

The Office of Inspector General has completed an audit of
procurements by the Michigan Department of Natural Resources
(MDNR) under Superfund cooperative agreements with the
Environmental Protection Agency  (EPA).  The objectives of our
audit were to determine if:  (1) MDNR's procurement policies
and practices met the Federal requirements contained  in Title
40 of the Code of Federal Regulations  (CFR) Part 35,  Subpart
0 and  (2) Region 5 provided appropriate assistance and
oversight for MDNR's procurement activities.
BACKGROUND

The Comprehensive Environmental Response, Compensation, and
Liability Act  (CERCLA), also called Superfund, 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 the state's cost-share.

All Superfund cooperative agreements require recipients to
comply with provisions specified in Federal regulations.
Prior to January 27, 1989, states with Superfund cooperative
agreements were required to follow Federal regulations
contained in 40 CFR Part 33 "Procurement Under Assistance
Agreements."  Effective January 27, 1989, 40 CFR Part 35,
Subpart 0 (Subpart 0), Interim Final Rule further codified
the procurement requirements and added specific requirements
unique to Superfund cooperative agreements.  The final
version of Subpart O became effective July 5, 1990.  If a
state certifies that its procurement practices meet or exceed
the requirements of Subpart O, it can initiate contract
awards under its cooperative agreements without prior EPA
review and approval.

MDNR is responsible for administering the State of Michigan's
environmental protection programs.  This includes managing
remedial activities at selected Superfund sites under EPA's
CERCLA authority.

Michigan's Department of Management and Budget (MDMB) is
responsible for procurement within the state.  MDMB has
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
developed standard state procurement procedures which are
contained within its Administrative Manual.
RESULTS-IN-BRIEF

MDNR certified to EPA that its procurement system met all
Subpart O requirements.  Therefore, EPA did not review and
approve individual procurement actions under cooperative
agreements with MDNR, as allowed under Subpart 0.  However,
our review found that MDMB's procurement procedures and
MDNR's procurement practices may not have satisfied all of
the requirements.  In addition, MDNR submitted the self-
certification form without conducting a periodic evaluation
of its procurement system and without providing all requested
supporting information.  As a result of these deficiencies,
Region 5 could not be certain that MDNR procurements under
Superfund cooperative agreements met established Federal
requirements.
PRINCIPAL FINDINGS

MDNR Procurements May Not Have Met the
Procurement Requirements of Subpart O

MDMB's procurement procedures and MDNR's procurement
practices under Superfund cooperative agreements may not have
met all EPA requirements.  We reviewed MDMB's standard
procurement procedures as outlined in its Administrative
Manual and MDNR's specific procurements of Level Of Effort
(LOE) contracts in 1989 and 1993.  We found that both the
standard procurement procedures and the actual practices for
procuring the LOE contracts may have fallen short of the
Subpart 0 requirements.  Our specific concerns relate to (1)
cost analysis, and (2) profit analysis.

MDNR's Certification of Its Procurement System Did
Not Ensure That It Met All Subpart O Requirements

In applications for Superfund cooperative agreements, MDNR
repeatedly certified to EPA that its procurement system met
all applicable requirements.  Based on this certification,
EPA allowed MDNR to complete procurements under its Superfund
cooperative agreements without prior review and approval.
However, we found deficiencies in MDNR's certification.
Specifically, MDNR (1) did not periodically evaluate its
system in relation to Subpart 0 requirements and (2) was not
clear on the meaning of all Subpart 0 requirements.  We also


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
found that MDNR had generally not provided all  information
required on the certification forms.  As a result, MDNR's
certification did not ensure that its procurements met all
Subpart 0 requirements.
AGENCY COMMENTS AND ACTIONS

In responding to our draft report on March 17, 1994, the
Regional Administrator agreed that MDNR should institute a
requirement for cost analysis if it does not have such a
requirement.  The Region has established a workgroup to
develop guidance and provide training to the states on
contract management issues, including cost analysis.

The Region agreed to remind MDNR of the importance of
maintaining documentation of its reviews of its procurement
system when future reviews are performed.  Region 5 also
agreed to (1) remind MDNR to complete Part B of the
certification form and reference 40 CFR Part 35, Subpart O
and (2) communicate to MDNR the Region's procedure for
providing procurement assistance to recipients.
RECOMMENDATIONS

We recommend that the Regional Administrator implement the
planned corrective actions outlined in the response to our
draft report.  When implemented, these actions should fully
address our findings.
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                       MDNR COOPERATIVE AGREEMENT  PROCUREMENTS
                       TABLE OF  CONTENTS


                                                          Page

 EXECUTIVE  SUMMARY  	   i

 CHAPTERS

   1   INTRODUCTION  	   1

        PURPOSE  	   1

        BACKGROUND  	   1

        SCOPE AND  METHODOLOGY	3

        PRIOR AUDIT  COVERAGE  	   4


   2   MDNR'S SELF-CERTIFICATION PROVIDED INADEQUATE
      ASSURANCE  OF COMPLIANCE WITH PROCUREMENT
      REQUIREMENTS  	   5

