5297 100R76101
AUDIT GUIDE
FOR
CONSTRUCTION
GRANT PROGRAM
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
FEBRUARY 1976
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This document is not a replacement for or supplement to EPA regulations,
guidelines, or official EPA policy statements. It is a guide used by the
Environmental Protection Agency and its auditors to assist in conducting
interim and final construction grant audits. As such, this guidance is
subject to be modified as EPA regulations, guidelines, and policies change.
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CONTENTS
Page
1: INTRODUCTION 1.1
1.1 Purpose of Audit Guide 1.1
1.2 Program Background 1.2
1.3 Authority for Audit 1.2
1.4 Audit Standards 1.3
1.5 Audit Objectives 1.3
1.6 Matters Requiring Immediate Attention 1.4
1.7 Quality Control 1.4
2: DEFINITION OF PROGRAM TERMS 2.1
3: PRELIMINARY PROCEDURES 3.1
3.1 Developing the Audit Approach 3.1
3.2 Types of Audits 3.2
3.3 Developing the Plan 3.3
3.4 Major Activity Areas for Audit Focus 3.7
4: FIELD AUDIT PROCEDURES 4.1
4.1 Approach to Audit Costs 4.2
4.2 General Audit Steps 4.7
4.3 Specific Areas of Audit 4.9
5: EXIT CONFERENCE 5.1
6: THE AUDIT REPORT 6.1
6.1 Introduction 6.1
6.2 Content and Format of Auditor's Report 6.2
6.3 Presenting the Findings 6.2
6.4 Auditor's Report on Subagreement Costs 6.3
APPENDIX ASurvey of Grantee's Accounting, Procurement, and
Property Management Systems A.I
APPENDIX BBond Calculation Guidance B.I
APPENDIX CSupplemental Audit Procedures for Relocation Costs C.I
APPENDIX DReserved for Industrial Cost Recovery and User Changes. D.I
APPENDIX ECriteria for Eligibility and Allowability of Selected Items of Costs E-l
APPENDIX FEPA Area Audit Offices and Cognizant Geographic Areas F-l
APPENDIX GReferences G-l
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CHAPTER 1: INTRODUCTION
1.1 PURPOSE OF AUDIT GUIDE
This Guide has been prepared to assist the Environmental Protection Agency (EPA)
and its auditors to conduct interim and final audits of the Construction Grant Program.
The audit steps in this guide are intended to provide general insight into the nature and
scope of audit contemplated. This guide is not intended to be a complete manual of
procedures, nor is it intended to supplant the auditor's judgment of the work required to
meet the audit objectives outlined in this audit guide. The audit procedures contained in
this guide may not cover all circumstances or conditions encountered in auditing a
particular grant and similarly not all of the audit procedures will apply to each grant
audited. Auditors must use their professional judgment to tailor the procedures to meet
conditions at the audit site so that the audit objectives set forth in the guide may be
achieved.
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1.2 PROGRAM BACKGROUND
The first Federal legislation concerning water pollution was the Rivers and Harbors Act
of 1899. The Act provided that those convicted of polluting navigable waters or their
tributaries would be guilty of a misdemeanor, and upon conviction, would be fined
between $500 and $2,500 and imprisoned for not less than 30 days nor more than one year.
Forty-nine years later, the 1948 Federal Water Pollution Control Act was enacted. It
provided grants for the planning and design preliminary to construction and loans for
construction. The Federal Water Pollution Control Act of 1956 provided the basis for the
current construction grant program. This Act was amended in 1961,1965,1966,1970, and
1972. The Act, as amended, provides for Federal grants to municipalities, intermunicipal
agencies, states, and interstate agencies for the purpose of planning, designing, and
constructing waste treatment facilities.
The Department of Health, Education and Welfare administered the program until
1966. The Federal Water Pollution Control Act of 1966 transferred this responsibility to
the Department of the Interior. The construction grant program was transferred to the
Environmental Protection Agency in 1970 (Reorganization Plan No. 3).
After June 30, 1967, Federal participation in grants made to a grantee for the cost of
constructing a waste treatment facility could be increased to 40 percent, if the state agreed
to pay not less than 30 percent of the estimated reasonable cost of all state construction
projects receiving Federal grants. The percentage limitation could be further increased to
50 percent in cases where the state agreed to pay not less than 25 percent of estimated
reasonable cost of all projects for which Federal grants were made, and if enforceable
water quality standards had been established for the waters into which the project
discharged. An additional Federal participation of as much as ten percent of the approved
grant was permitted if the funded project was in conformity with a metropolitan plan for
that particular area. Thus, it was possible for a Federal grant to be awarded for an amount
equal to 55 percent of the total estimated reasonable project cost. Title II of the Federal
Water Pollution Control Act Amendments of 1972 authorized a Federal grant of 75 percent
of the cost of construction of a treatment works.
1.3 AUTHORITY FOR AUDIT
The authorized representatives of the Administrator of EPA and the Comptroller
General of the United States have authority to audit the grantees' books, documents,
records, and papers (P.L. 92-500). This audit authority is extended to the subcontractor's
books, documents, records, and papers which are pertinent to the project (40 CFR 35.935-
7). EPA auditors and auditors under contract thereto are the Administrator's representa-
tives.
The EPA Office of Audit is responsible for all audits of EPA grants. The Area Audit
Manager (see Appendix F) may elect to have an individual audit conducted by his staff,
another Federal agency, state or local auditors, or an independent public accountant.
When the Area Audit Manager elects to have the audit performed by an independent
public accountant, the Manager must notify the grantee or contractor as to the firm
performing the audit. It will be the selected firm's responsibility to contact the grantee or
contractor to arrange the commencement of the audit.
1.4 AUDIT STANDARDS
Audits of EPA construction grants will be made in accordance with this guide and the
"Standards for Audit of Governmental Organizations, Programs, Activities, and
Functions" issued by the Comptroller General in August 1972. The independent public
accountant will not be required to express an opinion as to the efficiency and economy of
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operations or with respect to program evaluations. He will, however, be required to
perform certain audit tests related to these aspects and to report the results of his
examination.
In performing audits of EPA grant/con tracts, the auditors are expected to adhere to
generally accepted auditing standards. In addition, the auditor should utilize those
portions of the American Institute of Certified Public Accountants' (AICPA) Industry
Audit Guides considered applicable. Of particular importance is the guide "Audits of State
and Local Governmental Units."
1.5 AUDIT OBJECTIVES
The objectives of the audits of grants and contracts are:
to determine whether the management controls exercised by grantee through its
management system, accounting system, procurement system, and property control
system are adequate to provide assurance that costs claimed/incurred are reasonable,
allowable, and allocable to the sponsored project under the grant terms and conditions,
Federal Management Circulars, and Applicable EPA regulations.
to identify any noncompliance with applicable grant provisions or EPA rules and
regulations and, based upon the review, to provide recommendations for improvement.
to determine whether the costs claimed under the EPA grant are reasonable, allowable,
and allocable to the sponsored project.
1.6 MATTERS REQUIRING IMMEDIATE ATTENTION
1. Suspected Fraud, Irregularity, or Collusion
Audits performed in accordance with this guide are not for the purpose of detecting
fraud, although audits may minimize fraud loss, discourage irregularities, and identify
conditions of gross mismanagement. If, during the examination, instances of possible
fraud, duplications, gross mismanagement, or other similar irregularities are noted the
auditors should:
document the situation
immediately notify the Area Audit Manager of the situation encountered; and
proceed only in accordance with instructions provided.
2. Insufficient Data or Inadequate Systems
Auditors are expected to use professional judgment in arriving at conclusions
concerning the sufficiency of available supporting data. If additional guidance is needed
as to the acceptability of certain data, the auditor should contact the Area Audit Manager
or his designated representative. Where insufficient data or inadequate systems preclude
the reaching of opinions concerning the reasonableness, allocability, and allowability of
costs within a reasonable period of time, auditors must, as a minimum:
document tests and observations to support the auditor's opinion regarding insufficient
data or inadequate systems.
notify the Area Audit Manager and cease work until instructions are received.
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1.7 QUALITY CONTROL
EPA retains the right to review audit work papers to evaluate the over-all quality of the
audit performed. In this regard, EPA may require that copies of the audit work papers be
forwarded along with the completed audit report to the responsible Area Audit Manager
or his designated representative. The audit work papers will be returned to the auditor
upon completion of the EPA evaluation. Based on this review, the auditor may have to
return to the job site to perform whatever additional work is required. In this regard, the
auditors should retain the work papers applicable to the audit of any EPA grant or
contract for three years after completion of the assignment and submission of the required
audit report.
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CHAPTER 2: DEFINITION OF PROGRAM TERMS
In conducting a construction grant audit, it is extremely important that the auditor
understand certain program terms. Program terms are denned in Title 40, Part 35.805 and
35.905 of EPA's Final Construction Grant Regulations. In addition, the following
definitions are presented to further assist the auditor.
Cutoff DateA cutoff date is establish by the EPA Regional Office. The grantee is
notified of the cutoff date by letter. After the cutoff date, the cost of any work performed,
equipment or materials delivered or installed, or services rendered will not be allowable
for Federal participation. If no other cutoff date is established, the cutoff date will be the
date of the final inspection,
Federal ShareThe amount of the Federal grant not to exceed the smaller of the
amount of the approved grant or the actual allowable audited costs multiplied by the
percentage of Federal participation on which the grant was computed.
Force AccountThe grantee's use of his own employees, material and equipment for
construction, construction related activities, or for facility repair or improvement.
GranteeAn applicant who has received a grant. A grantee may be a municipality,
intermunicipality agency, state, interstate agency, District of Columbia, Puerto Rico,
Virgin Islands, Guam, American Samoa, or Trust Territory of the Pacific Islands.
Industrial Cost Recovery Recovery, over a period of 30 years or the life of the
facility, of construction costs of a treatment works, for the industrial users, based on the
proportionate treatment of waste from such users. Fifty percent recovered funds together
with any interest earned during the year is to be refunded annually to the U.S. Treasury.
Forty percent of the recovered amount is to be retained by the grantee and used only for
EPA approved construction. The remaining ten percent may be used as the grantee
wishes.
Operation and MaintenanceThe operation and maintenance of a treatment works
during its service life, following completion of the Step 3 phase.
Project FileThe EPA file which contains each grant agreement or amendment (such
as Step 1, Step 2, or Step 3) and supporting documents, correspondence with the grantee,
copies of inspection reports, and the grantee's payment requests.
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CHAPTER 3: PRELIMINARY PROCEDURES
3.1 DEVELOPING THE AUDIT APPROACH
The scope of each construction project is initially denned by a prospective applicant,
with final determination made by the Regional Administrator when grant assistance is
awarded (35.930-4).
Grants are generally obligated in three separate stages of project development: Figure
3.1.
Step 1Facilities Plans and Related Elements
Step 2Preparation of Construction Drawings and Specifications
Step 3Fabrication and Building of a Treatment Works
A "project" may consist of an entire step, a segment, or a combination of steps (35.905-24).
Construction grant projects funded under Public Law 84-660 consist of a combination of
steps 1, 2, and 3. An average sized project may require approximately two years to plan
and construct. Very large regional projects may require 12 to 15 years.
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Figure 3.1
CONSTRUCTION PROJECT MILESTONES-OVERVIEW
STEP I
* Facility Plans, and Related Elements
* Municipality submits application
Reviews by state and EPA
» Facility plans and alternatives proposed
* Environmental and social aspects considerations
* Priorities as set by State for Step 2
STEP 2
Preparation of Construction Drawings, Plans & Specifications
Municipality submits application
Reviews by state and EPA
Plans and specifications completed
Review and approval by state and EPA
Priorities as set by EPA for Step 3
STEP 3
Fabrication, Building, and Certification of Treatment Works
Municipality submits application
Reviews by state and EPA
Applicant advertises and selects low, qualified bidder
Review and approval by state and EPA
Construction
a) Progress payments
b) Request for changes approved
c) Interim inspections by state/EPA
d) Interim audits by state and/or EPA
e) User charge, industrial cost recovery system
f) Operations and maintenance manual approved
g) Grantee certifications
Project completed
Final audit, payment
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3.2 TYPES OF AUDITS
Two types of field audits will be conducted:
interim audits, and
final audits
The overall objectives of these audits are to ensure that the grantee is in compliance with
grant requirements and to identify any areas in the management of the construction
grant program program which need improvement.
The auditor is expected to have the skills necessary to perform the reviews required to
meet the objectives of this guide. However, should the auditor encounter situations
requiring skills of an engineering technical nature, he should contact the Area Audit
Manager, who will review the situation and arrange for technical assistance.
3.2.1. Interim Audits
The primary purpose of the interim audit is to review the grantee's operations during
the initial stages of construction in order to detect any weaknesses in internal controls or
in the controls over contractors responsible for design and construction and to offer
positive recommendations for improvements. Interim audits will be performed during the
earlier part of a construction project, often shortly after the construction contractor has
submitted a construction payment request. Accordingly, interim audits will be primarily
directed toward:
internal accounting controls,
procurement systems,
design and construction controls, and
costs incurred
3.2.2. Final Audits
The primary purpose ot the final audit is to review the grantee's records after completion
of the project to assure that costs claimed are reasonable, allocable, and allowable and
that the grantee has met the grant objectives.
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3.3 DEVELOPING THE PLAN
The EPA Office of Audit will utilize the criteria presented in Figure 3.2, other relevant
reports, grant construction audit information, and the results of sampling tests to select
projects for audit.
Figure 3.2
FACTORS TO BE CONSIDERED IN DETERMINING AREAS OF AUDIT
EMPHASIS
Size of grants/projects
Existence of unit-price contracts
Type of construction contracts and subcontracts
Type and materiality of engineering contracts and subcontracts
Number and significance of change orders
Experience with prior gran tee/project audits
Indication of deficiencies
Once the grantee has been selected, the Office of Audit will review construction
grant/project files and, after consultation with the Regional Office, will assemble an audit
planning package, which will be utilized to:
determine whether a field audit will be performed;
establish the scope of audit contemplated and provide a basis for preparing the
necessary audit request documents; and
assist the prospective auditors in establishing a firm resource estimate.
Descriptive data needed for completing the audit estimates will be provided (Figure 3.3)
to prospective auditors for use in developing an audit plan. Other grant data relevant to
actual project costs and contract information (Figure 3.4) should be Dbtained from the
project file by the auditor selected to perform the audit.
In addition, there are substantial regulatory requirements tne grantee must comply
with under the P.L. 92-500 construction grant programs. These requirements are set forth
in part 30 and 35 to EPA's regulations. The auditor must also review the documents in
order to identify the terms and conditions unique to the audit being performed.
In reviewing the project, the Audit Manager will determine if there are any areas
requiring special attention. The Manager will thus identify areas for which he requires
detailed audit coverage as well as areas requiring little or no coverage. In addition, the
Manager may want to expand the audit to cover certain aspects of efficiency, economy, or
program effectiveness. Whenever the scope is thus expanded, the Manager will provide
the additional audit guidance necessary for appropriate coverage of the expanded areas.
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Figure 3.3
Information to be Provided to Prospective Auditors for Use in Determining Scope,
Schedule, Resource Plans, and Estimates of Audit Efforts
Grant number
Grantee name and address, phone number
Eligible project cost
Grant amount
Number and dollar value of change orders
Number, amount, and type of Construction Contract
Number, amount, and type of Engineering Agreements
Extent pf force account work (as available)
Cutoff Date
Notification if construction is located in a flood hazard area requiring the grantee to
purchase flood insurance.
NPDES Permit
Figure 3.4
Information to be Obtained from the Project File by the Auditor Performing the Audit
Final project inspection date
Any additional engineering, construction contracts
Copies of related subcontracts (as available)
Final inspection reports and cut-off dates (final audits)
Copies of EPA approved change orders
Bid tabulations, contractor proposals
Expenditure work sheet calculations
Payments made by EPA
Approvals to advertise, award contracts
Other pertinent correspondence (i.e., management problem areas)
Grants information and control data sheets
Inspection reports, correspondence, and memorandums
Final Project Progress Report and Payment Request (PPR & PR) or Outlay Report
and Request for Reimbursement for Construction Program.
Form FWPCA-7, or Form 5700-32, Application, with supporting documentation
Form FWPCA-Vc, State Priority Certification and Project Approval
Form FWPCA-8a, or Form 5700-20 (Offer and Acceptance)
* Normally not available from regional office project files for an interim audit.
After the auditor has been selected and he has studied the project file
furnished by EPA; he must:
note any special grant conditions which may be significant to the audit; and
familiarize himself with the regulations applicable to the grant/project and indicated
in grant award documents.
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3.4 MAJOR ACTIVITY AREAS FOR AUDIT FOCUS
The general scope of audits will be established by the EPA audit managers during the
definition and audit planning stages. The major activity areas to be addressed during the
audits include the grantee's:
accounting practices;
procurement practices; and
project management practices.
Both interim and final audits will include the audit of costs incurred associated with these
activities.
3.4.1. Accounting Practices
A primary requirement for the competent management of any project is a good account-
ing system. The major areas which should be of primary concern to the auditor during his
survey (Appendix A) are as follows:
a. Accounting records
In order to have an accounting system, there must be records of all financial
transactions. This system should document all receipt and disbursement transactions,
including explanations and identifying codes (e.g., invoice number) on a chronological
basis. It should also group them by type of account (e.g., expense, asset) and by individual
account (e.g., Board of Supervisors payroll, communications expense). Accounts should be
set up in such a way as to identify each cost with a cost center and cost objective in the
form of a task or subtask. A cost center may be an organizational unit, a function, or even
an item of expense. Its purpose is to collect costs on a functional basis. Thus, accounts
might be divided into more than one cost center (e.g., payroll expense might be distributed
into several department(s) and cost centers may have more than one account (e.g., the
accounting department's costs might include payroll expense, supplies, and other
accounts). An important project management objective of accounting records is the
derivation of information regarding actual vs. budgeted costs by project task and by
performing organization. A separate cost center or series of subaccounts should be
established to identify and accumulate the costs applicable to the EPA construction grant.
All entries in the chronological and account groupings should be cross-referenced.