        MDNR PROCUREMENTS MAY NOT HAVE MET THE
        PROCUREMENT  REQUIREMENTS OF SUBPART O 	   5

        MDNR'S CERTIFICATION OF ITS PROCUREMENT
        SYSTEM DID NOT ENSURE THAT IT MET
        ALL SUBPART  O REQUIREMENTS	9

        REGION 5 SHOULD PROVIDE ADDITIONAL
        PROCUREMENT  ASSISTANCE TO MDNR	12

        CONCLUSION	13

        AGENCY COMMENTS AND ACTIONS 	  13

        OIG EVALUATION/RECOMMENDATION 	  14


APPENDIXES

  APPENDIX 1   REGION 5 REGIONAL ADMINISTRATOR'S
                RESPONSE TO THE DRAFT REPORT	15

  APPENDIX 2   ABBREVIATIONS  	  19

  APPENDIX 3   DISTRIBUTION 	  20


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
                          CHAPTER 1

                         INTRODUCTION
PURPOSE

The Office of Inspector General has completed an audit of
procurements by the Michigan Department of Natural Resources
(MDNR) under Superfund cooperative agreements with the
Environmental Protection Agency (EPA).  The objectives of our
audit were to determine if:  (1) MDNR's procurement policies
and practices met the Federal requirements contained in Title
40 of the Code of Federal Regulations (CFR) Part 35, Subpart
0 and (2) Region 5 provided appropriate assistance and
oversight for MDNR's procurement activities.
BACKGROUND

The Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA), also called Superfund, 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 the state's cost-share.

Although states may accept responsibility for managing
specific Superfund activities, CERCLA does not allow EPA to
delegate Superfund program authority to the states.  EPA
remains responsible for ensuring that states carry out these
functions in accordance with CERCLA, Federal regulations, and
Superfund program policies.  Unlike other forms of Federal
financial assistance, under a cooperative agreement, EPA
maintains significant involvement throughout the project.

All Superfund cooperative agreements require recipients to
comply with provisions specified in Federal regulations.
Prior to January 27, 1989, states with Superfund cooperative
agreements were required to follow Federal regulations
contained in 40 CFR Part 33 "Procurement Under Assistance
Agreements."  Effective January 27, 1989, 40 CFR Part 35,
Subpart 0, Interim Final Rule further codified the
procurement requirements and added specific requirements
unique to Superfund cooperative agreements.  The final
version of Subpart O became effective July 5, 1990.  The
requirements for certification, cost analysis, and profit


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
analysis discussed in this report were the same in both the
interim final and final rule.

To alleviate the need to review and approve each individual
state procurement under these regulations, EPA established a
self-certification process.  In brief, a state can certify,
in writing, that its procurement practices meet or exceed the
requirements of Subpart o.  It can then initiate contract
awards under its cooperative agreements without prior EPA
review and approval.

MDNR is responsible for administering the state of Michigan's
environmental protection programs.  This includes managing
remedial activities at selected Superfund sites under EPA's
CERCLA authority.  At the time of our audit, MDNR had more
than 20 separate Superfund cooperative agreements with EPA.
MDNR used the funds obtained through some of these agreements
to contract out for various Superfund remedial activities.
MDNR had routinely certified that its procurement procedures
met the Subpart 0 requirements.

For remedial investigation and feasibility study (RI/PS)
work, MDNR procured services from consulting engineering
firms through what they term level of effort (LOE)  contracts.
Because of the large number of sites requiring work, MDNR
found that it would be cumbersome to initiate a new
procurement action each time RI/FS services were needed.
MDNR's LOE contract process allowed it to select a group of
contractors (usually between two and six) in one procurement
action.  MDNR then rotated work assignments among the
contractors as work arose.  According to MDNR officials, this
practice divided work into more manageable segments and
produced higher quality work.  New contracts are generally
awarded every four years.

Michigan's Department of Management and Budget (MDMB) is
responsible for procurement within the state.  Within MDMB,
procurement authority is divided between two offices.  The
Office of Purchasing procures items including supplies,
materials, equipment, services and printing needed by state
departments and agencies.  The Office of Facilities contracts
for the design, construction, and management of facilities.
MDNR's LOE contracts awarded in 1989 were handled by the
Office of Purchasing.  The new set of contracts, soon to be
awarded, are being handled by the Office of Facilities.
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                        MDNR COOPERATIVE AGREEMENT PROCUREMENTS
   SCOPE AND METHODOLOGY

   We conducted work at MDNR and MDMB.  We reviewed Federal
   procurement regulations contained in 40 CFR Part 35, Subpart
   O, both  interim final and final versions.  We also examined
   EPA's internal guidance applicable to procurement under
   Superfund cooperative agreements.  We analyzed MDMB's
   standard procedures for procuring consulting services as
   documented in its Administrative Manual.  In addition, we
   reviewed the process MDNR used to award multi-year contracts
   for RI/FS services in 1989 and 1993.  We compared MDMB's
   procedures and MDNR's practices with the requirements of
   Subpart  O to determine if they met the intent of the
   regulations.  We discussed with MDNR's Office of Budget and
   Financial Aid how MDNR evaluates its procurement system
   before certifying that all of the Federal requirements are
   met.