Further, the groupings should be cross-referenced to the supporting documents.
b. Supporting documents
Every entry in the accounting records should be supported by appropriate documenta-
tion. This could be a document from outside the grantee's office, as in the case of an
invoice, or it could be an internally generated document, as in the case of payroll. In many
cases, several documents will support a single transaction. For instance, a purchase of
materials should have a purchase request, purchase order, and receiving report in
addition to an invoice. It might also involve requests for proposal, contracts, advisory
board resolutions, progress reports, and progress payments. The key is that the files of
supporting documents should contain all information necessary to explain every
transaction completely and should be cross-referenced in such a way that transactions
can be traced from any document dealing with the transaction back to the initiation of
that transaction and forward to the entry or entries concerned with that transaction.
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c. Traceability
Traceability is composed of two elements. The first is mechanical in nature. All entries
should be traceable to supporting documents. This requires a good filing system based on
reference codes for each entry and document. In a small system, codes may not need to be
as detailed, due to the lower volume of transactions, but in almost all systems referencing
based soley on a date or name will eventually prove cumbersome, inefficient, and probably
inadequate. Sequential numerical codes are usually best, not only for ease of referencing
but also for internal control.
The second element of traceability is the logic behind the transaction. One should be
able to determine not only what was done but why it was done. It is here that written
procedures become important. Some companies and governmental units survive without
them; however, they constantly experience employee turnover, changes in circumstances,
exceptions to the unwritten rules, and loose internal control. A grantee should have or
should prepare complete procedures for handling grant funds.
d. Segregation of Costs
Accounting systems under Federal grants must provide for segregation of costs. In
order to permit grantees and EPA to determine in which costs the government will
participate, the accounting system must differentiate between:
eligible and ineligible costs;
Each construction grant project is normally evaluated by EPA Regional Office personnel
to determine which portions of the project are eligible for Federal participation under
Federal Statutes. All costs applicable to eligible portions of the project are considered
eligible costs. Costs applicable to the ineligible portion conversely are considered
ineligible and cannot be claimed for Federal participation.
allowable and unallowable costs;
All costs related to construction grants must be allowable under applicable Federal
regulations and the terms of the grant if EPA is to participate. Grantee costs must also be
considered allowable under Federal Management Circular (FMC) 74-4 and EPA
regulations in 40 CFR 35.940. Each cost should be scrutinized in view of these
requirements. Unallowable costs should then be segregated, thus preventing their
inclusion in the grantee's claim for Federal participation.
direct and indirect costs.
A further distinction must be made between direct and indirect costs. Direct costs are
those which can be directly identified to a particular grant. For example, accounting or
procurement costs are commonly not identified with individual grant projects. Grantee
indirect costs are not allowable as charges to a grant program unless an indirect cost
proposal identifying indirect costs and showing its proposed allocation is prepared,
audited, and accepted by the Federal government (see 40 CFR 30.715-2 and 40 CFR 35.940-
4).
e. Internal control
Internal control is the means by which the accounting, procurement, and other
management systems are regulated. It serves to assure management that proper
procedures are being followed with respect to receipts and disbursements.
Each grantee should have controls which act to check the functioning of the system
automatically and which insure that all major transactions have checks and balances on
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the individuals involved. It should also be remembered that contractors hired by the
grantee should be supervised, not only with respect to their work but also with respect to
their accounting for the costs of work under reimbursable contracts. This supervision
should also be provided for as a part of the grantee's internal control system. For example,
costs of contractor's efforts by task should be recorded and should have an audit trail
which the grantee could examine in detail if the contract was significant in amount.
f. Accounting reports
Accounting reports are the ultimate product of an accounting system and are often the
least planned aspect of the system. This applies more to internal reports than to external
reports due to the fact that the form of many external reports is prescribed. The grantee
should realize that the data which must be reported to outside sources is not always the
data which is required for internal management. Like internal control, reports will vary
from grantee to grantee. The keys here are simplicity, comparability, and advance
planning.
The constant question must be: has the grantee given sufficient thought to planning the
accounting system? It should be based on analysis of his needs and resources, rather than
on a standard system copied from a book. The thing to look for is an understanding of
those needs and an analysis of how the accounting system will fulfill them.
3.4.2. Procurement Practices
a. Construction contracts (Figure 3.5)
EPA regulations (40 CFR 35.938-3) require that each construction contract shall be
either a lump sum contract, a unit price contract, or a combination of the two. Each
contract must be awarded by means of formal advertising to the lowest responsive,
responsible bidder.
Lump Sum
The lump sum contract generally provides that the contract will be paid a lump sum
agreed to in advance for the construction of the facility reflected in detailed plans and
specifications. It is not subject to adjustment by reason of contract cost experience and,
when appropriately applied, places maximum risk upon the contractor. The grantee and
Federal government are assured of a reasonable price through the receipt of competitive
bids under the formal advertised procurement process. For changes in scope of work, non-
competitive change orders to formally advertised procurements must be negotiated.
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Unit price
The unit price contract generally provides that the contractor will be paid a fixed sum for
each unit of work performed under the approved plans and specifications. This type of
contract is commonly used where the work represents a repetition of things, such as the
laying of sewer lines, or where the quantity of work may vary substantially. Unit prices
are not subject to adjustment by reason of cost experience. Like lump sum contracts, the
reasonableness of the total contract price is assured through the receipt of competitive
bids under the formal advertised procurement process. Where there are significant
differences in unit quantities awarded and unit quantities constructed, the reasonable-
ness of unit prices must be established through negotiation.
Figure 3.5
CONSTRUCTION CONTRACT
CHARACTERISTICS
AREAS OF CONSID-
ERATION
FIRM FIXED-PRICE
(LUMP SUM)
UNIT PRICE
Cost & fee/profit pat-
tern
Cost is not specified
Profit is not specified
A total price is established
Cost is not specified
Profit is not specified
Unit price is fixed
Effect of overrun or
underrun
All costs over price are borne by
contractor
Cost underrun increases profit
All costs over price are borne by
contractor
Cost underrun increases profit
Basis of payment
Progress payment varies
Payments of billing price upon
delivery and acceptance of prod-
uct
Progress payment varies
Contractor's potential
risks
Profit can go to zero and below
Specified schedules and techni-
cal performance requirements
must be met
Contractor must deny extra
contractual effort
Changes to the contract and
claims must be managed astute-
ly
A proven cost, schedule, plan-
ning, and control system is
essential
Can expect an increase in dis-
putes with government
Profit can go to zero and below
Specified schedules and techni-
cal performance requirements
must be met
Contractor must deny extra
contractual effort
Changes to the contract and
claims must be managed astute-
ly
A proven cost, schedule, plan-
ning, and control system is
eesessential
Can expect an increase in dis-
putes with government
b. Engineering contracts (Figure 3.6)
The method of obtaining engineering and consulting services under grants is generally
through a negotiated procurement. This type of procurement should involve screening a
number of firms for technical competence. Historically, the grantee's consultants have
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commonly been preselected and thus the important point is the reasonableness of the
negotiated price and method of reimbursement. Under a negotiated procurement, there
are a number of types of contracts. They include fixed price, cost reimbursable, time and
material (labor hour contracts) or combinations of the above. The Federal Procurement
Regulations (FPR), Section 1-3.4 discusses in detail these forms of contracting, when they
are considered applicable, and their limitations. The following summary of each is
provided.
Fixed Price
The FFP or lump sum contract generally provides for a firm price agreed to in advance for
the services to be procured. It is not subject to adjustment by reason of the contract cost
experience and, when appropriately applied, places maximum risk upon the contractor.
Since the contractor assumes full responsibility for profit or loss, he has maximum
incentive for effective cost control and contract performance. The FFP contract is suitable
for use in procurements only when definite performance requirements are available and
whenever fair and reasonable prices can be established at the outset. Prior to award, a
negotiation process which includes either price or cost analysis should take place between
the firm and the grantee to arrive at a reasonable estimate of cost plus a negotiated profit.
The grantee is expected to document this negotiation.
Cost Reimbursable
The cost reimbursable type of contract provides for the payment of actual cost plus a fixed
fee to the contractor. The fixed fee once negotiated does not vary with actual cost. Since
the fixed fee does not vary in relation to cost, the CPFF contract provides the contractor
only minimum incentive for effective management control of costs. The CPFF contract
provides that the contractor receive his actual allowable labor,'other direct costs, and
indirect costs, plus a fixed fee profit. The CPFF contract is written to provide for a total
estimated cost (contract ceiling). The firm's costs are subject to an audit during or after
completition of performance to determine that their claims included only allowable costs
in accordance with applicable regulations.
Time and Materials (Labor Hour)
This type of contract provides for the procurement of services on the basis of direct labor
hours at specified fixed hourly rates (which include direct labor, overhead, and profit).
This type of contract does not afford the contractor with any positive incentive to control
cost. It is essential that this type of contract be used only where provision is made for
adequate controls, including appropriate surveillance during performance. Because this
type of contract does not encourage effective cost control and requires almost constant
surveillance, it should be used only after determination that no other type of contract will
suitably serve. This type of contract shall establish a ceiling price which the contractor
should not exceed.
The labor hour contract has been used frequently by engineering and consulting firms
in the past. While it is an acceptable form of contracting, certain controls that have not
existed in the past are essential. The grantee is responsible for obtaining cost data from
the consulting engineer for evaluation and negotiation in establishing hourly rates. This
should be documented to show that a determination of reasonableness was made. In
addition, the grantee is responsible for maintaining surveillance over the hours charged
by the contractor. The contract must set a reasonable ceiling on the total cost of these
services. A final audit will be made to assure that the contractor has appropriate
documentation to support the time charged to the project.
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In summary, any of the above forms of contracting can be acceptable. However, the
grantee is responsible for demonstrating that:
the method selected is appropriate for the services to be performed; (See FPR 1-3.4)
the necessary evaluation of the reasonableness of the proposed costs was made; and
controls were maintained during performance.
In reviewing procurement systems for procurements awarded under EPA's "Subagree-
ments Regulation for Construction Grants" the auditor should be guided by the
requirements of 40 CFR 35.936, 40 CFR 35.937 and 40 CFR 35.938.
Figure 3.6
Engineering Contract Characteristics
AREAS OF CONSID-
ERATION
Cost & fee/profit pat-
tern
E ffect or ov errun o r
underrun
Basis of payment
Contractor's potential
risks
COST-PLUS-FIXED-FEE
Cost is estimated
Fee is fixed in CPFF
No fee m cost
Fee $ unchanged
Government assumes risk of overrun and
benefits of underrun
Cost reimbursed as incurred, plus prorated fee
No fee risk
Best effort only is required to meet cost
Government maintains a high level of in-
volvement in contractor's operations
Contractor normally does not contest extrac-
ontractual direction, requests and interpreta-
tions
FIRM FIXED-PRICE
(LUMP SUM)
Cos* is not specified
Profit is not specified
A total price is established
All costs over price are borne by contractor
Cost underrun increases profit
Progress payment vanes
Profit can go to zero & below
Specified schedules and technical perfor-
mance requirements must be met
Contractor must deny extra contractual effort
Changes to the contract and claims must be
managed astutely
* A proven cost, schedule, planning, and
control system is essential
Can expect an increase in disputes with
government
LABOR HOUR
Cost is not specified
Profit is not specified
Fixed hourly labor rates are negotiated
All costs over price of each hour's work are
borne by contractor
Cost underrun increases profit
Payment based upon actual hours worked
* Profit can go to zero and below
Specified schedules and technical perfor-
mance requirements must be met
Changes to the contract and claims must be
managed astutely
A proven cost, schedule, planning, and
control system is essential
3.4.3. Project Management Practices
The project management approach applied by the grantee is significant to his ultimate
ability to control costs and schedules. In addition to a clear understanding of contractual
relationships, it is necessary that the grantee, the engineer and the construction
contractor establish a complete communication system with effective controls over costs
and schedules and with a rapid decision-making and feedback capability. The basic
principles of such a system of management controls are shown in Figure 3.7.
a. Planning and design phases cost and schedule control
The control of costs and construction schedules during planning and design is of great
importance. Common activities and management control activities are shown in Figure
3.7.
b. Construction phase cost and schedule control
Emphasis during the construction phase is focused on the management and monitoring
of project cost and schedule data for construction labor, material installations, and
performance of subcontractors providing equipment and services. The grantee must
ensure that adequate inspections at the project locations are provided and that
construction and equipment conform with the approved plans and specifications.
Controls exercised during this phase are shown in Figure 3.7.
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Figure 3.7
Basic Principles of the Grantee-Engineer-Construction System
Proper definition of project scope, estimated cost, schedules, and responsibilities of the
grantee, the engineer, and the construction contractor.
Prompt revision of scope, estimated costs, and schedules after changes
Control of design costs, and procurement of engineering services and construction
Control of schedule, costs, and changes during construction by monitoring:
- work schedules, material schedules, and start-up,
- material quantities purchased, used _
Planning and Design Phase Cost and Schedule Control Activities
Regular planning and design meetings attended by proper management membership
Regular reports on planning and design progress as related to prior schedules
Specification reviews and approval for major equipment, much the same as for
drawings _
Controls Applied During Construction
A program for viewing overall time schedule and cost variances from budgets and
schedules
Inspections and reports of installed quantities of materials and comparison of plans
and actuals
Control of field progress by regular site reviews and continuing physical inspection-
/monitoring
A change order budget system, which shows dollars, manhours, and quantities of
materials or equipment.
A change order approval system, with adequate formalized evaluations of the impact of
pending changes, and change notification procedures for fully implementing approved
changes _ _ _
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CHAPTER 4: FIELD AUDIT PROCEDURES
In performing the audit, the auditor must use professional judgement on a case-by-case
basis in determining the specific audit procedures to be applied. Not all of the audit
procedures outlined in this guide will apply to each audit.
The auditor must consider the materiality of costs incurred by the grantee as related to
administrative labor and materials, engineering services and construction. In addition,
the management controls applied by the grantee to the overall program must be reviewed.
The prior sections of this manual outline project management systems and their
relationships to the audit, including the need to focus on the specifics of the procurement,
accounting, and project management activities.
This section sets forth the field audit procedures to be used in conjunction with this
guidance. Major portions of this section are:
4.1 Approach to Audit of Costs
4.1.1. Factors Determining Allowability
4.1.2. Review of Costs
4.2 General Audit Steps
4.2.1. Initial Field Audit Procedures
4.2.2. Verification of Claim
4.2.3. Verification of Eligibility
4.2.4. Credits, Rebates, and Refunds
4.2.5. Unpaid Bills
4.3 Specific Areas of Audit
4.3.1. Audit of the Force Account
4.3.2. Audit of Engineering Services
4.3.3. Audit of Construction Costs
4.3.4. Criteria for Audit of Special Items of Costs
4.3.5. Other Audit Matters
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4.1 APPROACH TO AUDIT OF COSTS
In conducting audits of EPA construction grants, the auditor will be attempting to
reach a conclusion as to the acceptability of costs. In an interim audit, the auditor will
express an opinion on costs incurred through the grantee's most current accounting
period even though these costs may not have been claimed on a reimbursement voucher to
EPA. In a final audit, the auditor will express an opinion on the cost reported on the final
report of expenditures or updated form. Thus, in a final audit where the grantee has
actually incurred costs in excess of the amounts claimed or reported, the auditor may not
increase the amount of the grantee's claim. He should, however, disclose through
footnotes the extent of unclaimed or unreported costs which would normally be considered
allowable.
4.1.1. Factors for Determining Allowability
To be allowable under a grant program, costs must meet the following general criteria:
Be necessary and reasonable for proper and efficient administration of the grant
program, be allocable thereto and, except as specifically provided herein, not be a
general expense required to carry out overall responsibilities of State or local
governments:
Be authorized or not prohibited under State or local laws or regulations;
Conform to any limitations or exclusions set forth in the grant document, Federal laws
or other governing limitations as to types or amounts of cost items;
Be consistent with policies, regulations, and procedures that apply uniformly to both
federally assisted and other activities of the unit of government of which the grantee is
a part;
Be accorded consistent treatment through application of generally accepted accounting
principles appropriate to the circumstances;
Not be allocable to or included as a cost of any other federally financed program in
either the current or a prior period; and
Be net of all applicable credits.
Costs questioned normally fall under one or more of the following categories:
Prohibited costs. Costs which are specifically prohibited under the terms of the grant
or other cost principles cited in the grant or applicable EPA regulations or guidelines.
Unreasonable Costs. In determining the reasonableness of a given cost, considera-
tion shall be given to:
Whether the cost is of a type generally recognized as ordinary and necessary for the
conduct of the grantee's (contractor's) business or the performance of the contract;
The restraints or requirements imposed by such factors as generally accepted sound
business practices, arm's length bargaining, Federal and State laws and regulations,
and grant/contract terms and specifications:
The action that a prudent businessman would take in the circumstances, considering
his responsibilities to the owners of the business, his employees, his customers, the
Government, and the public at large; and.
Significant deviations from the established practices of the grantee/contractor which
may unjustifiably increase the grant/contract costs.
The auditor in conducting his examination should be cognizant of the costs incurred
which indicate to him that they may be excessively high or even unwarranted. In making
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efte determination as to any costs which might be questioned as being unreasonable the
auditor would rely on his own judgment. In making these determinations the auditor is
not expected to make judgments on technical matters outside of his area of expertise.
Unallocable Costs. In reviewing the allocability of costs, the auditor will be guided by
the following criteria:
A cost is allocable to a particular grant/contract to the extent of benefits received.
Any cost allocable to a particular project or function may not be shifted to a Federal
grant/contract to overcome fund deficiencies, avoid restrictions imposed by law or
grant/contract agreements or for other reasons.
Where an allocation of common costs will ultimately result in charges to a
grant/con tract, an indirect cost rate proposal will have to be prepared to justify the
equitability of the charge.
Undocumented Costs. Costs for which detailed documentation is not available to
show that the costs claimed were in fact incurred under the EPA grant/contract.
Unapproved Costs. Costs for which grant/con tract provisions or applicable cost
principles require awarding agency approval, but for which the auditor finds no evidence
of such approval.
4.1.2. Review of Costs
Under the terms of the grant, EPA's participation in a project is for a limited period.
Thus EPA may only participate in those costs properly chargeable to that period, with the
exception of certain pre-grant costs which will be allowable (40CFR 35.925-18). In
reviewing costs, the auditor will be examining total project costs. For many projects, EPA '
is only participating in a portion of the project. Thus, it will be necessary for the auditor to
review the grantee's segregation of costs as to the eligible and ineligible portions of the
project.
When portions of the project are considered ineligible, the ineligible portions should be
clearly identified by EPA in the review of plans and specifications. Bid documents
commonly distinguish between eligible and ineligible portions of a construction contract.
Where the contractor's monthly pay estimates are prepared on the same basis as the bid
documents, distinction between eligible and ineligible construction costs is simplified.
Further guidance concerning the eligibility of specific items is included in Appendix E.
EPA may only participate in the acceptable portion of eligible costs. The auditor will
review each cost to determine whether it is acceptable as a charge to the EPA project.
During the audit, the auditor will be testing the systems utilized by the grantee in
managing the grant. Where items of costs are shown to be unallowable, unreasonable,
unallocable, undocumented, unapproved, or ineligible, the costs should be questioned.
Where the audit tests have not disclosed any material deficiency with respect to items of
cost, the cost should be accepted.
Once the auditor has evaluated eligible construction costs, he will classify the costs as
accepted or questioned.
The auditor must review costs other than construction costs claimed to determine
whether or not they are acceptable. He then should allocate acceptable other costs over the
eligible and ineligible portions of the project on the following basis:
Total Eligible Construction
Costs Accepted x Other Acceptable _ Other Eligible
Total Construction Costs Costs Accepted Costs
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Total eligible project costs will be computed as follows:
Total Eligible Construction + Other Eligible
Costs Accepted Accepted Costs
Total Eligible
Accepted Costs
The percentage of project costs in which EPA is participating, per the grant agreement,
will then be applied to total eligible project costs accepted. This will show the Federal
share earned. The designation of a cost as questionable by the auditor does not
necessarily mean that the cost will be disallowed. The determination as to the
acceptability of costs will be made by the EPA Regional Administrator.
Figure 4.1
EXAMPLES OF PROHIBITED (UNALLOWABLE) COSTS
Interest on bonds or other financing costs
Fines and penalties resulting from violation of Federal, State, and local laws
Personal injury compensation or damages as a direct result of construction on the
project.
EXAMPLES OF UNREASONABLE COSTS
Purchase of expensive equipment needed only for a short period when a lease would
have been more economical
Costs for which appropriate evidence is not available under a negotiated contract that
the grantee or contractor employed those controls necessary to assure that the price was
reasonable
EXAMPLES OF IMPROPERLY ALLOCATED COSTS
Costs already matched to another Federal program
Inequitable allocation of indirect costs to the contract/grant
Costs allocated in total to the grant, which also benefitted other grantee/con tractor
programs
EXAMPLES OF IMPROPER DOCUMENTATION OF COSTS
Lack of time and attendance records, invoices, etc.
Lack of written contracts with consultants
Lack of proper authorization to incur costs or to disburse funds
Non-Federal contributions recorded but not documented
EXAMPLES OF COSTS NOT APPROVED BY EPA
Purchase of capital equipment
Costs incurred before or after grant/contract period (except step 1 and 2, grants prior to
July 1, 1975 (40 CFR 35.925-18)
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4.2 GENERAL AUDIT STEPS
4.2.1 Initial Field Audit Procedures
In starting the audit, the auditor should:
obtain background information on the grantee organization. This may be in the form of
charters, bylaws, incorporation documents, or public relations documents which
identify the nature of the organization's operations and key employees. In addition, the
auditor should obtain copies of the organization's financial reports as well as access to
any audit reports issued by the organization's internal or external auditors.
identify any additional EPA or other Federal grants or contracts being performed by
the grantee. In this regard, the auditor will obtain the grant/contract number, the
amount of the agreement, the status of the grant/contract, and the Federal agency
involved. The auditor should promptly communicate this to the Area Audit Manager so
that a decision may be made as to whether the scope of the audit will be expanded to
cover these agreements.
familiarize himself with the grantee's accounting, personnel, procurement, and
property management systems as they relate to grant expenditures. In this regard, the
auditor should initially obtain information regarding any established policies and
procedures governing these activities. He should then perform a limited survey to
identify significant weaknesses in the systems as they apply to the EPA grant,
utilizing, as a minimum, the survey questionnaire contained in Appendix A of this
audit guide. The survey should include sufficient testing of the records to validate the
information obtained in the survey.
4.2.2. Verification of Claim
Examine the latest/final request for reimbursement/cash outlay report and reconcile
each expense item in total to the project cost and/or disbursement ledger.
Determine the mathematical accuracy of the report and the ledger.
Determine whether the grantee prepared the report based on his accounting records, or
whether it was prepared by EPA or the grantee's consultant. If it was prepared by
others, determine what records he used to obtain the costs reported.
Scrutinize supporting data (i.e., contractor(s) and/or other certification for cumulative
billing amounts submitted to the cash outlay reimbursement report).
Determine the total cash payments to the grantee under the construction grant.
4.2.3. Verification of Eligibility
Identify from the EPA project file any portions of work under each construction contract
or engineering subagreement which have been designated ineligible for Federal
participation.
Review the grantee's disbursement ledger to determine if project costs are segregated by
means of a special project account which identifies eligible and ineligible costs as well
as allowable and unallowable costs and which contains separate accounts for each item
of expense (FMC 74-4), i.e.:
construction, by contract;
engineering services; and
legal and administrative services.
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4.2.4. Credits, Rebates, and Refunds
Throughout the audit, the auditor should be alert for evidence of credits, rebates, or
refunds. If noted, it should be ascertained that such items were credited properly to the
construction account. As part of the audit:
examine contractor billings noting whether certain items are marked or indicated for
deletion; and
examine cash receipt records, noting funds received from contractors and/or other
sources, i.e., State sales tax refunded to grantees or subcontractors.
4.2.5. Unpaid Bills
If the grantee has any unpaid bills relating to the specific grant under audit, the
following audit steps should be taken:
determine whether there are sufficient funds available to pay bills in a timely manner.
assure that costs related to long standing unpaid bills or retainages have not been
included on the request for reimbursement or cash outlay report to EPA.
4.3 SPECIFIC AREAS OF AUDIT
4.3.1. Audit of the Force Account
The actual construction work is normally performed by construction contractors under
contracts awarded through competitive bidding. Similarly, construction related activities
such as preliminary planning, designing, preparation of plans and specifications, and
resident inspection services are normally performed by consulting engineers under
subagreements. However, in some instances, the work is performed by employees of the
grantee. This is known as "force account" work. If force account costs are claimed, such
costs should consist of project work performed by employee labor of the grantee or
materials, equipment, and supplies purchased by the grantee (direct travel costs may be
allowed). If force account work has been done, the project file should contain some
supporting information, ranging from a simple summary of costs to complete payroll
documentation.
Determine whether:
* Force account work (construction/engineering/administration) was specifically
approved by EPA as provided in EPA Regulations 40 CFR 30.645, 40 CFR 35.935-2, 40
CFR 35.936-14.
Construction work handled through force account was not for repair and maintenance
of existing facilities.
Completed construction was appropriately approved by the grantee's engineer.
Purchases of material or supplies were based on competitive bids as required by State or
local procedures or Federal regulations (this step may be included under the Review of
Procurement Controls).
The auditor should include in his work papers a schedule showing force account labor
costs and on a selective basis:
Trace hours charged to time records
8 Verify payroll computations
Verify payments made from the payroll to the construction account.
» Verify fringe benefit costs.
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The auditor should include in his work papers a schedule of force account material,
supply, and equipment costs and, on a selective basis:
Verify types and quantities of items used to issue slips or similar documentation.
Determination that the amounts charged were reasonable and computed in accordance
with grantee's normal costing policy.
Determine that costs claimed do not include nonexpendable construction equipment
(i.e., exceeds minimal cost and life expectancy) even though such equipment may have
been purchased specifically for the project.
Determine that any write-offs of expendable items do not exceed the amounts allowable
under the cost principles contained in FMC 74-4.
Determine whether the grantee followed EPA guidance in disposing of or adjusting
costs for unused material items which remained after completion of construction.
If use allowance or rental rates were used in arriving at costs charged to the project,
determine whether these factors are in line with FMC 74-4. Review and test the method
used to accumulate hours of equipment usage. Test payments made for use of equipment
to invoices and cancelled checks and/or to fund transfer documents.
4.3.2. Audit of Engineering Services
In reviewing procurements of engineering services the auditor should be aware thai
EPA regulations governing these procurements have changed with the issuance of
Program Guidance Memorandum No. 53 and with the issuance of EPA's "Subagreement
Regulations for Construction Grants" (40 CFR 35.935, 35.936, and 35.937 dated December
17, 1975). Accordingly, the audit criteria may change depending upon whether the
engineering contract was awarded prior to or after the effective date of the above
regulations.
a. Contracting Procedures
It is the responsibility of the grantee in contracting for engineering services to take
reasonable measures to ensure that services are obtained from qualified firms at a
reasonable price.
Grantees may use their own procurement regulations which reflect applicable state and
local law, rules and regulations provided that these rules and regulations adhere to
minimum standards as set fourth in Attachment O, FMC 74-7. Effective July 1, 1975,
grantee procurements of consulting engineering services must be in accordance with the
requirements of Program Guidance Memorandum No. 53 which was superceeded by
Appendix D to EPA's "Subagreement Regulations for Construction Grants." Effective
December 17, 1975, grantee procurements of consulting engineering services must be in
accordance with the requirement of 40 CFR 35-936 and 40 CFR 35-937
For procurements awarded under 40 CFR 35-936 and 40 CFR 35-937 the auditor should
review the grantee's procurement procedures for consulting engineering services and
determine that these procedures include where applicable requirements for:
Public notice (40 CFR 35.937-2)
Evaluation of qualifications (40 CFR 35.937-3)
Solicitation and evaluation of proposals (40 CFR 35.937-4)
Negotiation (40 CFR 35.937-5)
Cost and price considerations (40 CFR 35.937-6 and 40 CFR 35.937-7)
Required solicitation and Subagreement provisions (40 CFR 35.937-9)
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It should be noted that 40 CFR 35.937 (a) provides that the provisions of 35.937-2 (Public
Notices), 35.937-3 (Evaluation of Qualifications), and 35.937-4 (Solicitation and Evalua-
tion of Proposals) are not required, but may be followed, where the population of the
grantee municipality is 25,000 or less according to the most recent U.S. census. When
$10,000 or less of services (e.g., for consultant or consultant subcontract services) is
required, the provisions of 35.936-19 (small purchases) shall apply.
For procurements awarded prior to the effective date of 40 CFR 35.936 and 40 CFR
35.937, the auditor should determine that the grantee has documentation to show that:
Procurements were conducted so as not to prohibit maximum open and free
competition.
Contracts were made only with responsible contractors who possess the potential
ability to perform successfully under the terms and conditions of a proposed
procurement. Consideration should have been given to such matters as contractor
integrity, record of past performance and financial and technical resources.
The contract clearly defines the scope of services to be provided under each
reimbursement method included in the contract. The contractual language should be
specific enough to identify the services provided under each phase of the contract
Agreements between grantees and engineering firms covering engineering services take
a number of forms. Usually, a single agreement is entered into which covers all phases of
engineering. Traditionally, these agreements were entered into well in advance of the
award of a construction grant and represented a continuing relationship for engineering
services. The reimbursement provisions contained in such agreements have varied from a
single fee covering all services to separate fees for each phase of work, or combination
thereof. Historically, the reimbursement for engineering services has included; (a) lump
sum contracts, (b) fixed labor hour rates, (c) percentage of construction cost contracts (fee
curve), and (d) actual labor cost plus a stipulated multiplier for overhead and profit (cost-
plus-a-percentage-of-cost).
For agreements awarded after July 1, 1975, the cost-plus-percentage-of cost (including
salary multiplier where profit is included in the multiplier) and the percentage-of-
construction-cost types of contracts are not acceptable. (Appendix D to EPA "Subagree-
ment Regulations for Construction Grants" published December 17, 1975.)
In some cases a negotiated subagreement may have been.executed prior to July 1,1975,
to cover work under more than one step of a grant. Guidance for these situations is given
in Appendix D as referenced above.
b. Contracts for Engineering Services Awarded Prior to July 1, 1975
EPA does not consider that the fee curve or multiplier method of compensation ensures
a reasonable price in the absence of an effective negotiation based on current cost data.
However, EPA does not take exception to these forms of contracting prior to July 1, 1975,
as they were in accordance with industry practices which EPA regulations did not
prohibit. The auditor's report should disclose instances where the fee curve or multiplier
forms of contracting were used. The auditor will not be responsible for determining the
reasonableness of fees awarded under the fee curve or the- n.nltipliei. In cases where
engineering services are compensated under a multiplier, fee curve or lump sum contract
awarded prior to July 1, 1975. the following paragraphs as appropriate should he ^Hu^ed
in the schedule and referenced to technical services costs incurred/claimed, accepted, and
questioned.
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If multiplier and/or fee curve was used:
"We noted that compensation for engineering services was based upon the
method of contracting. We do not consider that this method of
contracting ensures a reasonable price. However, the use of the and
profit resulting soley therefrom have been accepted because, at the time the contractual
arrangement was made, this method of contracting was not prohibited and was in
accordance with accepted industry practices. The method of
contracting is prohibited by Appendix D to Subpart E of 40 CFR, Part 35."
If lump sum contract was used:
"We noted that compensation for engineering services was based upon a lump sum
method of contracting. We do not consider that this method of contracting ensures a
reasonable price in the absence of an effective negotiation based on current cost data. The
use of a lump sum contract not negotiated on this basis, and the resulting profit, have been
accepted in this case because, at the time the contractual arrangement was made, a
negotiation based on current cost data was not a requirement of the industry or EPA.
Appendix D to Subpart E of 40 CFR, Part 35 requires that all negotiated contracts be
based on current cost and pricing data."
c. Contracts for Engineering Services Awarded under EPA "Subagreement
Regulations for Construction Grants" (40 CFR 35.936, 40 CFR 35.937)
Determine whether the grantee performed a negotiation to establish the reasonableness
of compensation. As a minimum, this should include a cost review to determine the
composition of each element of cost and the profit proposed by the consulting engineer.
Unless available documentation shows that the grantee's negotiation resulted in a
reasonable price, the auditor will make a review of the reasonableness and validity of cost
data submitted. Where review of the engineers records shows that cost data was incorrect,
unreasonable, or unallowable under applicable cost principles (FPR 1-15.2, FPR 1-15.4),
the excessive costs should be questioned. In addition, the fee curve and multiplier forms of
contracting are considered ineligible and the cost of services under contracts awarded
using these methods of compensation after July 1, 1975, should be questioned.
The right of access to records in auditing charges for engineering services under
agreements awarded prior to the effective date of EPA's "Subagreement Regulations for
Construction Grants" is governed by the terms of the engineering agreement and
Appendix D to the subagreement regulations. This guidance generally prescribes the right
of audit access to the engineer's records. In instances where indication of fraud, gross
abuse or corrupt practices are noted, the auditor has the right of access to all records.
Refusal by a consulting engineer to allow access to his records as provided by Appendix D
will render costs incurred under such contract ineligible. Accordingly, all such costs will
be questioned pending access to records.
Guidance for reviewing engineering costs is as follows:
d. Verification of Engineering Costs
(1) Determine amount of charges for engineering services. (This should be detailed by
services billed under the various methods of reimbursement, e.g., fixed price, or lump sum.)
(2) Based on a review of the records, determine that claims for services provided are
applicable to the eligible portion of the construction.
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(3) Determine that the cost of engineering services claimed by the grantee do not
include charges related to ineligible services such as site acquisition, bond preparation,
easements, rights of way, claims against the government, etc. The engineer's invoice
should be in sufficient detail to clearly define the nature of the work performed.
(4) Verify the mathematical accuracy of the billing for engineering services and test
grantee payments for engineering services to vouchers and cancelled checks.
e. Engineering Services Compensated Under the Fee Curve
(1) Question all costs billed under this method of compensation for agreements entered
into after July 1, 1975.
(2) Determine whether the amount billed agrees with the contract terms as to the rate
used and the method of application.
(3) Ascertain whether the compensation provided in the contract is consistent with the
American Society of Civil Engineers (ASCE) or State Society guidelines in effect at the
time of the award, except as provided for in steps four and five below.
(4) Determine whether the compensation (fee) percentage is based upon the total of all
construction contracts under a specific project, i.e., treatment plant, interceptor sewers,
rather than a separate fee percentage for each contract. If not, the additional costs
resulting from the use of rates for each contract should be questioned. In making a
determination as to the allowability of costs based on a separate fee percentage for each
contract, consideration should be given to the appropriate ASCE or State Society
guideline in effect at the time the engineering agreement was negotiated.
(5) Determine whether the actual construction cost upon which the engineer based his
compensation is significantly higher than the engineer's original estimate of construction
costs. If so, the auditor should follow the guidance contained in paragraph B.5 of
Appendix D to the subagreement regulations. (Part B of Appendix D to Subpart E of 40
CFR Part 35.)
f. Engineering Services Reimbursed Under "Lump Sum" or Fixed Price
Contract
(1) Determine that the amount billed is in accordance with the terms of the agreement
and Appendix D to EPA's Subagreement Regulation for Construction Grants (Part B of
Appendix D to Subpart E of 40 CFR Part 35) and that the work was accepted by the
grantee.
(2) For "lump sum" or fixed price contracts awarded under the subagreement
regulations, the auditor should analyze the information documenting the grantee's cost
review of the composition of costs and perform audit steps three through eight below.
(3) Determine what review was performed by the grantee to determine the reasonable-
ness and validity of the amounts proposed (both quantity and dollar estimates).
(4) Where the grantee has not performed a review of subagreement costs or the review is
considered inadequate the auditor should furnish the Area Audit Manager with a list of
all applicable subagreements. (A review of proposed subagreement costs is considered
adequate if: (1) the grantee's in-house engineering staff develops an independent detailed
cost estimate which when compared to the proposed consulting engineering cost estimate
demonstrates the reasonableness of the proposed amount, (2) the grantee performs a
verification of the proposed costs and quantities to the data used by the engineering firm
in developing the proposal, or (3) sufficient cost and pricing data for work similar to this
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project are available to provide a basis for comparison.) The manager will decide whether
an audit of the subcontracts is considered necessary, the Area Audit Manager will so
advise the auditor reviewing the grant.
If another agency will perform the audit, the Area Audit Manager will initiate the
request for audit and provide a copy of the request to the auditor performing the review of
the grant. The auditor does not have to wait for the results of audit requests from another
Federal agency; he should prepare the audit report and set aside the requested portions.