   We also  conducted work at EPA Region 5.  We discussed with
   the Region 5 Waste Management Division Superfund project
   officer  and the Planning and Management Division Contracts
   and Grants Branch how EPA monitors MDNR's procurement system
   certification process.  We reviewed Region 5's cooperative
   agreement application files to determine if MDNR properly
   completed its procurement system certification forms.  We
   also discussed how EPA provides procurement assistance to
   MDNR.

   We conducted this audit from October 1, 1992 to December 6,
   1993.l  We discussed  informal position  papers with MDMB  and
   MDNR officials on November 15,  1993.  Based on their
   comments, we revised the position paper.  We discussed the
   revised position paper with Region 5 Waste Management
   Division Superfund Program Management Branch on December 9,
   1993, and with Region 5 Planning and Management Division
   Contracts and Grants Branch on December 13, 1993.  We
   conducted further discussions of the position papers with
   these Region 5 organizations on December 21, 1993.   Region 5,
  MDMB, and MDNR comments were incorporated into the draft
  report,  which we issued on December 30, 1993.   We discussed
  the draft report with Region 5 representatives on January 27
  and March 10,  1994.   The Regional Administrator responded to
  our draft report on March 17,  1994.   The response is
  incorporated into the report and included as Appendix 1.
        suspended  fieldwork  from  February  1,  1993  to August l,
1993 in order to conduct other time critical work.
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
We performed our evaluation in accordance with the Standards
for Audit of Governmental Organizations. Programs,
Activities, and Functions, issued by the Comptroller General.
We reviewed internal controls related to MDNR's procurement
process and its compliance with Federal regulations.
Additionally, we reviewed the fiscal year 1992 and 1993
Federal Managers' Financial Integrity Act reports for Region
5 and the Waste Management Division.
PRIOR AUDIT COVERAGE

There were no recent audits of MDNR's procurement under
Superfund cooperative agreements that applied to our audit
objectives.
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
                           CHAPTER  2
   MDNR'S  SELF-CERTIFICATION PROVIDED INADEQUATE ASSURANCE
         OF  COMPLIANCE WITH PROCUREMENT REQUIREMENTS

MDNR certified to EPA that its procurement system met all
requirements of Subpart O.  This self-certification gave MDNR
the ability  to initiate procurements and award contracts
under  its  Superfund cooperative agreements without EPA's
review and approval.  However, our audit found that MDNR's
procurements may not have met all the Subpart O requirements,
and its  self-certification was not well supported.  Region 5
needs  to increase its efforts to validate the self-
certification process and assist MDNR with procurement under
Superfund  cooperative agreements.
MDNR PROCUREMENTS MAY NOT HAVE MET THE
PROCUREMENT REQUIREMENTS OF SUBPART 0

MDMB's procurement procedures and MDNR's procurement
practices under Superfund cooperative agreements may not have
met all Subpart O requirements.  We reviewed MDMB's standard
procurement procedures as outlined in its Administrative
Manual and MDNR's specific procurements of LOE contracts in
1989 and 1993.  We believe that both the standard procurement
procedures and the actual practices followed for procuring
the LOE contracts may have fallen short of the Subpart 0
requirements.  Our specific concerns relate to (1) cost
analysis and  (2) profit analysis.

Cost Analysis

MDMB's procurement procedures did not include a requirement
to conduct a cost analysis of contract proposals.  However,
in its actual procurement of LOE contracts, MDNR implemented
some additional procedures in an effort to meet the Subpart O
requirement for cost analysis.  The Subpart 0 requirement for
cost analysis is very general and no minimum steps are
specified.  Thus, it was difficult to determine whether
MDNR's actions met the Subpart 0 requirements.  We do not
believe that MDNR's steps were a sufficient cost analysis to
ensure that the contract prices were reasonable,  allocable,
and allowable.  Region 5 needs to provide additional guidance
to MDNR on conducting an adequate cost analysis.

Subpart O requires states to conduct and document a cost
analysis for all negotiated contracts over $25,000.  It


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
defines cost analysis as "the review and evaluation of each
element of contract cost to determine reasonableness,
allocability and allowability."  The regulations exclude the
need for a cost analysis only when  (1) adequate price
competition exists and  (2) the recipient can establish price
reasonableness.  Price reasonableness must be based on (a) a
catalog or market price of a commercial product sold in
substantial quantities to the general public or (b) prices
set by law or regulation.