The audit report should explain that the subagreement is being audited by another audit
agency and that the results will be transmitted as soon as received.
If the Area Audit Manager has determined that no other Federal audit agency is
cognizant and that the subagreement should be audited, the auditor should make
arrangements to perform an audit of the documentation maintained by the engineering
firm. In instances where access to records necessary for the audit is denied, all
engineering fees billed under this method of compensation should be questioned pending
access to records.
(5) The auditor should compare the lump sum or price negotiated under the contract and
the engineers actual incurred costs. Where actual costs were substantially less than
estimated costs included in the proposal used as a basis for negotiation, a comparison of
estimated and actual incurred quantities (labor hours/material quantities, etc.) should be
made. (40 CFR 35.937-6 (c)(6) requires that the engineer account for costs in the same
manner in which he proposes costs.)
(6) In instances where the actual quantities (labor hours) were significantly less than
estimated quantities, the auditor should obtain an explanation for the differences from the
consulting engineer. Where the reduction in quantities was due to new and improved work
methods or efficiencies in performance, the auditor should accept the lump sum price. In
other instances, the auditor should review the data used for estimating the quantities
included in the consulting engineer's proposal. In instances where the data used as a basis
for negotiation was not complete, current, or accurate, the auditor should question
amounts claimed in excess of costs, computed using complete, current, and accurate data.
(7) In instances where actual costs were significantly less than estimated costs and
where actual quantities did not vary significantly from estimated quantities, the auditor
should review the engineer's cost proposal used as a basis for negotiation.
(8) In reviewing the engineer's cost proposal, the auditor should as a minimum
determine that costs proposed were allowable under FPR 1-15.2 and 1-15.4.
In instances where amounts proposed do not represent current (at the time of
negotiation) valid cost or pricing data, the auditor should question any amounts claimed
in excess of that computed using current, complete, and accurate cost data.
The auditor should determine that:
(a) Salary rates proposed represented current salary data, factored for the length of
the contract.
(b) Fringe benefits represented cost history based on actual fringe benefit cost
incurred by the engineering firm.
(c) Costs of material and supplies were based on current cost information.
(d) Costs of subcontracts were based on properly documented previous experience of
similar work or bids from the prospective subcontractors.
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(e) Travel costs were based on amounts regularly paid under the engineer's standard
procedures.
(f) Other direct costs were based on accurate, valid costing data.
(g) Indirect costs were proposed based on rates computed in accordance with FPR 1-
15.2 and 1-15.4.
g. Engineering Services Reimbursed Under the Multiplier Form of Contracting
(1) Question all costs billed under this method of compensation for agreements entered
into after July 1, 1975 unless the agreement complies with 40 CFR 35.937-Id of the EPA
"Subagreement Regulations for Construction Grants."
(2) Determine whether the amounts billed were based on the terms of the agreement.
(e) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of the salary cost billed.
(4) In establishing the acceptability of salary cost used as a base to which the multiplier
is applied, the auditor should use actual salaries and wages paid.
(5) Regardless of contract terms, the actual cost of fringe benefits must be supported by
the accounting records when they are claimed as a direct charge. If the charges are not
supported or if the actual cost is less than the amount claimed, the total of the difference is
unallowable for Federal participation. Where the fringe benefits are claimed as a direct
charge and also included in the multiplier, the duplicate direct charge is unallowable for
Federal participation.
(6) Regardless of contract terms, where charges have been made to the grant and there
was not cost incurred, the charges should be questioned. Labor charges and related costs
for straight time or overtime hours which are billed but for which cost has not been
incurred will be unallowable for Federal participation.
(7) Service charges are defined as: any supplemental charges added to other direct cost
(non-salary) which are claimed on an actual cost basis.
Regardless of contract terms, the actual cost of service charges must be supported by
accounting records. If the service charges are not supported or if the actual cost is less
than the amount claimed, the total or the difference is unallowable for Federal
participation. This is in accordance with the ASCE manual which states,that the service
charge is for expenses to be reimbursed by the client. PG 64 dated February 5, 1976.
In reviewing direct cost claimed by the engineer, the auditor should determine whether
service charges are claimed on an actual cost basis, or a percentage added to a direct cost
item. For example, service charge of X% added to the cost of supplies purchased or outside
services. When such claims are identified, the auditor should:
(a) determine the engineer's actual cost of the services as supported by the
accounting records
(b) determine that costs included in the service charge are consistently applied and
are not duplicated in other accounts such as overhead
(c) compare the service charge applied to the actual cost of the service and question
any over-recovery of actual cost
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(8) For multiplier form of contracts awarded after July 1, 1975, the auditor should
perform Step 4 under "lump sum" contract. In auditing the engineer's records, the auditor
should:
(a) Determine the adequacy of the firm's accounting system to identify and
accumulate project salary cost. *
(b) Verify the accuracy of labor hours and rates billed. In this regard, the auditor
should determine that overtime worked but not paid for is not billed to the
grantee. In addition, the auditor should determine that the multiplier is applied
to the labor of only "bona fide" employees of the engineering firm.
(c) In reviewing costs claimed under multiplier contracts awardend under 40 CFR
35.937, the auditor should compare the overhead portion of the multiplier to the
engineers proposed overhead rate developed from his accounting records at the
time of negotiation. The auditor should determine that the overhead rate devel-
oped by the engineer was prepared in accordance with FPR 1-15.2 and 1-15.4 and
was based on complete, current, and accurate cost data. In instances where the
rate used as a basis for negotiation was not based on complete, current and
accurate cost data allowable under FPR 1-15.2 and 1-15.4 the auditor should
compute an acceptable overhead rate in accordance with FPR 1-15.2 and 1-15.4
and question amounts resulting from the use of an unacceptable rate.
h. Engineering Services Reimbursed Under a Labor Hour Form of Contracting
(1) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of labor hours billed.
(2) For labor hour form of contracts awarded after July 1, 1975 perform Step 4 under
"lump sum" contract.
(3) The auditor should determine the adequacy of the firm's accounting system to
identify and accumulate project labor hours.
(4) Verify the accuracy of the labor hours claimed to the accounting records.
(5) Determine that the categories of labor billed are in accordance with the contract
terms and that employees are charged in the correct classification.
(6) In reviewing costs claimed under a labor hour form of contracting awarded under 40
CFR 35.937, the auditor should compare the rates claimed to the engineers proposal which
details the labor rates, overhead rate and profit factor used as a basis for negotiation. The
audit should determine that:
(a) The labor rates used as a basis for negotiation were based on complete, current,
and accurate cost data at the time of negotiation. The cost data used should include
actual average labor rates for categories of employees or for specific employees
anticipated to perform the work.
(b) the overhead rates used as a basis for negotiation was prepared in accordance
with FPR 1-15.2 and 1-15.4 and was based on complete, current, and accurate cost data.
(7) In instances where the total rate negotiated under 40 CFR 35.937 was not based on
complete, current, and accurate cost data or was not prepared in accordance with FPR 1-
15.2 and 1-15.4, the auditor should compute an acceptable rate and question amounts
resulting from the use of an unacceptable rate.
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i. Engineering Services Reimbursed Under a Cost Plus a Fixed Fee Contract
(1) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of costs billed.
(2) Where the grantee has not performed review of subagreement costs or the reviews
were inadequate the auditor should furnish the Area Audit Manager with a list of all
applicable subagreements. The Manager will decide whether an audit is needed and, if one
is needed, who will perform the audit. If no audit of the subcontracts is considered
necessary, the Area Audit Manager will so advise the auditor reviewing the grant. In such
cases, the costs claimed under the subcontracts will be considered allowable if costs were
claimed in accordance with subcontract provisions.
If another agency will perform the audit, the Area Audit Manager will initiate the
request for audit and provide a copy of the request to the auditor performing the review of
the grant. The auditor does not have to wait for the results of audit requested from another
Federal agency; he should prepare the audit report and set aside the requested portions.
The audit report should explain that the subagreement is being audited by another audit
agency and that the results will be transmitted as soon as received.
If the Area Audit Manager has determined that no other Federal audit agency is
cognizant and that the subagreement should be audited, the auditor should make
arrangements to perform an audit of the documentation maintained by the engineering
firm.
Instances where access to records necessary for the audit is denied, all engineering fees
billed under this method of compensation should be questioned.
(3) Determine whether other direct costs claimed are reasonable, applicable, and
allowable under the terms of the contract and the Federal cost principles contained in
FPR 1-15.2 and 1-15.4.
(4) Review the firm's overhead rate to determine that it is reasonable, equitable, and in
accordance with the principles set forth in FPR 1-15.2, and 1-15.4, and the EPA Audit
Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals.
(5) More complete guidance as to the audit of CPFF contracts is contained in the "Audit
Guide for EPA Contracts." The overhead rates considered allowable by the auditor should
be used in determining allowable indirect costs under the subagreement.
4.3.3. Audit of Construction Costs
Plant construction and equipment costs represent a major portion of the construction
grant program. The grantee will normally have established a procedure for or will have
engaged the design engineer to ensure that construction is in accordance with the
specifications, plans, schedules, and the construction contract.
The basic procurement system requirements and procedures utilized to award the
construction contract must be in accordance with the applicable grant regulations 40 CFR
35.936 and 40 CFR 35.938, dated Dec. 17, 1975. Specific criteria for procurement systems
are outlined in the prior section of this guide.
In reviewing procurements of construction contracts the auditor should be aware that
EPA regulations governing these procurements have changed with the issuance of EPA's
"Subagreement Regulations for Construction Grants." Accordingly, the audit criteria
may change depending upon whether the construction contract was awarded prior to or
after the effective date of the revised regulations.
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a. Audit Guidance for Basic Construction Contracts and Change Orders
(1) The auditor will review the grantee procurement records for each construction
contract awarded in excess of $10,000 to determine whether:
(a) Construction contracts awarded under the grant are lump sum or unit price or are
combinations of the two. (40 CFR 35.938-3)
(b) Adequate public notice (40 CFR 35.938-4) was given.
(c) Adequate time (40 CFR 35.938-4) was given for preparing bids.
(d) Biridine documents include: (40 CFR 35.938-4)
A complete statement of the work to be performed including necessary drawings
and specifications and the required completion schedule.
The terms and conditions of the contract to be awarded.
A clear explanation of the method of bidding and the method of evaluating bid
prices.
Responsibility requirements or criteria which will be used in evaluating bidders.
(e) The grantee provided for sealed bids and for safeguarding bids received until
public opening. (40 CFR 35.938-4)
(f) Contracts were awarded to the lowest responsive, responsible bidder. If not,
determine what rationale exists for awarding to other than the lowest bidder. (40 CFR
35.938-4)
(g) Approvals were obtained from EPA prior to contract award.
(h) Awarded contracts contain a provision for access to contractor/subcontractor
records, reports, drawings, and accounts for the purpose of inspection, review, copying,
and audit by EPA representatives. (40 CFR 35.935-7)
(i) Items considered ineligible to EPA were identified as ineligible in the contracts.
(j) Special circumstances or provisions pertaining to the contract require review: i.e.,
implementation of the provisions of the Uniform Relocation Assistance and Real Property
Acquisition Act of 1970 where acquiring real property for the project. (A supplemental
audit guide is available for an audit of relocation costs (Appendix C).)
(2) Review and test the grantee's procedures for accumulating cost of change orders.
(3) Determine if change orders to the contract(s) pertain to eligible construction and
have been reviewed, checked for duplication of base contract items, and approved by EPA.
If approvals from EPA have not been received such costs are not acceptable.
(4) Determine whether documentation is maintained that demonstrates the purpose,
cause, and necessity for the change order(s), and reasonableness of the change order
price.
(5) Determine that change orders for quantity increases or decreases were approved by
the grantee as soon as it could be readily determined that a change was necessary and/or
an overrun/underrun would occur.
(6) Determine that prior EPA approval was obtained for changes over $100,000.
(7) Determine whether the grantee or consulting engineer performed an evaluation to
establish the reasonableness of the change order price. (40 CFR 35.938-5)
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(a) Original Bid Item. For variances in quantities of items included in the original
bid package, it is acceptable to use the original bid price. However, if the variance is
significant (15%) and the dollars are material, the grantee should be required to
demonstrate he has evaluated the reasonableness of using the original bid price.
(b) New Items. Since the reasonableness of the price of new bid items was not estab-
lished in the basic award the grantee should take adequate measures to assure that new
items are reasonably priced. Prices for new items should be established on the basis of an
independent estimate developed from current cost and pricing data or a detailed analysis
of the data used to develop the contractor's price. The responsibility for establishing the
reasonableness of change order prices is frequently delegated to the consulting
engineering firms. In these instances, the audit should include a review of the engineer's
records, which should include estimates of manhours to be expended, quantities of
material, hours of equipment usage as well as cost and pricing data.
Change orders negotiated after the effective date of EPA's "Subagreement Regulations
for Construction Grants" 40 CFR 35.936 & 938 must be negotiated on the basis of current
cost and pricing data furnished by the contractor to the grantee. For lump-sum or unit
price change orders awarded, the auditor should analyze the information documenting
the grantee's cost review of the composition of costs and perform the following audit
steps:
Determine what reviews were performed by the grantee or his consulting engineer to
determine the reasonableness and validity of the amounts proposed (both quantity and
dollar estimates).
Where the grantee has not performed a review of change order costs or the reviews are
considered inadequate the auditor should furnish the Area Audit Manager with a list of
all change orders under the specific contract being reviewed. (A review of proposed
change order cost is considered adequate if (1) the grantee or his consulting engineer
develops an independent detailed cost estimate which when compared to the
contractor's proposed change order cost demonstrates the reasonableness of the
amount proposed or (2) the grantee performs a verification of the proposed costs and
quantities to the data used by the contractor in developing the proposal.) The Manager
will decide whether an audit of the contractor's records is needed. If no audit of the
subcontracts is considered necessary, the Area Audit Manager will so advise the
auditor reviewing the grant. In such cases, the costs claimed under the change order
will be considered allowable if costs were claimed in accordance with FPR 1-15.2 and
FPR 1-15.4. If the Area Audit Manager has determined that an audit of the contractor's
records is necessary, the auditor should make arrangements to perform an audit of the
documentation maintained by the contractor.
Initially, a comparison should be made between the amounts paid under the contract
and the contractor's actual incurred costs. Where actual costs were substantially less
than estimated costs, a comparison of estimated and actual incurred quantities (labor
hours/material quantities, etc.) should be made.
In instances where the actual quantities (material and manhours) were significantly
less than estimated quantities, the auditor should obtain an explanation of the
differences from the contractor. Where the reduction in quantities was due to new and
improved work methods or other efficiencies the auditor should accept the amount
negotiated for the change order. In other instances the auditor should review the data
used for estimating the quantities included in the contractor's proposal. In instances
where the data used as a basis for negotiation was not complete, current or accurate, the
auditor should question amounts claimed in excess of costs computed using complete,
current and accurate data.
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In instances where actual costs were significantly less than estimated cost and where
actual quantities did not vary significantly from estimated quantities, the auditor
should review the contractor's cost proposal used as a basis for negotiation.
In instances where amounts proposed do not represent current (at the time of
negotiation) valid cost or pricing data, the auditor should question any amounts
claimed in excess of that computed using current cost data. The auditor should also
ascertain the rationale for differences disclosed above.
In reviewing the contractor's cost proposal, the auditor should as a minimum determine
that:
(a) Salary rates proposed represented current salary data factored for the length of the
contract.
(b) Fringe benefits represented cost history based on actual fringe benefit cost incurred
by the engineering firm.
(c) Costs of material and supplies were based on current cost information.
(d) Costs of subcontracts were based on properly documented previous experience of
similar work or bids from the prospective subcontractors.
(e) Other direct costs were based on accurate, valid costing data.
(f) Indirect costs were proposed based on rates computed in accordance with FPR 1-15.2
and 1-15.4.
(8) Determine that all credit (decrease) change orders have been considered in interim
payments to contractors.
(9) Determine whether the work was completed and accepted by the grantee or his
designated representative.
(10) Determine whether the contractor completed construction within the time
constraints provided in the contract. In instances, where construction was not completed
within the time frame established by the contract including amendments, determine
whether or not the grantee recovered liquidated damages as specified in the construction
contract. Any additional costs - construction, engineering, legal, or administrative -
generated because of a contractor's lack of performance should be covered by the
liquidated damages clause. Thus, any such increase in cost is unallowable for Federal
participation even in the event the grantee elects not to exercise his right to recover
liquidated damages.
b. Verification of Construction Pay Estimates
It is the grantee's responsibility to establish adequate controls to ensure that
construction contractors are paid only for construction work performed and materials and
equipment furnished.
Audit tests of construction pay estimates are dependent, to a large degree, on the type of
construction contract awarded, i.e., lump sum, unit price, or a combination of lump sum
and unit price items. Contracts awarded on a lump sum basis are firm fixed price and
those awarded on a unit price basis consist of estimated quantities with a fixed unit price.
(1) Lump Sum Contracts
In practice, the responsibility for initially approving interim pay estimates is normally
delegated by the grantee to the consulting engineer as an element of services during the
construction phase. However, it is the grantee's responsibility to determine that adequate
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procedures and controls are exercised by the consulting engineer to ensure that
contractors are paid only for acceptable construction performed through the cut off date of
the pay estimate. Accordingly, the auditor should determine whether the grantee has
performed a review or analysis to make such a determination.
(2) Unit Price Contracts
Under unit price contracts the contractor is normally reimbursed monthly on the basis
of actual quantities furnished under each bid item. The total cost of this type of contract is
flexible to the extent that quantities are estimated and final payment will be based on
actual quantities received. The responsibility for verifying unit quantities claimed is
normally a part of the services provided by the consulting engineer.
The auditor should perform adequate tests to determine whether the grantee or the
consulting engineer (acting as the grantee's representative) exercised the necessary
controls to ensure that payments are made only for quantities received. Claims for
quantities which cannot be supported in the grantee's or consulting engineer's records
should be questioned.
c. Audit Guidance for Construction Pay Estimates
(1) Lump Sum Contracts
Under lump sum contracts, the contractor is normally reimbursed monthly on the
basis of percentage of completion of work plus project inventories stored. In performing
final audits, the auditor should:
(a) Examine vouchers, invoices, and disbursement records to determine that costs
claimed have been paid in accordance with the original contract award and approved
change orders.
(b) Determine that the work required under the contract has been completed by the
contractor and accepted by the grantee based on a final inspection by the grantee.
In performing interim audits, the auditor should:
(a) Examine vouchers, warrants, and/or cancelled checks to determine that costs
booked have been paid in accordance with approved progress pay estimates.
(b) Determine whether the grantee or the consulting engineer initially approves pay
estimates,.
(c) Review the procedures actually used by the consulting engineer to determine that
the procedures do in fact limit interim payments to work completed and accepted and
inventories stored (40 CFR 35.935.6). This should include appropriate tests of specific
items included in the pay estimate to source documents which indicate the resident
inspector's acceptance. The source documents will include inspector's diaries, daily
inspection reports and other correspondence.
(2) Unit Price Contracts
(a) Examine vouchers, invoices, and disbursement records to determine that costs
claimed have been paid. Costs claimed should be based on the total value of work in
place (completed work) reduced by any amounts withheld by the grantee as retainage
(i.e., usually a percent of costs claimed withheld to guarantee satisfactory completion of
work).
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(b) Review the procedures used for the verification of quantities claimed under unit
price contracts. The pay estimate should be prepared by the contractor and approved by
the grantee or his representative. In no instance should the contractor's pay estimate be
prepared by the grantee or his representative (the engineer).
(c) Verify quantities billed to the original contract and approved change orders.
(d) Describe briefly in the working papers the procedures in effect and the type of
records maintained for recording units of work completed, i.e., pipe placement, piles
driven, concrete placed, rock excavation, sheeting, etc. Are the procedures used and the
records kept in accordance with the firm's written procedures?
(e) Determine that quantities entered on monthly pay estimates agree with
amounts shown on authoritative documents such as loading slips or from daily
inspection reports and the inspection diary.
(f) Determine that all entries are dated. This applies to summary records, books of
secondary entry, and source documents.
(g) Determine that all records documenting quantities are maintained on a current
basis. Diaries should be maintained daily, inspection reports daily, summary sheets
weekly or monthly.
(h) Review and determine the mathematical accuracy of calculations of excavation
and backfill, sheeting, concrete, asphalt, rock excavation, and other items for which
quantities are determined through mathematical computations.
(i) Estimates for quantities of rock excavation, escavation below grade, and backfill
are often treated as contingencies because actual soil conditions may vary significantly
from that established in preliminary test borings. Determine that records show that
these items were actually used.
(j) Source documents such as the inspector's diary and/or daily inspection reports
sometimes indicate unacceptable construction. Determine whether the inspector has a
method, for summarizing construction deficiencies that is useful in obtaining
correction. Determine that all construction recorded as unacceptable has been corrected
or is in the process of being corrected.
d. Quality Control
It is the grantee's responsibility to ensure that construction is performed in accordance
with the design plans and specifications. This responsibility is normally assigned to a
consulting engineer which, under contract with the grantee, provides resident inspection
services. These services generally include furnishing a professional engineer to be in
overall charge of the project construction inspection, a qualified project representative,
and a resident inspector. The inspection of work and materials should normally be
continuous, whenever work is being performed on the project and throughout the duration
of construction.
The grantee or his consulting engineer should exercise controls to provide assurance
that construction was performed in accordance with the approved design plans and
specifications. The auditor should review records documenting this system of controls.
The auditor should exercise reasonable judgment in pursuing audit deficiencies and
indications of construction deficiencies. It is not intended that audits performed under this
guide require engineering evaluations of grantee or auditee operations. Should conditions
be encountered which require such evaluations, the auditor should contact the Area Audit
Manager, who will review the situation and arrange for appropriate technical assistance.
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e. Guidance for Auditing Quality Control Procedures
In auditing controls exercised by the grantee over quality of construction, the auditor
should place maximum reliance on inspections performed by state or EPA inspectors. In
this regard he should review inspection reports showing the results of such inspections.
Where such inspections are documented to show that each of the areas set forth below was
properly controlled by the grantee and his engineer, further audit work may not be
required. Where inspection documentation indicates management problems, the auditor
should follow-up to determine that corrective action was taken. Where inspection
documentation does not indicate a review of each of the subjects contained in the steps
below. The auditor should proceed as foljows:
(1) Where the grantee has delegated the responsibility for professional services during
construction and/or resident inspection, determine how the grantee stays apprised of
construction progress and problems encountered during the construction. The grantee's
procedures should include review and evaluation of daily inspection reports and
engineers' work progress reports, and observation of the work performed by the Resident
Engineer and resident inspectors.
(2) Determine the grantee's or consulting engineer's minimum qualification require-
ments for resident inspectors.
(3) Review personnel records and determine the resident inspectors' actual qualifica-
tions. Do these qualifications meet the minimum requirements (Step 2 above)?
(4) Determine whether the grantee or consulting engineering firm has written
procedures in the form of a "Construction Manual" or otherwise which prescribes the
duties and responsibilities of the resident inspectors in performing day-to-day activities?
Were these procedures followed?
(5) Determine whether procedures are written which provide the type of daily records to
be kept by the inspector (e.g., diaries, daily inspection reports). Were daily inspection
records maintained? Do such records appear to be complete in accordance with
procedures?
(6) Review work progress reports and other correspondence maintained by the grantee
and make note of any major construction problems identified. A determination should be
made that noted construction deficieincies were corrected. The auditor should also
determine that a punch list of minor construction deficiencies was maintained so that
corrective actions may be taken during project cleanup.
(7) Review the contract specifications and determine what tests (i.e., concrete density
tests, soil compaction, line and grade tests, etc) are required, who should perform the tests
and what limits or tolerances have been established.
(8) Determine on a selective basis from the engineer's records whether tests were
performed as required and whether test results were within the specified limits or
tolerances.
(9) Should the audit disclose construction deficiencies of a serious nature which have
not been corrected, the auditor should attempt to identify the cost associated with that
portion of construction. These costs will not be considered acceptable for EPA
participation until the construction deficiencies are corrected.
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4.3.4 Other Costs
In reviewing other costs, the auditor should determine whether the costs are allowable
and applicable to the EPA grant. Guidance concerning the allowability of specific items of
cost can be found in FMC 74-4, 40 CFR 35.940, FPR 1-15.2, FPR 1-15.4, and Appendix E to
this guide. The auditor should determine that:
the types of expenditures involved were contemplated in the original budget and the
expenditures were adequately documented;
in instances where the contractor has established separate pools for such costs as
computer services, reproduction, communications, etc., the methods used to calculate
and distribute such costs are equitable;
amounts claimed are properly supported as other direct costs and that similar costs are
not recovered through indirect costing methods;
the contractor credits to the government the applicable portion of any income, rebate,
allowance, and other credit relating to any allowable costs received by or accruing to
the contractor;
when applicable, necessary approvals have been obtained from the EPA project officer.
such costs are allowable under applicable cost principles.
4.3.5. Other Audit Matters
a. Flood Insurance
Effective July 1,1975 (or one year after a community's notification of identification as a
flood-prone community, whichever is later), EPA is prohibited by law from making any
grant for acquisition or construction purposes in a flood hazard area unless the
community in which the project is located is participating in the flood insurance
program and flood insurance is purchased by the grantee. If the audit planning package
furnished by the Area Audit Manager identified construction in a flood hazard area the
auditor should determine that the grantee has flood insurance.
b. Property Control
(1) Real Property -
Real property should be reviewed to determine that it is for the purpose of the grant
and to determine that it is controlled in accordance with 40 CFR 30.810-5, and FMC 74-
7, Attachment N.
(2) Personal Property -
The auditors should review the grantees' property management system using the
criteria set forth in 40 CFR 30.810, and FMC 74-7, Attach. N. In evaluating this system
the auditor should:
(a) determine whether the grantee maintains property records to account for
equipment purchased for use in the EPA grant program.
(b) review the property records maintained and consider whether they contain
necessary information, such as:
the manufacturer's serial number or other identification number, the acquisi-
tion date, the cost, the source of acquisition, percentage of EPA equity, ultimate
disposition data (including sales price and the method used to determine fair
market value), and the location, use, and condition of the property.
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a description of the property.
(c) ascertain whether the grantee takes a physical inventory of grant equipment
and reconciles the results with property records at least once every two years to verify
the existence, current utilization and continued need for the property.
(d) determine whether:
differences between the property record balances and physical balances are
investigated and fully documented;
property records are adjusted as a result of the inventory;
the grantee takes action to dispose of an item of equipment if it is no longer
needed; and
periodic inspections and routine maintenance are performed on equipment.
(e) select from the property records, a sample of equipment items purchased for the
EPA grant and physically inventory the equipment to see whether the system is
adequate in terms of (c) above.
c. National Permit Discharge Elimination System (NPDES)
The auditors should review the NPDES permit furnished in the audit planning package
to determine effluent limitations and other requirements as established in the permit. He
should determine from grantee records and discussions whether the permit requirements
are being met.
Does the grantee have procedures for performance reporting under the NPDES permit
requirements and/or state and local requirements? Have they been implemented?
Are required sampling, analytical, and reporting systems in operation?
Do reports indicate that standards are complied with? Note exceptions.
d. Operation of Facility
An important step of the field work will be a tour of the wastewater treatment plant. The
objective of this portion of the audit is to discuss operation of the plant with operating
personnel. The auditor will be alert for indications that the facility is not managed and
maintained in accordance with grant objectives.
During this phase of the audit, the auditor should:
* Determine whether the grantee has established a permanent record file, which
includes:
the operation and maintenance manual.
planning reports and design criteria.
plans, specifications, drawings, and manufacturers' specifications for operation and
maintenance of each unit.
flow charts indicating system hydraulics.
Determine whether the grantees has employed the number of qualified treatment plant
operators indicated in their operation and maintenance manual.
Has the grantee established institutional arrangements for personnel training and
development leading to certification?
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Do key supervisory personnel meet the state's minimum certification requirements?
Obtain and review copies of Federal, State, and/or local agency inspection reports.
Identify any major deficiencies reported, and determine the status of corrective action
being taken.
Discuss the overall operation of the plant with several levels of operating personnel,
including the plant superintendent, and inquire into:
(a) Problems which impair operators' ability to properly treat sewage:
(1) Equipment
(2) Process design
(3) Facility design
Obtain operating personnel's suggestions for remedial measures.
(b) Do any overflows occur or is it necessary to bypass any units? Frequency and
cause?
(c) What is frequency and nature of contacts by regulatory agency personnel-local,
state or Federal?
(d) Has an adequately funded preventive maintenance system been established?
(e) The success of the plant in meeting effluent limitations under their discharge
permits?
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CHAPTER 5: EXIT CONFERENCE
Throughout the course of the audit, the auditors are expected to discuss deficiencies
disclosed during audit, their effect, and possible corrective actions with responsible
officials of the audited parties. The primary purpose of these discussions is to ensure that
the audited parties have an opportunity to provide additional data with respect to the
problem areas identified during audit.
5.1 For audits with no findings or audits without significant findings the auditor should
notify the Area Audit Manager and then hold an exit conference with the audited party
(at the site or by telephone). When the audited party is a subcontractor, a separate or joint
exit conference may be held with the grantee and the subcontractor. If the audited parties
desire to provide written comments with respect to matters raised in the audit, they should
be furnished a copy of the draft report and afforded the opportunity to provide written
comments. It is not necessary to return to the job site for an exit conference.
5.2 For audits with significant findings the auditor should initially discuss the findings
with the Area Audit Manager by telephone. The auditor should then hold a preliminary
exit conference with the audited party to discuss the factual information disclosed during
the audit. It should be emphasized that the audit results and findings are tentative at that
point, and that they will be included in a draft report forwarded to the audited party for
written comment.
The auditor should prepare his draft audit report, highlighting the costs considered
unallowable and other deficiencies disclosed during the audit. The Area Audit Manager
should be promptly furnished a preliminary copy of the draft report. If after reviewing the
draft report, the Area Audit Manager agrees that the deficiencies are significant, he will
meet with the responsible EPA program officials to brief them of the situation. In addition
he shall require that the grantee and other audited parties (such as those performing
under subagreements) be furnished a copy of the draft audit findings and conclusions to
enable review and written comment prior to the exit conference.
After receipt of written comments from the audited parties, the auditor will conduct an
exit conference with each of the responsible parties involved. Thus, exit conferences must
be held with the grantee and other parties having subagreements whose operations
and/or costs were audited.
5.3 The auditor's workpapers shall contain the name of the auditor who conducted the
exit conference, the names and positions of grantee representatives, details of the matters
discussed, and a summary of the reactions of the audited parties.
A synopsis of the audited parties comments will be included in the section of the audit
report entitled, "Comments on Compliance, Performance, and Internal Controls." When
written comments are obtained, they may be included as an attachment to the report. The
auditor may also include any rebuttal considered appropriate in light of the audited
parties comments.
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CHAPTER 6: THE AUDIT REPORT
6.1 INTRODUCTION
Audits of EPA construction grants may result in findings and recommendations
concerning costs questioned or deficiencies in the administration of the grant. For
effective administration of the construction grant program, it is imperative that audit
reports contain all findings, observations, conclusions, and recommendations resulting
from the audit.
6-1
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6.2 CONTENT AND FORMAT OF AUDITORS' REPORT
The audit report will be prepared in accordance with the following instructions and in
the formats shown in the Example Accountant's Reports, Exhibits and schedules
contained at the end of this chapter.
6.2.1. Scope Paragraph
a. The scope paragraph will identify the grant audited and the period audited. The
period audited will be from the date of grant offer to date of final inspection or designated
cutoff date.
b. The scope paragraph will also include a statement that the examination was made
in accordance with the EPA "Audit Guide for Construction Grant Program" and the GAO
"Standards for Audit of Governmental Organizations, Programs, Activities, and
Functions." If conditions were encountered which preclude the inclusion of such a
statement, an appropriate statement will be prepared explaining the nature of conditions
which required a deviation.
6.2.2. Opinion
The report will contain an opinion as to the costs incurred/claimed and costs eligible
under the EPA grant. Based on the review of the reasonableness, allowability, and
allocability of costs claimed in conjunction with grant terms and conditions and
applicable Federal regulations, the auditor will classify costs as "accepted" or
"questioned" in a separate schedule referenced in the report.
6.2.3. Comments on Compliance, Performance, and Internal Controls
The report will include a separate section relating to the compliance, performance and
internal control reviews made during the examination. The report should include a
discussion of any deficiencies identified during the course of the audit. In addition, the
report must contain comments as to the adequacy of the accounting system and
procurement system.
6.3 PRESENTING THE FINDINGS
Audit findings, whether they relate to costs questioned or grant administration
procedures, will be presented in sufficient written detail to ensure that report recipients
may readily:
understand the finding;
understand the basis for the finding;
grasp the significance of findings not directly related to the costs questioned; and
include management improvement recommendations as applicable.
6.4 AUDITOR'S REPORT ON SUBAGREEMENT COSTS
Findings and recommendations concerning costs questioned or deficiencies disclosed in
the audit of subagrefiment costs will be reported on in a separate schedule.
6-2
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Area Audit Manager
Office of Audit
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs incurred/claimed* and EPA Eligible Costs
(Exhibit A) for the City of Anywhere, U.S.A. under EPA Grant No. XXXX for the period
(month, day, year) to (month, day, year). Our examination was made in accordance with
the "Standards for Audit of Governmental Organizations, Programs, Activities, and
Functions" the "Audit Guide for Construction Grant Program" issued February 1976 by
8 EPA, and accordingly included such tests of the accounting records and such other
52- auditing procedures as we considered necessary in the circumstances.
As part of our examination, the allowability of costs incurred/claimed under the project
was determined in accordance with the provisions of the Grant and applicable Federal
regulations. Schedule I sets forth the costs which we questioned in this regard and
includes an explanation of the reason such costs were questioned.
In our opinion subject to the effects, if any, on Exhibit A of the ultimate resolution by the
.2 Environmental Protection Agency of the questionable expenditures referred to in the
preceding paragraph, Exhibit A presents fairly the financial information contained
therein in accordance with the financial provisions of the grant and generally accepted
accounting principles.
.o -^ In addition, in connection with our examination of the statement of costs incurred-
jjg g /claimed and eligible EPA costs, we have reviewed the Grantee's system of internal
§ g1 control and compliance with provisions of the Grant and applicable Federal regulations.
c3 Our report thereon appears as Exhibit B.
This report is intended for use in connection with the grant to which it refers and should
not be used for any other purpose.
*For interim audits, the auditor's report should should address costs incurred. For final
audits the auditor's report should address costs claimed.
DATE SIGNATURE
6-3
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EXHIBIT A
City of Anywhere, U.S.A.
Secondary Sewage Treatment Plant
Statement of Costs Incurred/Claimed and EPA Eligible Costs
for the Period (month, day, year) to (month, day, year)
Costs Incurred
Total EPA Eligible
Construction $2,780,000 $731,715
Technical Services:
Subcontracted 103,537 20,707
Force Account 30,000 6,000
Total Costs $2,913,537 $758,422
Grant No. XXXX was awarded to the City of Anywhere, U.S.A. under Public Law 84-660.
The grant was awarded on (month, day, year) and provides for 55 percent Federal
participation in the construction of a secondary sewage treatment plant and interceptor
sewers. At the time of completion of the audit field work (month, year), construction was
approximately 40 percent complete on two contracts. The third construction contract
under the grant had been recently awarded but construction had not started at (month,
year).
See Schedule I for a statement of costs accepted and questioned during the audit.
6-4
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SCHEDULE A-l
City of Anywhere, U.S.A.
Secondary Sewage Treatment Plant
Statement of Costs Incurred, Accepted and Questioned
for the Period (month, day, year) to (month, day, year)
Construction Contracts
Contract No.:
xxxxxx
xxxxxx
xxxxxx
Total Construction Cost
Technical Services:
Subagreements
Force Account
Total Technical Services Cost
Total Costs
Incurred
$243,750
150,000
337.965
731,715
EPA Eligible Costs
Accepted Questioned
$216,383
0
334.965
551,348
$ 27,367
150,000
3.000
180,367
Notes
Note 1
Note 1
Notel
20,707
6,000
26.707
1758.422
6,485
3,302
9.787
$561.135
14,222
2,698
16.920
$197.281
Note 2
NoteS
Determination of amount
due grantee or EPA
based on audit:
Federal share (55%) of
accepted eligible costs
$308,624*
$108.508
Less
EPA payments made through
(Month, day, year)
Balance due grantee
300,000
$ 8.624
*This amount should not be construed as being the final determination of the Federal
share of accepted eligible costs. The amount may vary depending upqn the resolution by
the EPA of questioned costs totaling $197,281.