MDNR's 1989 LOE contracts were negotiated and valued at over
$25,000.  Although competition existed for the contract
awards, MDNR could not establish price reasonableness based
on the criteria in the regulation.  Thus, a cost analysis was
required.

MDMB's guidance called "Selecting Professional Service
Contractors for Major Projects" includes a section on
evaluating cost proposals.  Suggested steps include reviewing
(1) personnel classification and number of hours proposed for
each task, (2) personnel hourly rates for appropriateness,
and (3) the multiplier applied to hourly rates and
reimbursable costs.  Using this guidance, a committee
evaluates and scores each cost proposal.  This process is not
a cost analysis since it does not include any examination of
contractors'  data supporting the rates (costs) proposed.

Although MDNR was not certain how to satisfy the Subpart 0
requirement for a cost analysis, it did review the cost
proposals submitted.  However, the objective of the review
was to rank contractors for future work assignments.  The
evaluation of cost proposals did not include any examination
of contractors' data supporting the costs proposed and was
not used as a basis for negotiating final contract rates.

In addition,  MDNR implemented several procedures in an effort
to control costs in the 1989 LOE contracts.  For labor rates,
MDNR asked the contractors to submit ranges of their low and
high hourly rates for each professional and technical level,
as well as the names and pay rates of all staff assigned to
the MDNR contract.  However, MDNR did not analyze whether the
proposed ranges were appropriate or accurate, nor verify
whether the individuals were actually being paid the rates
proposed.

For indirect costs, MDNR required the contractors to submit
an analysis showing the components and methodology used in
computing the proposed rate.  This information was sent to an
individual in MDNR's Surface Water Quality Division, who


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
reviewed the submittal for reasonableness.  However, MDNR
never verified any of the contractors1 supporting
information.

MDNR also established procedures to try to determine "fair
market prices" for certain equipment items.  It contracted
with a firm  (Dataquest) to establish rates for equipment to
be used under the contract.  Dataquest already published a
"blue book" of rental rates for construction equipment.
MDNR's intention was that it develop a similar guide for
equipment used in hazardous waste cleanups.  However, MDNR
encountered difficulties with the Dataquest contract and
terminated it in early 1991 without producing the desired
rate schedule.

MDNR subsequently established alternate procedures in an
effort to manage equipment costs.  It required contractors to
obtain three written quotes and accept the lowest bid for the
purchase or rental of all items over $500.  MDNR believed
that this process would result in reasonable fair market
prices for equipment.

For the 1993 LOE contracts being awarded, MDNR has
predetermined prices for many items within the RFP and
established maximums for others.  For example, the RFP
indicates the maximum amounts that will be allowed for meals
and lodging.  In another example, offerers were directed not
to submit cost proposals for drilling activities.  Instead,
MDNR set prices for all drilling functions,  contractors were
instructed to charge those rates regardless of their actual
costs.  MDNR arrived at those prices by taking an average of
the drilling prices included in the proposals submitted in
1989, after throwing out the high and low rates.  MDNR used
the same process for reviewing equipment, labor, and indirect
costs as in the earlier contracts.

While MDNR is not required to follow the exact cost analysis
procedures established in the Federal Acquisition
Regulations, it should have procedures that are equivalent
and will produce the same result.  In the absence of specific
guidance on cost analysis, MDNR took steps in awarding its
LOE contracts aimed at determining "fair market prices".  We
do not believe, however, that these steps constituted a cost
analysis.  MDNR's steps did not provide a basis for
negotiations with contractors nor did they ensure that the
costs proposed were reasonable.  Region 5 needs to work with
MDNR to outline the minimum requirements of a cost analysis
and specific steps needed to meet those requirements.
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
Profit Analysis

Subpart O Section 35.6585 also requires a profit analysis  in
all cases in which cost analysis is performed.  Subpart O
states:

     To establish a fair and reasonable profit,
     consideration will be given to the complexity of
     work to be performed, the risk borne by the
     contractor, the contractor's investment, the amount
     of subcontracting, the quality of its record of
     past performance, and industry rates in the
     surrounding geographical area for similar work.

However, there are no further instructions on how to
determine a fair and reasonable profit.

We found that MDNR did not perform a profit analysis for the
contracts it awarded in 1989.  Contractors proposed profit
rates on the various cost categories ranging from 4 to 16
percent.  MDNR accepted all of the proposed rates, without
negotiation.  As a result, MDNR may have paid higher rates
than were necessary or appropriate.  The contract
administrator stated that she believed since there was
competition for the contracts (more than one offerer), profit
analysis was not required.  However, as noted above, cost
analysis was required in this case, so profit analysis was
automatical!'  required.