6-5
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Notes to Schedule A-l
Note 1 Construction Contracts
a. Grantee Overpaid on Unit Price Contract - $27,367: The grantee contracted
for the erection of 198,422 feet of wooden fence around the construction site of the
treatment plant at a cost of $1.50 a linear foot for a total price of $297,633. The
contractor submitted invoices totaling $325,000 for the 198,422 feet offence installed.
The consulting engineer approved and the grantee paid the overpayment requested.
The overpayment was $27,367.
b. Grantee Awarded Contract Prior to Project Funding - $150,000: The grantee
awarded a contract in the amount of $550,000 for the installation of an interceptor
sewer to the treatment plant site. The award was made six weeks before EPA
approved the grant. The grantee has stated the award was necessary so that the work
could be coordinated with the reconstruction of Alpha Road between 10th and 12th
Streets, South. The contractor has submitted a change order to the consulting
engineer, requesting an increase of $5,000 to cover financing costs resulting from
delays in being reimbursed for construction in place because of the premature contract
award. The consulting engineer plans to submit a request for grant modification to the
EPA Regional Administrator covering these financing costs. EPA regulations do not
permit its funds to be used to pay financing costs. Further, the contract between the
grantee and the contractor cannot, under the present grant, be financed from EPA
funds because it was signed six weeks prior to grant approval. Accordingly, we
question $150,000 incurred to date.
c. Costs Incurred Due to Construction Delay - $3,000: The grantee contracted for
a protective wooden fence to be completed by September 15, 1974. The fence was not
completed until September 18,1974. This delay required another contractor under the
grant to defer the start of excavation to September 20, 1974. The contractor incurred
$3,000 in equipment rental costs during the three-day delay.
6-6
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Note 2 Technical services - Subagreements
A summary of audit recommendations follows:
Costs Costs Costs
Description Incurred Accepted Questioned Reference
Personnel $ 32,000 $10,000 $22,000 a.
Fringe Benefits 6,000 1,886 4,114 b.
Overhead 32,000 10,000 22,000 c.
Travel 2,537 2,537 0
Subcontracts 23,000 0_ 23.000 d.
Total Costs $ 95,537 $24,423 $71,114
Fee 8,000 8,000 Q
Total Cost
Plus Fixed Fee $103.537 $32.423 $71.114
Eligible Costs $ 20.707* $ 6.485*1 $14.222*
a. Engineering Firm's Records Do Not Accurately Record Project Cost -
$22,000: The consulting engineer was unable to support charges totaling $22,000
for project supervision and inspection. The project was charged for the full time of the
project engineer, and one-half time for another engineer whose identity we could not
determine. The engineering firm's payroll records did not identify the projects to
which the inspectors were assigned, and the firm was unable to provide the weekly
time sheets which, a representative of the firm stated, contain project identification.
We are questioning all charges except the salary of the project engineer. The
engineering firm's representative agreed that records were not available to support all
salary charges but contended that the staff had performed sufficient work to earn the
costs claimed.
b. The amount questioned represents the application of the firm's fringe benefit rate of
18.7% to personnel costs questioned in Note 1 above. (18.7% X $22,000 = $4,114).
c. The amount questioned represents the application of the firm's overhead rate of 100%
to personnel costs questioned in Note 1 above. (100% X $22,000 = 22,000).
d. Approval of Engineer Subcontracts - $23,000: The consulting engineer,
without the knowledge or approval of the grantee or EPA, subcontracted the design of
the settlement basins. EPA regulations require prior approval of subcontracts and a
determination that such subcontracts are reasonably priced. In addition to not
obtaining EPA or Grantee approval, the consulting engineering firm could not
demonstrate that the subcontract was awarded at a reasonable price. Consequently,
we have questioned this subcontract of $20,000 plus a 15-percent management fee of
$3,000, or $23,000. The engineering firm's representative stated that they were not
aware of these requirements and based upon the performance of the subcontractor,
they considered this to be a reasonable price.
6-7
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* In this example audit report, engineering fees were considered to be compensated under
a cost reimbursable contract, thus an audit of actual cost was performed. In cases where
engineering services are compensated under a multiplier, fee curve or lump sum contract
awarded prior to Julyl, 1975, the following paragraphs, as appropriate, should be
included in this schedule and referenced to technical services costs incurred/claimed
accepted, and questioned.
If multiplier and/or fee curve was used:
"We noted that compensation for engineering services was based upon the
method of contracting. We do not consider that this method of
contracting ensures a reasonable price. However, the use of the and
profit resulting solely therefrom have been accepted because, at the time the contractual
arrangement was made, this method of contracting was not prohibited and was in
accordance with accepted industry practices. The method of
contracting is prohibited by Appendix D to Subpart E of 40 CFR, Part 35."
If lump sum contract was used:
"We noted that compensation for engineering services was based upon a lump sum
method of contracting. We do not consider that this method of contracting ensures a
reasonable price in the absence of an effective negotiation based on current cost data.
The use of a lump sum contract not negotiated on this basis, and the resulting profit,
have been accepted in this case because, at the time the contractual arrangement was
made, a negotiation based on current cost data was not a requirement of the industry or
EPA. Appendix D to Subpart E of 40 CFR, Part 35 requires that all negotiated contracts
be based on current cost and pricing data." (This paragraph should not be inserted in
cases where the grantee can demonstrate that the contract was negotiated on the basis of
current cost and pricing data submitted by the engineer.)
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Note 3.
Force Account: The grantee charged the grant for $13,492 of force account work that
was not authorized in the grant agreement. Due to the absence of supporting
documentation, the nature of the work performed could not be determined. Accordingly,
we question force account costs applicable to the eligible portions of construction. The
eligible construction cost was 20 percent, computed as follows: $551,348 :-- $2,780,000 =
20%, This percentage was applied to unauthorized force account work to determine the
amounts applicable to eligible portions of construction ($13,492 X 20% = $2,698).
The grantee concurred with the facts but considered that he should be entitled to his
claims.
6-9
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EXHIBIT B
CITY OF ANYWHERE, U.SA.
SECONDARY SEWAGE TREATMENT PLANT
CONSTRUCTION GRANT XXXXXX
COMMENTS ON COMPLIANCE PERFORMANCE AND INTERNAL CONTROLS
As a part of our examination, we reviewed and tested the grantee's system of internal
accounting control to the extent we considered necessary to evaluate the system as
required by generally accepted auditing standards. Under these standards the purpose of
such evaluation is to establish a basis for reliance thereon in determining the nature,
timing, and extent of other auditing procedures that are necessary for expressing an
opinion on the financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance as to the safeguarding of assets against loss from unauthorized use or
disposition, and the reliability of financial records for preparing financial statements and
maintaining accountability for assets. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting control should not exceed the benefits
derived and also recognizes that the evaluation of these factors necessarily requires
estimates and judgments by management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting control. In the performance of most
control procedures, errors can result from misunderstanding of instructions, mistakes of
judgment, carelessness, or other personal factors. Control procedures whose effectiveness
depends upon segregation of duties can be circumvented by collusion. Similarly, control
procedures can be circumvented intentionally by management either with respect to the
execution and recording of transactions or with respect to the estimates and judgments
required in the preparation of financial statements. Further, projection of any evaluation
of internal accounting control to future periods is subject to the risk that the procedures
may become inadequate because of changes in conditions and that the degree of
compliance with the procedures may deteriorate.
The "Audit Guide for Construction Grant Program" issued February 1976 by the Envi-
ronmental Protection Agency requires a review and evaluation of the adequacy of the
accounting system and internal controls of the grantee to safeguard its assets, check the
accuracy and reliability of the accounting data, promote operating efficiency, and
encourage compliance with prescribed management policies and such additional fiscal,
accounting, and administrative requirements as EPA may establish. We understand that
procedures in conformity with the criteria referred to in the aforementioned Audit Guide
are considered by EPA to be adequate for its purposes in accordance with the Audit Guide
and that procedures that are not in conformity therewith indicate some inadequacy for
such purposes. Based on this understanding and on our study, we believe that the City's
procedures were adequate (inadequate) for the purposes of EPA except for (because of) the
conditions described below, which we believe are material weaknesses in relation to the
grant to which this report refers. In addition to such weaknesses, other conditions which
we believe are not in conformity with the criteria referred to above are described on the
following pages.
6-10
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GRANTEE'S ACCOUNTING SYSTEM (Interim Report)
The grantee's accounting system is not considered adequate to identify and accumulate
costs under the subject grant. The grantee maintains a general accounting system
controlled by a general ledger and supported by various accounting journals. However,
the grantee does not maintain cost or project accounting records to identify EPA eligible
project costs. The general ledger includes one construction account which includes the
cost of all construction projects undertaken by the City. As a result, we could not
determine the amount of EPA eligible expenditures incurred.
EPA general grant conditions provide "the grantee shall maintain books, records,
documents, and other evidence and accounting procedures and practices, sufficient to
reflect (1) the amount, receipt and disposition by the grantee of all assistance received for
the project, including both Federal assistance and any matching share or cost sharing,
and (2) the total cost of the project, including all direct and indirect costs of whatever
nature incurred for the performance of the project for which the EPA grant has been
awarded . . ."
During the course of our audit the accounting system deficiency was discussed with the
City Controller who made arrangements for a public accounting firm to identify and
accumulate from the City's records, costs incurred under the grant project. At the
completion of our audit, project costs incurred by the City from inception of the grant
through June 30,1975 had been identified and summarized. However, costs incurred since
July 1, 1975 have not been analyzed and a system to provide the identification and
accumulation of future grant expenditures has not been implemented.
Recommendation
We recommend that EPA require the City to take immediate action to implement
accounting procedures adequate to reflect EPA eligible and allowable project costs.
Grantee's Comments
The grantee concurred and indicated that necessary corrective action would be taken.
GRANTEE'S PROCUREMENT SYSTEM
The grantee's procurement system relative to the procurement of construction and
engineering services was generally adequate except for procedures relating to pricing
change orders.
The grantee has not established effective procedures for controlling the change orders to
assure that: (1) a review of the reasonableness of change order costs is made, (2)
responsibility is assigned for final acceptance of the change order work prior to approving
payment on the change orders, and (3) responsibilities of city officials authorized to sign
and approve the change orders are defined. The grantee, on the recommendation of the
consulting engineer, approved three contract change orders, valued at $100,000 under
contract number XXXX. The change orders extended the construction period for nine
months and provided for extensive substitution of equipment.
Our review of the consulting engineer's records disclosed that the engineer had not
performed a cost analysis or taken other measures to assure the reasonableness of the
change order price. In addition, neither the grantee nor the consulting engineer had
approved the change order work prior to payment for the change order. We also noted that
the changes have not been submitted to EPA for approval. We do not take a position
concerning the merits of the changes, but we believe that changes altering the scope of the
project are subject to prior approval before they are binding on EPA.
6-11
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Recommendation
We recommend that the grantee be required to establish effective procedures for
controlling change orders which will, as a minimum, provide for reasonable costs,
acceptable work, and properly denned responsibilities for city officials approving the
change orders. In addition, prior EPA approval should be obtained whenever the change
orders alter the scope of the project and/or when cost changes exceed $100,000.
Grantee's Comments
The grantee and the engineering firm concurred with the auditor's findings and
recommendations.
ENGINEERING FIRM'S PROCUREMENT SYSTEM
The engineering firm's procurement system is considered generally adequate to protect
the interest of the grantee and EPA with the following exception.
The engineering firm awarded a subcontract for a portion of the work under his
contract with the grantee. However, in awarding such a contract, the engineer did not
perform an adequate cost or price analysis to ensure a reasonable price for the
subcontracted work.
Recommendation
We recommend that future subcontract procurements by the engineering firm under cost
reimbursement contracts be subjected to a cost or price analysis to assure reasonable
prices.
Engineering Firm's Comments
The engineering firm's representatives stated that they were not aware of this
requirement in the past but would give consideration to such in subcontracting for future
work.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
CORRECTION OF CONSTRUCTION PROBLEMS
Our review disclosed that construction inadequacies noted in the inspection reports
were not adequately controlled to assure correction. The current inspection system does
not provide for a mechanism for assuring that deficiencies identified in the inspection
process are corrected. For example, we identified 25 construction deficiencies from
inspector's diaries and daily inspection reports which have not been corrected at the time
of completion of the audit field work. These deficiencies were recorded over a six month
period ending in June 1974. As of June 1975, when we discussed such deficiencies with the
resident inspector and project engineer, there had been no action taken to require
correction of the deficiencies. The project engineer indicated thatjsome of the deficiencies
represented major structural defects.
Recommendation
We recommend that EPA take appropriate action to ensure that the grantee requires its
consulting engineering firms to adequately control and document follow-up action on all
construction problems included in the inspection reports or other records. The grantee
should ensure it is fully informed of the status of construction and operational problems
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identified by the consulting engineering firm. We also recommend that EPA perforjn an
inspection to determine the seriousness of the construction deficiencies and the
appropriateness of proposed corrective action.
Engineering Firm's Comments
Representatives of the engineering firm indicated that they would take prompt action to
follow-up on deficiencies and get the contractors to take necessary corrective action.
Grantee's Comments
The grantee stated that he would take the necessary action to get deficiencies corrected.
CONFLICTING CONTRACT TERMS
The grantee has relied on the consulting engineer to determine whether the contractors
have performed the work in accordance with the plans and specifications approved by
EPA. The contract between the grantee and consulting engineer is not clearly defined as
to that firm's responsibility for inspecting the work of construction contractors and its
authority to interpret the plans and specifications. The contracts between the grantee and
three of its contractors contain specific language that states the consulting engineer is the
grantee's representative on all matters concerning interpretation of plans and specifica-
tions, inspections, and obtaining rework of work not meeting those plans and
specifications. Thus, the grantee appears to rely on the consulting engineer to obtain
satisfactory completion of the project when in fact the contract does not provide that
assurance.
Recommendation
We recommend that the grantee be required to amend its consulting engineer contract to
specifically state the engineer's authority and responsibility.
Engineering Firm's Comments
Representatives of the engineering firm stated that they see no problem with the present
wording of the contracts.
Grantee's Comments
The grantee concurred with the audit finding and stated that the consulting engineering
contract would be appropriately amended.
ENGINEERING FIRM'S ACCOUNTING SYSTEM
The engineering firm's accounting system is not considered adequate to identify and
accumulate costs under the subject contract. Adequate documentation is not maintained
to support all costs charged to the project. Payroll records did not identify the projects to
which inspectors were assigned. As a result, we questioned $22,000 of personnel costs
charged to the project (see Schedule A-l, Note 2(a)).
Recommendation
We recommend that the engineering firm be required to maintain records which
properly document salary charged. This should include as a minimum weekly time sheets
which are signed by the employee and his supervisor and which identify all projects
which the employee is working on. In addition, appropriate reconciliations should be
made between labor distribution and payroll records.
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Engineering Firm's Comments
The engineering firm stated that immediate action was being taken to correct
deficiencies in the accounting system.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
6-14
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APPENDIX A
SURVEY OF GRANTEE'S ACCOUNTING
PROCUREMENT AND PROPERTY MANAGEMENT
SYSTEMS
A-1
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Survey of Grantee's Management Systems
System
Accounting
1. Has the grantee established project accounting records to record the costs applicable
to EPA grants or contracts?
2. Are all costs of a project recorded on these records?
3. Are the costs in these records used as the basis for the grantee's financial status
reports or vouchers?
4. Are the costs recorded on these records reflected on and reconciled with control
accounts contained in the grantee's control ledger?
5. Are project accounts broken into subaccounts by program element or cost objective?
6. Are approvals requested for significant deviations from amounts contained in the
grant proposals?
7. Is appropriate documentation maintained to support the costs of:
a. personnel?
b. consultants?
c. fringe benefits?
d. purchases of material, supplies, and equipment?
e. travel?
f. other costs?
3. Before being recorded, are the costs contained in the project accounting records
subjected to review as to their reasonableness, allowability, and allocability to the
EPA grants?
9. Are controls established to segregate costs incurred prior to or subsequent to the
established grant period?
10. Are the controls or procedures exercised in administering federal expenditures the
same as those utilized in the expenditure of the grantee's funds? (When the grantee's
requirements are more stringent than EPA requirements, it is expected that the
grantee will treat federal funds as he would treat his own.)
11. Are the grantee's accounting records subjected to an independent audit at least every
two years?
Cash
12. Are appropriate controls in effect to determine that vouchers or requests for advances
are based on actual expenditures recorded on the grantee's project accounting
records?
Personnel
13. Are procedures established to determine that employees working under federal grants
are paid at rates comparable to the rates paid other employees?
Yes
|
No
N/A
W/P Ref.
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Survey of Grantee's Management Systems
System
Personnel (( oiHinued)
14. Do the personnel and/ or payroll records provide support for time and attendance,
leave, and earnings for all employees?
15. Are time distribution records maintained to show the amount of time spent on federal
grants as well as the time spent on other activities?
16. Are controls in effect which provide for personnel costs to be distributed in accord-
ance with the time reflected on time distribution records, i.e., reconciliation of labor
distribution and payroll records?
17. Have controls been established to determine that overtime is appropriate for the
project approved in accordance with grantee policies, and acceptable under the terms
of the grant and applicable Federal Regulations?
18. When personnel are working on projects other than that sponsored by the federal
grant, do procedures provide for the cost of overtime to be:
a. charged to the federal project on which the overtime was spent?
b. allocated over the individual's total work during that period?
c. treated as an indirect cost?
d. other?
19. Have procedures been established governing the charges of personnel time related to
partners or principles in closely held corporations?
20. Are formal procedures established with respect to bonuses, retirement plans, and/ or
profit sharing?
Procurement
21. Are procedures established to determine whether professional services, equipment,
material and/ or supplies requested are really needed?
22. Are existing supplies or inventories reviewed to determine whether items requested
are not already available?
23. Are formal procurement procedures established to require that equipment, material,
and supplies are obtained on a competitive basis?
24. Are solicitations obtained from several sources so that the grantee obtains the most
qualified party to perform needed professional services? (40 CFR 35.936)
25. Are quotations obtained and reviewed to determine whether the price proposed is
reasonable to the grantee and EPA?
26. Are procedures established to determine whether the type of contract utilized is
appropriate for the procurement being undertaken?
27. Are procedures established which prohibit the grantee from utilizing types of
contracts unacceptable to the Federal Government? (40 CFR 35.937.1)
Yes
No
'N/A
W/P Ref.
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Survey of Grantee's Management Systems
System
Procurement (Continued)
28. Are internal controls utilized to determine whether contracts contain all required
clauses:
a. access to records?
b. ownership of data?
c. termination?
d. applicable cost principles?
e. defective pricing (in fixed price contracts)?
29. Are procedures in effect which provide for the grantee to request and obtain required
approvals:
a. subcontracts?
b. equipment purchases?
c. other capital expenditures?
Travel
30. Does the grantee have adequate established policies governing reimbursement for
travel?
31. Do these policies:
a. require the submission of travel vouchers showing the time and purpose of travel?
b. clearly indicate the nature of expenses being claimed?
c. require the submission of supporting documentation?
Obligations
32. Are procedures established to require that obligations reported are supported by
appropriate purchase orders, contracts, etc?
33. Do these procedures require that obligations are periodically reviewed with regard to
their validity?
34. Do the procedures require the timely liquidation of the obligations and the updating of
information contained on financial status reports?
Indirect Costs
35. Has the grantee established procedures indicating which costs are considered direct
costs as opposed to indirect costs?
36. Is the grantee claiming indirect costs under federal grants and contracts?
37. Has the grantee been submitting the required indirect cost proposals to the federal
Yes
No
N/A
W/P Ref.
i
1
agencies or retaining them for review during audit?
38. Have these proposals been audited and negotiated?
Property Management
39. Has the grantee established an equipment inventory system for controlling p«» cr:\
obtained under federal grants?
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Survey of Grantee's Management Systems
System
I'lopcilv Miiiia^cim-iil (( oiilmucd)
40. Does this inventory system show:
a. a description of the item?
b. a related property tag number?
c. the federal equity in the equipment?
d. the location of the equipment?
e. the condition of the equipment?
41. Are periodic inventories made to validate inventory information?
42. Are procedures established governing the use and disposition of property acquired
with federal funds?
43. Do these procedures require that EPA be notified of any change in the use of the
property?
44. Do the procedures require that EPA receive its appropriate share of any proceeds from
disposition of the property?
Yes
No
N/A
W/P Ref.
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APPENDIX B
BOND CALCULATION GUIDANCE
Bond issue costs are allowable if incurred under Public Law 84-660 but are considered
unallowable under Public Law 92-500.
The primary guidance for eligible bond cost for construction grants is included in
Construction Grant Memorandum 70-5 dated February 13,1970, which is quoted below:
"Subject: Uniform Determination of Bond Issue Costs for Construction Grants
It has been noted that some differences exist between Regions in the method of
determining bond charges eligible for grant participation. Therefore, in order to provide
for uniformity, the following procedures are to be followed in computing such costs.
Bond costs eligible for Federal participation are those associated with the bond funds
actually needed to finance the applicant's share of the eligible costs. Bond funds used in
computing bond costs, then, will normally include the total eligible cost of the project
less any funds from Federal and State sources. If a portion of the grantee's contribution
comes from sources other than a bond issue, a further deduction would be necessary. In
those cases where State grants consist of annual payments over an extended period and
it is necessary to issue bonds to prefinance the State grant, the eligible cost for
computing allowable bonding costs need not be reduced by the amount of the ultimate
State grant.
Eligible bond issue costs include those costs associated with printing, advertising,
issuing, and other costs subsequent to the bond election.
Federal and State grant amounts, plus any funds from other sources, will be computed
on a percentage basis, based on the funds expended for construction of the project. If a
project has proceeded on a reimbursable basis, bond costs based on all bonds used
during the construction are eligible, even though reimbursement is made at a later
date."
After determining the percentage of Federal and State grants to be considered (plus any
local funds from sources other than bonds) the eligible bond issue costs are determined by
use of the formula explained in Example 1.
Examples 2 and 3 cover some of the problem areas which may arise. In addition, the
following comments should clarify most of the situations encountered.
COMMENTS ON SPECIAL SITUATIONS
1. If the bond issue is increased during the project period, all bonds issued and all
related eligible costs are used in the bond formula.
2. If other Federal agencies participate in the eligible cost, the percentage reduction
from "K" is increased as shown on Example 1. A HUD grant is usually applicable to the
ineligible portion of the project and, if so, it is disregarded.
3. Where there is an increase in the Federal grant subsequent to the bond transaction,
and the grantee is legally bound to pay bond costs relative to the original grant amount,
no adjustment of the "K" factor is required. The same applies to State participation.
4. Studies for determining water or sewage rates are sometimes included in reported
legal or bonding cost and not identified. Such studies are considered general administra-
tion of the municipality, not eligible for Federal grant participation.
5. Immaterial differences in the bond cost calculation should be disregarded.
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BOND COST CALCULATIONS
EXAMPLE #1 - NORMAL BOND CALCULATION
Bond Formula
S
F = B -1
KG
F = Eligible bond issue costs to be calculated
S = Total eligible project costs, exclusive of bond issue costs $180,029
K = 100% less percentage of Federal grants, State grants, other financing, and grantee
cash
K = 100% - (30 + 15 + 10) = 45% (for this example)
B = Amount of bond issue$192,000
C = Allowable bond issue costs$4,500
Example
S
F = B
. i
KG
$180,029
F = $192,000
- 1
45% X $4,500
$180,029
F = $192,000
2,025
F = $180,029
93.81
F = $1,919
NOTE: In rare instances, an amount slightly greater than "C," allowable bond costs, will
be obtained for F. In such cases, use "C."
B-2
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BOND COST CALCULATIONS
EXAMPLE #2 - APPLICATION OF GRANTEE CASH TO INELIGIBLE COSTS
S = $81,145 F = Eligible bond issue costs to be calculated.
C = $972
B = $60,000
Determination of Ineligible Costs
Total Project Costs $82,145
Eligible Project Costs 81,145
Ineligible Project Costs $ 1,000
Source of Funds
Federal Grant 55%
Grantee Cash $5,000
Determination of % of Grantee Cash
(1) $5,000 - $1,000 (Ineligible) = $4,000 = cash available for eligible project costs
$4,000 = 4.9% of S
$81,145
Computation of K
K = (100% less 55% grant less 4.9% grantee cash) = 40.1%
Computation of F
S
F = B - 1
KG
$81,145
F = $60,000 - 1 = $531
.401X$972
(1) Local funding should be applied to the ineligible project costs first and the remainder
should be used to reduce K.
B-3
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BOND COST CALCULATIONS
EXAMPLE #3 - SIGNIFICANCE OF SOURCE OF FUNDS
Computation of "S"
Construction Cost
Technical Service
Administrative
Bond Cost
$120,220
13,310
600
(Omitted)
Source of Funds
Federal Grant
Bond issue
$ 44,260
75,000
Balance unaccounted for (1)
S = $134,130
Computation of "K"
K = 100% less 33% (Federal) less 11% (local) = .56
Computation of "C"
Legal Costs
Printing Costs
Advertising Costs
Computation of "F"
134,130
F = 75,000 - 1 = $2,227
S = $134,130
33
56
11
100
$1,500
500
187
C = $2,187
2,187 X.56
Since "F" is greater than "C", use $2,187 as eligible bond cost.
(1) The balance unaccounted for is assumed to come from local funds unless the funds
were obtained by means of a loan, in which case, the % obtained by loan would not be
deducted from the "K" factor. In the example above, if the $14,870 had been obtained
by loan, K would be 100% less 33%, or 67%.
B-4
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APPENDIX C
SUPPLEMENTAL AUDIT PROCEDURES FOR
RELOCATION COSTS
RELOCATION COST - APPLICATION OF AUDIT PROCEDURES
These audit procedures supplement the Audit Guide for Construction Grant Programs.
EPA Regional Audit Managers will provide independent public accountants and EPA
auditors with these supplemental procedures whenever a construction project includes
relocation costs.
The procedures must be followed explicitly because they are the audit application of
EPA regulations, 40 CFR, Part 4, that pertain to payments made to displaced persons.
RELOCATION COST - AUDIT PROCEDURES
People who are displaced or whose realty is acquired after January 1, 1971, due to an
EPA assisted project are entitled to compensation as provided by the Uniform Relocation
Assistance and Real Property Acquisition Act of 1970. Auditors shall use the following
checklist when examining relocation costs. Applications for benefits must be filed within
18 months from the date the displaced person moves from the acquired real property or the
date of final payment for such property, whichever is later, unless this time period is
extended by the EPA Administrator.
Allowable Costs
A. Dwelling and Personal Property
1. Transportation of people and personal property to a replacement site, not to exceed
50 miles unless justified.
2. Packing, crating, unpacking, and uncrating of personal property, and the cost of
advertising for such services.
3. Storage of personal property, generally up to 12 months.
4. Insurance premiums covering loss or damage of personal property in transit or
storage.
5. Lost, stolen, and damaged property; removal, reinstallation, and modification of
property.
6. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move, unless approved by the EPA Administrator..
7. Payments to each occupant of a dwelling in lieu of actual reasonable moving and
related expenses of (a) a $200 dislocation allowance, and (b) a'moving expense allowance
not to exceed $300 based on state-highway department or Federal Highway Administra-
tion allowance schedules.
8. A replacement housing payment not to exceed $15,000, provided the displaced
owner occupants actually owned and occupied the dwelling not less than 180 days prior to
installation of negotiations, and the displaced owner-occupant purchases and occupies a
replacement dwelling. The $15,000 allowance is the lower of (a) $15,000 less payment for
any increased mortgages, interest costs, or incidental closing costs, (b) the difference
between the acquisition price of the acquired dwelling and the estimated cost of a
replacement dwelling, or (c) the difference between the acquisition price of the acquired
dwelling and the actual price of the replacement dwelling.
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9. A replacement housing payment not to exceed $4,000 is payable to a displaced
tenant or a displaced owner-occupant of a dwelling for less than 180 days, provided he
occupied the dwelling for not less than 90 days and is not eligible for the $15,000
replacement housing allowance. A displaced owner-occupant is entitled to the $4,000
payment, rather than the $15,000 payment, if he elects to rent, rather than buy, a
replacement dwelling.
Computation of the $4,000 payment is as follows:
a. Displaced tenant. 48 times the reasonable monthly rent for a comparable
replacement dwelling, less 48 times the average month's rent paid by the displaced
tenant for the 3 months preceding the initiation of negotiation.
b. Displaced tenant by displacing agency. 48 times the reasonable monthly rent
for a comparable replacement dwelling less 48 times the monthly economic rent,
but no more than would be received under the $15,000 payment provision.
c. Displaced homeowners. 48 times the reasonable monthly rent for a comparable
replacement dwelling less 48 times the monthly economic rent, but no more than
would be received under the $15,000 payment provision.
In no event shall the rental payment, plus the monthly average rental or economic
rent, exceed the rental of the replacement dwelling.
Monthly economic rent is either the result of an analysis of the available private
rental market, or an analysis of at least three comparable replacement dwellings
available on the private market, or any method approved by the EPA Administrator.
10. Should a tenant elect to purchase a house within one year from displacement, the
replacement housing payment shall be the down payment, plus incident settlement costs,
using a conventional loan, and shall include points or a loan service fee. The maximum
payment is $4,000; if more than $2,000 the tenant must match the excess dollar for dollar
up to the $4,000 maximum Federal payment.
11. The rules for determining the cost of a replacement dwelling are the same as those
used to set monthly economic rent (Item 9).
12. Land values associated with the replacement housing payment shall be
determined as follows:
a. A dwelling located on a tract typical for the area - probable selling price of a
comparable replacement dwelling less the acquisition price of the acquired
property.
b. A dwelling located on a tract larger than typical for the area - probable selling price
of a comparable replacement dwelling on a typical tract less the estimated value of the
dwelling on a tract typical for the area.
c. A dwelling located on a tract having a fair market value higher than residential
use - probable selling price of a comparable replacement dwelling on a typical tract less
the estimated value of the dwelling assuming it was located on a tract typical for the area.
13. No part of a replacement housing payment may be made for any portion of a
dwelling used in connection with a business or farm.
14. Each individual or family occupying a multiple dwelling is entitled to separately
calculated replacement housing payments.
15. Displaced homeowners of a multi-family building are entitled to payment based
on the cost of a comparable one-family unit in a multi-family or single family structure.
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B. Business or Farm
1. Packing, unpacking, crating, uncrating, personal property, the advertising for
such services, and storage of personal property generally up to 12 months.
2. Insurance premiums covering loss or damage while in transition or storage.
3. Lost, stolen, and damaged property; removal, reinstallation, and modification of
personal property.
4. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move, unless approved by the EPA Administrator.
5. Should the cost of moving the property be disproportionate to its value,
reimbursement will be the difference between liquidated value of the property to be moved
and the replacement cost at the relocated site. This is applicable to junk yards, stockpiled
sand, gravel, minerals, metals, etc.
6. Should the cost of moving outdoor advertising displays equal or exceed its in-place
value, such displays may be acquired along with the realty, unless prohibited by state law.
7. The expenses of searching for a replacement farm or business:
a. Travel costs
b. Extra cost of meals and lodging
c. Time spent in search at the displaced person's salary rate, not to exceed $10 hourly
d. Necessary brokers fees to locate a replacement business or farm if approved by the
displacing agency
Search expenses are limited to $500 unless approved by the EPA Administrator.
8. Actual direct loss of tangible personal property as a result of relocation:
a. Business or farm operation discontinued - fair market value of personal property
for continued use at the displaced location, or estimated cost to move same up to 50
miles, whichever is less.
b. Personal property abandoned - reimbursement same as 8a above.
The cost of removal of personal property will not be offset against any payments due
displaced persons. The displaced person must make a bona fide effort td sell property not
moved.
9. A displaced person in business may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net income of the business if
that business substantially contributes to the displaced person's income and cannot be
relocated without substantial loss of income; is not part of a firm engaged in similar
business having one other location and is not being acquired by a State agency or the
United States; and is not an outdoor advertising business.
10. A displaced person in farming may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net earnings. Should the
acquisition be partial, payment can be made only if the remaining property is not an
economic unit.
11. A displacement nonprofit organization may elect, in lieu of reimbursement for
moving and related expenses, a fixed amount equal to the average annual net income,
provided the organization cannot be relocated without a substantial loss in existing
patronage, and the organization is not part of a commercial enterprise having one other
location, engaged in similar activity and not in itself being displaced.
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APPENDIX D
Reserved for Industrial Cost Recovery and User Charges
O-k
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APPENDIX E
Criteria for Eligibility and Allowability of Selected
Items of Costs
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APPENDIX E
INDIRECT, DIRECT, ETC. COSTS
Indirect Costs:
Indirect Costs are those incurred for a common or joint purpose, benefiting more than
one project or cost objective and not specifically identifiable to the particular project or
cost objective benefited. Indirect costs consist of items of a general overhead nature such
as office space, utilities, telephone, etc. The costs are allowable only if determined on the
basis of a negotiated indirect cost agreement and incorporated in the grant agreement.
See 40 CFR 30.715-2.
Travel Costs:
Grantee travel costs - allowable travel costs include travel considered necessary and
directly related to the accomplishment of project objectives. Travel not directly related to
construction and/or start up of the facility, including trips to professional meetings,
symposia, lectures, etc., is not allowable as a direct charge to the project. Travel not
directly related to a specific project may, however, be recovered under an indirect cost
agreement. (Federal Management Circular (FMC) 74-4).
Architect/Engineer travel costs - allowable travel costs include travel considered
necessary and project related, including on-site travel costs. Costs of relocation of
employees and their families may be considered allowable when such travel is justified
and approved by the grantee. The cost of transportation between living quarters and the
construction site is normally unallowable. In unusual circumstances, where job sites are
located in isolated areas and living quarters are not available within 30 miles, travel costs
between living quarters and the job site are considered allowable. (41 CFR 1-15.2 and 41
CFR 1-15.4).
Bond Costs:
All costs under PL 92-500 grants associated with the approval, preparation, issuance
and sale of bonds (including bond counsel and underwriters' fees) are ineligible for grant
participation. Interest on bonds or any other form of indebtedness is unallowable. (FMC
74-4)
Liquidated Damages:
Monies received by grantees in the form of liquidated damages shall have no effect on
the determination of allowable costs of grant projects. However, any additional costs -
construction, engineering, legal, or administrative-generated because of a contractor's
lack of performance should be covered by the liquidated damages received. Thus, any such
increase in cost as a result of lack of performance is unallowable for participation even in
the event that the grantee elects not to exercise his right to recover liquidated damages.
Bid Bond Forfeiture:
All bid bond forfeitures should be treated as a reduction to project construction costs.
STUDIES, REPORTS, FEDERAL REQUIREMENTS, ETC.
Rate Studies:
Such studies are eligible if required for the establishment of user charge or industrial
cost recovery systems in order to comply with Sections 35.925-11 and 12 of the Title II
Regulations. Such studies require prior approval either in the grant agreement or an
b-2
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amendment thereto. Allowable costs may include legal, CPA, and engineering fees related
to the studies. (In order to avoid double payment, care must be exercised to assure that
such work is not incident to a general contractual obligation).
Financial Reports and Studies:
To the extent that such reports constitute "Rate Studies" for user charges and/or
Industrial Cost Recovery procedures, the costs are allowable; provided that such studies
are approved in advance by the Regional Office and that the results of such studies are
acceptable to EPA. Financial reports which constitute studies of, for example, the local
tax base, structure, etc., to determine the financial capabilities of the applicant or the
financial feasibility of the proposed undertaking are similarly allowable. The cost of all
other financial reports and studies should generally be considered unallowable in that
they constitute a normal function of government.
In this regard the Regional Office should adhere to a strict interpretation of the term
studies. Generally, studies refers to preliminary reviews, overviews, examinations,
analyses, etc. The interpretation must not be extended to include preparing procedures,
designing implementation schemes, drafting statutes or regulations, delineating
boundaries relating to finances, issuance of bonds, adjustment of tax rates, establishment
of assessment districts, etc. or other activities which are a normal function of government
and as such are unallowable.