For the 1993 LOE contracts, MDNR took a different approach.
The contract administrator set the profit rate at 10 percent
of each element (total labor, other direct costs and
subcontracts)  so that all the contracts were consistent   The
10 percent figure represented the average rates charged r.y
the six current contractors.  However, averaging previous
rates does not constitute a profit analysis.  Also, MDNR's
setting of the profit rates eliminated the benefits of
competition.

Some or all of the contractors may have proposed less than 10
percent if allowed to do so.  For example, in the 1989
contracts, the profit rates on labor were generally at 10
percent or above.  However, many of the contractors proposed
and accepted lower profit rates on other direct costs and
subcontracts - some at 4 and 6 percent.

Also, since contractors were willing to accept 10 percent
profit on labor in 1993, it is quite possible that MDNR could
have negotiated lower rates for the 1989 contracts, instead


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
of accepting the proposed rates.  However, there was no
competition or negotiation involved in this aspect of the
contracts, and MDNR never performed an actual analysis to
determine whether the profits proposed and paid were
reasonable.
MDNR'S CERTIFICATION OF ITS PROCUREMENT SYSTEM DID
NOT ENSURE THAT IT MET ALL SUBPART 0 REQUIREMENTS

In applications for Superfund cooperative agreements, MDNR
repeatedly certified to EPA that its procurement system met
all applicable requirements.  Based on this certification,
EPA allowed MDNR to complete procurements under its Superfund
cooperative agreements without prior review and approval, as
allowed under Subpart O.  However, we found deficiencies in
MDNR's certification.  Specifically, MDNR (1) had not
periodically evaluated its system in relation to Subpart 0
requirements and (2) was not clear on the meaning of all
Subpart O requirements.  We also found that MDNR had
generally not provided all information required on the
certification forms.  As a result, MDNR's certification did
not ensure that its procurements met all Subpart 0
requirements.

MDNR Had Not Evaluated Its System

MDNR had not completed a systematic evaluation of its
procurement system by comparing its procedures to EPA
requirements.  MDNR relied on past EPA approval, the absence
of procurement related findings in its Single Audit reports,
and informal reviews of individual procurement plans as a
basis for its continued certification.  Thus, MDNR's
certification did not provide sufficient assurance that its
procurement practices satisfied the Subpart O requirements.

Cooperative agreement recipients must periodically evaluate
their procurement system to determine if it meets the
requirements of Subpart O.  Recipients must complete and
submit the "Procurement System Certification" form with each
cooperative agreement application.  On this form, the
recipient may

     (1)   state that the system has been certified within the
          past two years and has not substantially changed;

     (2)   certify that the system meets all requirements of
          Subpart O and list the applicable state procedures
          and regulations; or


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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
      (3)  elect not to certify that its system meets all
          requirements of Subpart O, thus agreeing to prior
          EPA review and approval of all procurement actions.

MDNR  officials stated that EPA reviewed and approved their
procurement system several years ago.  They assumed that this
approval was still valid.  However, Subpart O states that

      The certification will be valid for two years or
      for the length of the project period specified in
      the Cooperative Agreement, whichever is greater,
      unless the recipient substantially revises its
      procurement system....

Although MDNR submitted certification forms on a bi-annual
basis, there is no evidence that it performed an evaluation
of its system prior to each certification.

MDNR  also used the Single Audit reports as a basis for
believing its procurement system met Subpart O requirements.
Since the Single Audit reports did not report any procurement
weaknesses, MDNR assumed that its system was sufficient.
However, the Single Audit scope was very general and did not
include a comparison of MDNR's procurement system to the
procurement requirements in Subpart O.  Thus, the Single
Audit was not sufficient to ensure the system meets all
requirements.

An MDNR official also explained that each time they undertake
a procurement they compare the planned procedures to the
requirements in Subpart O.  However, such comparisons are
informal reviews and not documented.  If MDNR certified that
its system met the requirements, and if MDNR followed the
system it certified, then such a review would not be
necessary.  In the case of the LOE contracts, the contract
administrator maintained copies of Subpart O which she
referred to when developing the RFP, but again, no actual
comparison was documented.

MDNR Was Not Certain That It Met All Requirements

MDNR  certified to EPA that its procurement system met all
Subpart 0 requirements.  MDNR believed it was meeting the
requirements, however, officials acknowledged that several
aspects of the regulation were not clear to them.  MDNR has
periodically requested guidance from EPA on aspects of
Subpart O, however, EPA has not provided sufficient
clarification.
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                       MDNR  COOPERATIVE AGREEMENT  PROCUREMENTS
 For example,  as previously  discussed,  Subpart  O  requires  cost
 and profit  analysis.   However, the regulation  does not
 describe  the  minimum  steps  required  in each  of these  areas.
 The MDNR  contract  administrator told us that during the
 procurement of LOE contracts  in 1989 she tried to find out
 exactly what  type  of  cost and profit analysis  was required.
 No one within EPA  could provide guidance.  We  examined an
 MDNR internal memo which supported the contract
 administrator's statement regarding  cost analysis.  Without
 further guidance from EPA,  the contract administrator
 developed procedures  which  she felt  were sufficient to meet
 the requirement.   Our review  concluded that  MDNR's actions in
 both of these areas were not  sufficient.

 Certification Forms Did Not Include
 Adequate  Supporting Information

 Our review  of 17 certification forms,  which  MDNR submitted
 from 1983 through  1991, showed that  MDNR had generally not
 provided  all  information required.   Region 5 had not
 followed-up to obtain this  information.  The missing
 information was necessary for EPA to assess  the
 appropriateness of  MDNR's system evaluation.

 If a recipient chooses to certify that its system meets
 Subpart O requirements, it  must list its applicable state
 procurement regulations or  procedures  in Part  B  of the form.
 Listing the applicable state  regulations gives some evidence
 that the state has  compared its system to Subpart O
 requirements.  This section was not  filled out on any of  the
 MDNR* forms  we reviewed.  Requiring MDNR to completely fill
 out the form would  provide  Region 5  with information  needed
 to evaluate the adequacy of the certification  statement.

 We also noted that  EPA had  not yet revised the certification
 form to reflect the current regulation which applies  to
 Superfund cooperative  agreements (40 CFR Part  35, Subpart o).
 Although the new regulation became effective in  1989, the
 current certification  form  still refers to 40  CFR Part 33.
Region 5 officials  stated that EPA Headquarters  decided not
to revise the form.  Region 5 asked  states to  make a
handwritten change  on  the form.  However, none of the
certification forms we reviewed contained the  change.
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
REGION 5 SHOULD PROVIDE ADDITIONAL
PROCUREMENT ASSISTANCE TO MDNR

Region 5 has taken steps to improve state procurement under
Superfund cooperative agreements.  However, it needs to take
further action to assist MDNR, especially in the areas where
we found problems or uncertainty, such as cost analysis and
profit analysis.

Self-certification places the primary responsibility for
meeting the procurement requirements of Subpart O on MDNR.
However, EPA has a responsibility to monitor and assist MDNR
with its procurement activity.  EPA's Superfund State-Lead
Remedial Project Management Handbook (OSWER Directive 9355.2-
1) says that EPA must be able to provide technical or
administrative procurement assistance to the states.  Since
EPA has more procurement expertise and is more knowledgeable
about Federal requirements than the states, EPA is in a
better position than a state to understand the regulatory
requirements.  This does not mean that the Region must review
every procurement transaction.  However, it should have a
clear and consistent process to answer specific questions
about the requirements in Subpart O.

Region 5 has taken several steps to assist the states with
procurement.  In 1989, shortly after Subpart 0 was
promulgated, the Region held a training class which covered
procurement under the new regulation.  The Region formed a
contract management workgroup to address state procurement
and contract management issues.  Also,  Region 5 has conducted
Management Assistance Program (MAP) reviews.  In such
reviews, a contractor visits the state and reviews its
management of cooperative agreements.  These reviews look at
several different areas, including procurement, financial
management, and property management.  In the past, MAP
reviews have generally covered more than one of these areas.
Region 5 officials expressed an interest in tailoring a
future MAP review to focus on procurement issues.  This
should help MDNR answer some of its procurement questions.

Region 5 did not have a procedure by which MDNR could easily
obtain assistance from procurement experts.  Providing
procurement assistance is included as part of Region 5's
state project officers' responsibilities.  However, as the
project officers do not usually have the needed expertise to
provide such assistance themselves, it was unclear to MDNR
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                            Report NO. E1SGF2-05-0269-4100218

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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
who specifically should provide this assistance.  The Region
needs to clarify its process to ensure the states are
provided with adequate technical assistance in procurement.
CONCLUSION

Through the certification process, EPA has placed the
responsibility on MDNR for ensuring that its procurements
under Superfund cooperative agreements meet the requirements
of Subpart 0.  Our review found that MDMB's standard
procedures and MDNR's procurement of LOE contracts did not
fully follow the regulations.  Also, although MDNR routinely
certified that its procurement system met all Subpart 0
requirements, it had not conducted periodic evaluations to
support this conclusion.  Region 5 needs to increase its
review of the self-certification process and work with MDNR
to improve its procurement system.
AGENCY COMMENTS AND ACTIONS

The Region agreed that MDNR should institute a requirement
for cost analysis if it does not have such a requirement.
However, it stated that the regulations in Subpart o are so
general and vague that it is difficult to conclude that MDNR
did not meet the regulatory requirements.  The Region has
established a workgroup, which includes state represen-
tatives, to develop guidance and provide training to the
states on contract management issues, including cost
analysis.