Establishment of Special Assessment Districts:
The "mechanics" of establishing special assessment districts developed, for example,
on the basis of rate studies, are a normal function of government and as such the costs
associated therewith are unallowable. Included in this restriction are legal, administra-
tive and engineering costs associated with activities such as: (1) drafting, review and
passage of statutes/ordinances, (2) preparation of regulations, (3) delineation of district
boundaries, (4) elections, etc.
This policy extends equally to the establishment of any "special districts" such as
election, service, rate, etc. districts (including Regional Authorities) related to the grant
project.
Public Liaison Services:
Such services are generally unallowable since they constitute a type of public
information service and as such are not directly related to or necessary for the
construction of the treatment works.
Assistance with State and Federal Regulations:
The cost of assistance associated with addressing State and Federal Regulations and
procedures which are basic to the functions of general government, such as preparation of
applications and related documents, obtaining state construction permits, discharge
permits, etc. are unallowable. Costs growing out of meeting specific Federal statutory
requirements such as public hearings and other activities related to the user charge study,
facilities planning, NEPA procedures, Uniform Relocation Assistance and Real Property
Acquisition Policies Act etc. are allowable.
If such costs entail assistance which is readily available through Federal or State
offices, such as interpretation of Regulations, explanations of grant procedures, etc. they
should be disallowed.
(In order to avoid double payment, care must be exercised to assure that such work is
not incident to a general contractual obligation).
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Redesign/Replanning Costs Resulting from Changes in Federal Require-
ments:
In those cases in which an applicant's completed or partially completed planning
and/or designs are rendered invalid or unacceptable by changes in Federal requirements,
both the original cost plus the redesign or replanning costs are allowable. The Regional
Office must assure itself that the planning and/or design thus invalidated was
undertaken in good faith by the applicant and was not the result of a disregard for
existing Federal directives by either the applicant or his agent.
Costs of Implementing the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970 (PL 91-646):
Basically there are four categories of costs associated with this Act which may be
considered allowable:
1. Moving and related expenses
2. Replacement housing
3. Relocation assistance advisory services (entailing direct services of the grantee in
assisting the displaced person(s)).
4. Acquisition of real property.
Documented allowable costs from these categories incurred on or after July 1,1972, will be
treated as other allowable project costs and reimbursed at the same percentage rate. In the
case of costs resulting from acquisition or displacement occurring before July 1,1972,
EPA shall pay the full amount of the first $25,000 of such costs for each displaced person.
Allowable costs should be determined in accordance with 40 CFR Part 4 and guidelines
which will be issued pursuant thereto.
Field Surveys to Identify Cultural Resources:
Reasonable costs incident to field surveys to identify historical, architectural,
archeological and cultural resources in the primary impact area of grant projects are
allowable. Allowable costs must be determined on a case-by-case basis and may include
the cost of on-site inspections, review of pertinent documents, photographic reconnais-
sance, services of archeologists or historians, etc.
Such costs should receive prior approval and delineation by the EPA Regional Office.
Survey costs associated solely with the examination of the National Register of Historic
Places are unallowable. EPA may participate in the cost of intensive surveys (e.g.,
"digging") only when a sufficient amount of information exists to indicate that there is a
reasonably high probability of discovering important cultural resources.
See Program Guidance Memo #52 (7-2-75) for additional guidance on this subject.
Industrial Planning:
Step I related costs of industrial planning conducted and paid for by an industry whose
wastes will be treated in a municipal system are not allowable. (See Section 35.925-15 of
the Title Regulations).
Facilities Serving Communities and Federal Facilities:
Whenever a planned treatment works will jointly serve a municipality and a Federal
facility, that portion of construction cost allocable to the Federal facility will not be
allowable for 75 percent construction grant funding, subject to the following exceptions:
1. Facility planning (Step 1) costs.
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2. Cost of Step 2 work if a Step 2 grant has been certified by the State for funding to
EPA prior to the issuance of PGM number 62 (12-29-75).
3. Design and construction costs allocable to a Federal facility producing less than
250,000 gallons per day or 5 percent of the total design flow of waste treatment
works, whichever is less.
That portion of the construction costs allocable to the Federal facility shall be based on
all factors which significantly influence the cost of the treatment works. Factors such as
strength, volume, and delivery flow rate characteristics will be considered and included to
insure a proportional allocation of costs to the Federal facility.
As a minimum, the portion of construction cost allocable to the Federal facility should
be based on the ratio of its total hydraulic requirements, including allowances for future
needs, to the total design flow of the treatment works. The portion (percentage) allocable
to the Federal facility must be agreed upon by the municipality and Federal agency, and
approved by EPA prior to award of a Step 2 or Step 3 grant, whichever is applicable, for
the works or any portion thereof. See PGM #62 (12-29-75) for additional detail.
FACILITIES SITE RELATED COSTS
Site Acquisition vs. Site Preparation Costs:
All costs associated either directly or indirectly with the acquisition of any land used for
or incidental to the construction of treatment plants, lagoons, force mains, gravity sewers,
outfall lines, appurtenant piping and structures, and pumping stations whether by
purchase, rental, lease or easement are ineligible. Similarly, all legal, realty, engineering,
and grantee costs associated with such ineligible acquisition are unallowable as are the
costs of easements, rights-of-way, nonconstruction related surveying, plat preparation,
meetings, etc.
(NOTE): The cost of land used as an integral part of the treatment process (such as spray
irrigation sites - See PG 49 - 7-18-75) may be eligible if approved and in accordance with
pertinent regulations and/or guidelines. Legal, administrative and engineering costs
associated with the acquisition of grant eligible land are allowable for grant participation.
Costs associated with the preparation of the treatment works site (including
appurtenant features) before, during, and to the extent agreed upon in the grant
agreement or amendment thereto, after construction are generally eligible. These
costs include such items as: grade and construction-staking surveys, surveying for
alignment and slope, preparation of working drawings and plans dealing with site
preparation, locations, grades, slopes, distances, depths, alignments, etc. Also eligible are
costs such as fine-grading, seeding, and protective trees and shrubs.
Costs related to reasonable site screening or aesthetic purposes are also allowable.
Criteria for participating in aesthetics related work include: Support expressed in NEPA
related studies, approved facility plans, necessary screening of adjacent properties,
whether the facility is in constant public view or remote therefrom, etc.
Certificate as to Title to Project Site:
Except in the case of grant eligible land, legal costs associated with certifying as to the
adequacy of the grantee's interest in the project site should be considered a normal
function of government incident to the project and as such are unallowable.
Acquisition of Privately or Publicly Constructed Waste Treatment Facilities:
Costs incurred by a grantee or applicant associated with the purchase, lease or
acquisition of privately or publicly constructed and owned waste treatment facilities are
not allowable.
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Demolition of Existing Structures:
Demolition of existing structures constitutes an allowable cost provided that the
structures are on the facility site (including rights-of-way for the eligible sewer lines) and
that construction cannot be undertaken without such demolition. Off site demolition is
unallowable. Aesthetics related demolition is allowable only if it conforms to the criteria
relating to the allowability of site preparation outlined above.
If demolition of existing structures is required on a site not previously owned by the
grantee, the grantee must address such demolition in the cost effective analysis and
demonstrate to the satisfaction of the Regional Office that in choosing the site appropriate
consideration was given to the cost of demolition.
Removal, Relocation and/or Replacement of Utilities:
Costs associated with the removal, relocation and/or replacement of utilities (water,
electricity, etc.) are allowable when such activity is incident to and necessary for the
construction of the eligible facility. However, participation in the cost of replacing
existing utilities with utilities having a greater capacity than that originally in place can
only be allowed if mandated by local, State or Federal codes, ordinances or statutes. If a
mandate for greater capacity does not exist any additional cost must be borne by the
grantee.
The provision of new or increased utility service when required for the facility (e.g.,
construction of a new facility or increased capacity) being constructed is an allowable cost
provided that the grantee (utility customer) would ordinarily be required to pay for such
installation.
Restoration of Streets and Rights-of-Way:
The cost of restoring streets and/or rights-of-way to their original condition is an
allowable cost. The need for such restoration must result directly from the construction of
the eligible project. Allowable restoration may include, for example: refilling and
patching of street and roadway surfaces (generally limited to the width of the trench), fine
grading and reseeding of off-street rights-of-way, reasonable tree plantings, restoration of
sidewalks, etc.
EQUIPMENT, TOOLS, PARTS, ETC.
Mobile Equipment
Generally, such equipment is allowable if identified by the grantee and approved in
advance of purchase by the Regional Office and is directly necessary for the operation
and/or maintenance of the overall wastewater treatment facility. Such equipment must
be necessary for the transmission of wastewater or sludge or for the maintenance of plant
grounds and/or equipment. Allowable items include but are not limited to:
a. Portable stand-by generators.
b. Large portable emergency pumps to provide "pump-around" capability in the event
of pump station failure or pipeline breaks.
c. Sludge tanks and trailers and other necessary transport and handling equipment in
those cases where the location of the ultimate sludge disposal site requires such
equipment.
d. Grounds and building maintenance apparatus. Such apparatus may include, for
example: mowers and snow removal equipment (in certain geographic areas). Regional
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Offices may use such criteria as cost effectiveness, potential for abuse, frequency of use,
etc. in considering allowability. Requests for participation based upon less than 100
percent use, should be agreed to only in special situations and prorated accordingly.
e. Cars and trucks are unallowable, except for specialized sludge handling/transport
equipment as noted in "c" above.
NOTE: The grantee is required to maintain property accountability on all such
equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Office Equipment and Furnishings:
Such items as identified by the grantee and approved in advance by Regional Office,
when installed or located at the treatment works and necessary to the administrative
and/or technical (including training and meetings) functioning of the works, may be
allowable. In larger facilities allowability may be extended to reasonable special purpose
rooms and equipment related to the function of the facility. There-may well be instances in
which the Regional Office will need to exercise judgment as in the case of "luxurious
furnishings", televisions, etc.
NOTE: The grantee is required to maintain property accountability on all such
equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Shop Furnishings:
Reasonable furnishings for shop areas such as shelves, bins, work benches, etc. are
allowable costs.
NOTE: The grantee is required to maintain property accountability on all such
equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Laboratory Equipment and Supplies
Generally, laboratory items identified by the grantee and approved prior to procurement
by the Regional Office as necessary to conduct tests as may be required for plant operation
are allowable. In addition, the cost of a reasonable inventory of chemicals and supplies
necessary to start operation of the plant is allowable. An EPA publication "Estimating
Laboratory Needs for Municipal Wastewater Treatment Facilities" discusses equipment
needed for various size plants.
NOTE: The grantee is required to maintain property accountability ori all such
equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Safety Equipment:
Based upon the specific needs of individual facilities, necessary and reasonable safety
equipment is an allowable cost. Generally such equipment should be delineated in the
operation and maintenance manual and the approval of that document may constitute
the basis for our participation.
NOTE: Such equipment should meet applicable Federal, State, local, and industry safety
regulations and standards. The grantee is required to maintain property accountability
on all such equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Tools:
Allowable tools are only those which are specified as special purpose tools necessary for
the repair and adjustment of specific process components by the equipment supplier(s)
/manufacturer(s) or approved by the Regional Office. All other tools are unallowable.
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NOTE: The grantee is required to maintain property accountability on all such
equipment in accordance with FMC 74-7 and 40 CFR 30.810.
Replacement Parts:
Replacement parts identified and approved in advance by the Regional Office as
necessary to assure uninterrupted operation of the facility may be included as allowable
costs. Allowable replacement items are only those which constitute critical parts of major
systems components and which are: (1) not immediately available and/or whose
procurement involves an extended "lead-time", (2) identified as critical by the equipment
supplier(s), or (3) are critical but not included in the inventory provided by the equipment
supplier(s). In those instances where adequate "back-up" components are built into the
system a reduction in replacement parts should be made.
Items of routine "programmed" maintenance such as ordinary piping, air filters,
couplings, hose, bolts, etc. are unallowable. See EPA Technical Bulletin: "Design Criteria
for Mechanical, Electric and Fluid System and Component Reliability" for additional
discussion.
Collection System Maintenance Equipment:
EPA participation in the cost of such equipment purchased in connection with a
construction grant shall be based upon a proration of the portion of the collection system
in which we participate to the total system. Thus if EPA participates in 65 percent of the
grantee's total collection system, the allowable costs shall constitute 65 percent of the cost
of such equipment purchases pursuant to the grant agreement. Generally, the proration
should be based upon the relative lengths of the new to the total system rather than cost or
size. Such equipment must be reasonable and be approved by the Regional
Office.
In addition allowability will be based upon: (1) a demonstrable frequency of need, and
(2) the equipment must be necessary to preclude the discharge or by-passing of raw
sewage, and/or (3) the equipment is necessary to provide for the health, safety and
welfare of the citizens.
INSPECTION, MONITORING, ETC.
Project Inspection:
Costs associated with technical inspections of the eligible project before and during
construction (including change order approved time extensions) are allowable. Such costs
must be clearly documented and, to avoid double payment, the work must not be incident
to a general contractual obligation.
Groundwater Monitoring Facilities:
Costs associated with the construction of groundwater monitoring equipment and
facilities may be considered allowable only in those cases in which, as a direct result of
project construction, the possibility of groundwater deterioration, depletion or modifica-
tion exists. Allowability may not be extended to the operation, surveillance and/or
analyses associated with these facilities.
Such facilities require the prior approval of the Regional Office.
Biological "Seeding":
Under certain conditions (climatic, geographic, nature of wastes, etc.) reasonable costs
associated with the purchase and/or transportation of biological seeding materials
required for initiating (or expediting the initiation of) the treatment process operation are
allowable.
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SUBAGREEMENT COSTS
(These requirements have been EPA National policy under both PL 84-660 and PL 92-
500 as required under 40 CFR 30.800 and .805).
Services Charges
Service charges are denned as: any supplemental charges added to other direct cost
(non-salary) which are claimed on an actual cost basis.
Regardless of contract terms, the actual cost of service charges must be supported by
accounting records. If the service charges are not supported or if the actual cost is less
than the amount claimed, the total or the difference is unallowable for Federal
participation. This is in accordance with the ASCE manual which states that the service
charge is for expenses to be reimbursed by the client.
Fringe Benefits
Regardless of contract terms, the actual cost of fringe benefits must be supported by
accounting records when they are claimed as a direct charge. If the charges are not
supported or if the actual cost is less than the amount claimed, the total or the difference is
unallowable for Federal participation. Where the fringe benefits are claimed as a direct
charge and also included in the multiplier the duplicate direct charge is unallowable for
Federal participation.
Labor Charges and Related Costs
Regardless of contract terms, where charges have been made to the grant and there was
no cost incurred, the charges should be questioned. Labor charges and related costs for
straight time or overtime hours which are billed but for which cost has not been incurred
will be unallowable for Federal participation. (Compensatory time will be considered in
determining actual labor costs incurred. However, compensatory time is allowable only if
it is incurred in accordance with established company policy, if it is properly controlled
and accounted for, and if it is used within an annual accounting period.)
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APPENDIX F
COGNIZANT
EPA AREA AUDIT OFFICES AND
GEOGRAPHIC AREAS
Address of Cognizant
EPA Area Audit Office Geographic Area
Mr. Juan Soto, Jr.
Area Audit Manager
Environmental Protection Agency
Mid-Atlantic Area Audit Group
401 M Street, S.W., Rm. 3704
Washington, B.C. 20460
(202) 755-0953
Mr. Joseph J. DeRosa
Area Audit Manager
Environmental Protection Agency
Eastern Area Audit Group
90 Church Street
Room 802
New York, New York 10007
(212) 264-5730
Mr. Roger Smith
Area Audit Manager
Environmental Protection Agency
Northern Area Audit Group
1 North Wacker Drive
Chicago, Illinois 60606
(312) 353-7910
Mr. Truman R. Beeler
Area Audit Manager
Environmental Protection Agency
Western Area Audit Group
100 California Street
San Francisco, California 94111
(415) 556-1954
Mr. Leslie M. Buie
Area Audit Manager
Environmental Protection Agency
Southern Area Audit Group
Suite 921
1720 Peachtree Road, N.W.
Atlanta, Georgia 30309
(404) 526-3623
Pennsylvania, Delaware,
Maryland, Virginia,
West Virginia, and
Washington, D.C.
Maine, Connecticut, New York,
Massachusetts, Rhode Island,
Vermont, New Hampshire,
New Jersey, Puerto Rico,
and Virgin Islands
Ohio, Michigan, Wisconsin,
Minnesota, Indiana, Illinois,
Iowa, Nebraska, Missouri,
and Kansas
Colorado, Utah, Nevada,
Hawaii, Washington, Oregon,
California, Idaho, Montana,
Wyoming, Arizona,
North Dakota, Alaska,
and South Dakota
Alabama, North Carolina,
South Carolina, Florida,
Georgia, Mississippi, Texas,
Arkansas, Tennessee,
Kentucky, Oklahoma,
New Mexico, and Louisiana
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APPENDIX G
REFERENCES
GAO "Standards for the Audit of Government Organizations, Programs, Activities, and
Functions"
FMC 74-4 Cost Principles Applicable to Grants and Contracts with State and Local
Governments
FPR Section 1-15.2 Cost Principles Applicable to Grants and Contracts with Commercial
Organizations
FPR Section 1-15.4 Cost Principles Applicable to Construction and Architect-Engineer
Contracts
FMC 74-7 Uniform Administrative Requirements for Grants-in-Aid to State and Local
Governments
40 CFR 30 Interim General Grant Regulations, issued November 1971
40 CFR 35 Interim Grant Regulations, issued June 9, 1972
40 CFR 30 Final General Grant Regulations, issued May 1975
40 CFR 35 Subpart E Grants for Construction of Treatment Works - Federal Water
Pollution Control Act Amendments of 1972 issued February 1973 and updated February
1974 and December, 1975.
40 CFR 30 Federal Guidelines, Design, Operation, and Maintenance of Waste Treatment
Facilities
EPA Program Guidance Memorandum No. 64 - Alllowability/Eligibility of Miscellaneous
Costs
EPA Program Guidance Memorandum No. 49 - Eligibility of Land Acquisition Costs for
Land Treatment Processes
EPA Audit Guide for EPA Contracts
EPA Audit Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals
Public Law 84-660
Public Law 92-500
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