The Region also agreed that MDNR is required by Subpart O to
review and document its review of its procurement system.
The Region will remind MDNR of the importance of maintaining
this documentation when future reviews are performed.  The
Region believes that past EPA approval, the absence of
procurement related findings in the Single Audit reports and
informal reviews of individual procurement plans are
important indicators for reasonable assurance that
procurement requirements are met.  Region 5 also agreed to
(1) remind MDNR to complete Part B of the certification form
and reference 40 CFR Part 35, Subpart O and (2) communicate
to MDNR the Region's procedure for providing procurement
assistance to recipients.
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
OIG EVALUATION/RECOMMENDATION

The corrective actions proposed by the Region, when
implemented, should fully address our finding.  However, the
Region has not provided specific milestone dates for  (1)
reminding MDNR of the importance of maintaining documentation
when conducting future reviews of its procurement system,  (2)
reminding MDNR to complete Part B of the certification form
and reference 40 CFR Part 35, Subpart 0, and  (3)
communicating to MDNR the Region's procedure for providing
procurement assistance to recipients.  Please provide us with
milestone dates for completion of the proposed actions.
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                        MDNR  COOPERATIVE  AGREEMENT PROCUREMENTS
                                                         APPENDIX 1
                                                         Page  1 of 4
 	           UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
\	/                         REGION 5
 <""1t                   77 WEST JACKSON BOULEVARD
                           CHICAGO. IL 60604-3590

                             w 11 m
                                                      -EPf TO THE A^ENTION Of
 SUBJECT:   Draft  Audit  Report E1SGF2-05-0269
           Audit  of  Procurement Under MDNR Superfund
           Cooperative  Agreements

 FROM:      Valdas V. Adamkus
           Regional  Administrator

 TO:        Anthony C. carrollo, Divisional Inspector General
            For Audits, Northern Division
Thank you for the opportunity to comment on the findings in the
subject draft audit report.  The attached comments, prepared by
staff of the Planning and Management Division and the Waste
Management Division, represent Region S's response to the draft
audit report findings and recommendations.

If you have any questions regarding the attagtfed comments, please
contact Howard Levin at 6-7522.
Attachment
                                 15

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                         HDNR COOPERATIVE AQREEMEKT PROCUREMENTS
                                                          APPENDIX 1
                                                          Page 2  of 4
                                    Attachment -Page  1  of  3  Pages

 Cost Analysis

 We agree that if the Michigan Department of Natural  Resources
 (MDNR) does not have a requirement  for cost analysis for
 contracts under the Superfund program, they should institute such
 a requirement.  However,  the  regulations are so general and vague
 that we believe it is very  difficult to conclude that  MDNR did
 not meet the regulatory requirements.  This lack of  specificity
 has been an ongoing frustration to  both the Region and the
 states. In order to provide more specific guidance to  states on
 contract management issues, including cost analysis, the Region
 has established a workgroup to develop guidance and  provide
 training.  Three states participate as members of the  workgroup,
 but all states will benefit from its products.

 The audit report is critical  of the MDNR for not doing an
 "examination of contractors actual cost data."  The  report needs
 to clarify what is meant  by "actual cost data."  It  is our
 understanding that the intention was to refer to the contractors
 supporting documentation  for  their budget projections,  not their
 "actual costs."   As you are aware, the Level of Effort contracts
 are "enabling" only and involve work not yet identified,  so there
 are no actual costs to be examined.  Actual costs are examined by
 individual project managers when an individual work assignment is
 made under the umbrella contract.

 The audit report also  discusses MDNR's predetermined prices for
 some items and states:  "contractors aust charge those rates
 regardless of their actual costs."  This statement is not true in
 all cases.   Some rates are "not to exceed prices."  MDNR reports
 that contractors have  submitted invoices for less than the
 established price.


 Recommendation 1 Response

 He  would  agree that  the MDNR is required to review and  document
 the review of the Department's procurement system in accordance
 with 40 CFR Part 35, Subpart O.  MDNR believes that they  have
 done the  equivalent  of a Subpart 0 review prior  to each
 certification, but did not offer evidence of documentation.  The
Region will  remind the MDNR of the importance  of maintaining this
documentation when future reviews are performed  and ask that such
documentation be provided to the Region  when it  is requested.
 Further,  we  believe that past EPA approval,  the  absence of
procurement  related findings in the Single  Audit reports,  and
 informal  reviews of  individual procurement  plans are  important
 indicators  for reasonable assurance that these procurement
requirements  have been met.


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                         MDKR COOPERATIVE AGREEMENT PROCUREMENTS

                                                          APPENDIX 1
                                                          Page 3  of 4
                                    Attachment -Page 2  of  3  Pages

 Recommendation 2 Response

 The Region will remind the MONK to complete  Part  B of  the
 certification form and ask them to reference 40 CFR Part  35,
 Subpart 0 rather than Part 33  on the form.   KDNR  has agreed to
 comply.


 Recommendation 3 Response

 The Region believes that  the procurement methods  used  by  the MONR
 are consistent with the optional  competitive  process described in
 40 CFR Part 35.6565 (5).   This regulation states:   "recipients
 may use competitive proposal procedures for qualifications-based
 procurement of architectural engineering (A/E) professional
 services whereby competitor's  qualifications  are  evaluated and
 the most qualified competitor  is  selected, subject  to  negotiation
 of fair and reasonable compensation."  The audit  report claims
 that the MONR did not  use this optional method because "technical
 capability and price are  considered  in selecting  the best
 qualified offerer."  He agree  that technical capability was the
 key factor in the selection process  as evidenced  by the use of a
 "Statement of Qualifications"  to  create a short list of qualified
 contractors.   However,  we do not  agree that price was an equal
 factor.   Price was considered  (after the short list of qualified
 contractors was  determined) because, in accordance with the above
 regulations,  the  price  must be  fair and reasonable.  Therefore,
 Subpart  0 requirements  have been vet and re-certification is not
 necessary.  Further, based on a March 9, 1994 discussion with
 office of the  Inspector General representatives,  we understand
 that the finding  and recommendation discussed here will not
 appear in the  final version of the audit report.


 Recommendation 4 Response

 The Region's procedure  is to provide a single point of  contact
 with an  assistance recipient by identifying  a project officer  for
 each award.  The project officer is responsible for routine
 contact  between the Region and the recipient  on all matters
 related to the award.  On matters related to  grant regulations
 (including issues related to the Subpart 0 procurement
 regulations), the Grants Management Section  (CMS)  is responsible
 for providing guidance, interpretation,  and assistance. CMS
works directly with project officers and customarily with
recipients either through, or in coordination with a project
officer.  We will ensure that this information is  communicated to
the MDKR.
                                  17

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                         MDNR  COOPERATIVE AGREEMENT PROCUREMENTS
                                                          APPENDIX 1
                                                          Page 4  of 4
                                   Attachment -Page 3 of 3 Pages
 Recommendation  5  Response
The  Region will  continue to provide such assistance to the MDNR.
In 1989,  the Region sponsored a two-day financial seminar which
included  cost  and price analysis instruction.  These subjects
were again covered in June , 1993, at a Regional two-day seminar
on Superfund administrative issues.  Headquarters
contracting/grants experts attended both seminars.   Recently,
Region  5  has formed a workgroup on state contract management
under Superfund  Cooperative Agreements.  The workgroup is made  up
of Superfund Cooperative Agreement project officers,  grants
specialists, contracting project officers,  Superfund  Remedial
Project Managers, and some state representation.   The ultimate
goals of  this  workgroup are to develop guidance to be used by
state personnel  who work with contracts,  and to provide
meaningful training in areas which are identified as  weak areas.


General Comments

He believe the audit report should clarify  the  Subpart  0
regulations which were in effect in 1989  and 1993,  the  years of
MDNR's Level of Effort contracts.   In  1989,  the regulations had
not yet been finalized,  but there  was  an  Interim  Final
regulation,  effective January 27,  1989.   The final  version of the
Subpart 0 regulations became  effective July 5,  1990.
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                               Report HO.  E18GF2-05-0269-4100218

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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
CERCLA

CFR
EPA
LOE
MAP
MDMB
MDNR
OSWER
RI/FS
RFP
                                                  APPENDIX  2
                                                  Page  1  of 1
                        ABBREVIATIONS
Comprehensive Environmental Response, Compensation,
and Liability Act
Code of Federal Regulations
Environmental Protection Agency
Level of Effort
Management Assistance Program
Michigan Department of Management and Budget
Michigan Department of Natural Resources
Office of Solid Waste and Emergency Response
Remedial Investigation and Feasibility Study
Request for Proposal
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                      MDNR COOPERATIVE AGREEMENT PROCUREMENTS
                                                  APPENDIX  3
                                                  Page 1 of l

                         DISTRIBUTION

Inspector General  (2410)

Assistant Administrator for Solid Waste and Emergency
  Response  (5101)

Director, Office of Emergency and Remedial Response  (5201)

Director, Grants Administration Division  (3903F)

Associate Administrator for Regional Operations  (1501)

Agency Followup Official  (3101)
  Attention:  Assistant Administrator for the Office of
              Administration and Resources Management

Agency Followup Coordinator (3304)
  Attention:  Director, Resource Management Division

Headquarters Library  (3401)

Regional Administrator, Region 5  (R-19J)

Region 5 Audit Followup Coordinator  (MFA-10J)
  Attention:  Chief, Financial Analysis Section

Region 5 Library (PL-12J)
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                            Report NO. E1SGF2-05-0269-4100218

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