1 °-
5046 f| United States
,* Environmental Protection
ii Agency 905R861 08
v>EPA Report of Audit
ERA'S PLANNING, NEGOTIATION, AWARDING
AND ADMINISTERING OF EMERGENCY
RESPONSE CLEANUP SERVICES CONTRACTS
E5E26-05-0101-61508
SEPTEMBER 23, 1986 U.S. Environmental Protection Agency
Region V, Library
230 South Dearborn Street
Chicago, Illinois 60604
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TABLE OF CONTENTS
INTRODUCTION 1
SUMMARY OF FINDINGS i 3
ACTION REQUIRED 12
BACKGROUND 13
SCOPE AND METHODOLOGY 16
FINDINGS AND RECOMMENDATIONS
EXCESSIVE COSTS PAID FOR SUPERFUND REMOVALS ..... 24
1. EPA NEEDS TO IMPROVE COMPETITION FOR ERCS CONTRACTS 37
2. EPA NEtDS TO OBTAIN REASONABLE CONTRACT RATES 55
3. USE OF FIXED RATES SHOULD BE LIMITED 69
4. EPA NEEDS TO BETTER PLAN TO OBTAIN AND
UTILIZE DATA IN NEGOTIATIONS .^ 77
5. EPA NEEDS TO CHANGE ITS METHODS FOR PROCURING TRANSPORTATION
AND DISPOSAL SERVICES 91
6. EPA SHOULD IMPROVE CONTRACT MONITORING 98
APPENDIX
1. DISTRIBUTION 102
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ABBREVIATIONS
CERCLA Comprehensive Environmental Response,
Compensation and Liability Act of 1980
CFR Code of Federal Regulations
EPA U.S. Environmental Protection Agency
ERCS Emergency Response Cleanup Services
FLSA Fair Labor Standards Act
G&A General and Administrative
GAO U.S. General Accounting Office
NTP Notice to Proceed
OSC On-Scene Coordinator
PCB Polychlorinated Biphenyl
PNA Prenegotiated Agreement
RCRA Resource Conservation and Recovery Act
RFP Request for Proposal
SUPERFUND CERCLA
TAT Technical Assistance Team
TEP Technical Evaluation Panel
TSCA Toxic Substances Control Act
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I UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
f WASHINGTON, D.C. 20460
SEP 2 3 !986
THE INSPECTOR GENERAL
SUBJECT: Audit Report No. E5E26-05-U1U1-61508
Report on Audit of EPA's Planning, Negotiating,
Awarding and Administering of Emergency Response
Cleanup Services Contracts
VJflW^cT>!arFKr ^
FROM:
^Inipector General
TO: Howard M. Messner
Assistant Administrator for Administration
and Resources Management (PM-208)
J. Winston Porter
Assistant Administrator for Solid Waste
and Emergency Response (WH-562A)
INTRODUCTION
We have completed an audit of the Planning, Negotiating, Awarding, and
Administering of the Emergency Response Cleanup Services (ERCS) Contracts.
The objective of this audit was to evaluate the efficiency, effectiveness,
and economy of the ERCS contracts. To evaluate the procurement process we:
0 evaluated how well the Agency has fulfilled its mission relating to the
present ERCS contracts.
0 obtained information which will assist the Agency in designing and
executing future contracts for similar services.
To accomplish our objectives, we reviewed the development of the ERCS concept
and the procedures used to negotiate the fixed rates in the ERCS contracts.
We also reviewed the general policies and procedures used by the prime con-
tractors to carry out their responsibilities under the contract. We were
particularly interested in examining the contractors' costs associated with
providing ERCS services.
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On a judgmental basis, we selected a limited number of services and items
from certain delivery orders for detailed analysis. In general, we selected
delivery orders which were among the largest for the respective contractor and
services and items which were used most frequently on the selected delivery
orders. Under the terms of the ERCS contracts, the contractors were required
to be able to provide extensive resources (both labor and equipment) anywhere
within large geographic areas within a matter of hours. Hhen it becomes
necessary for contractors to respond to critical emergencies within the
minimum timeframe allowed in the contract, it is reasonable to assume that
contractor costs could escalate considerably. Consequently, contractors may
have proposed rates which would correspond to the maximum level of emergency
response required by the contract. The delivery orders selected for review
were not critical emergencies and neither unusual nor extraordinary response
costs were identified.
The selection of large delivery orders with extensive use of services and
equipment over several weeks or months would demonstrate the best rate consi-
deration for EPA because the fixed rates for equipment were discounted for
extended periods of use. Delivery orders of short duration would utilize the
most expensive, least cost efficient hourly and daily equipment rental rates.
The services and items reviewed were billed to EPA using both the negotiated
fixed rates specified in the contracts and provisional rates which had not
been contractually negotiated at the time of our audit.
Using the applicable Federal cost principles, we estimated contractor and
subcontractor costs for these selected services and items and compared these
estimates to the rates billed to EPA. The difference between our estimated
costs for contractors and subcontractors and the rates paid by EPA is referred
to in this report as "markup." Markup includes (1) costs which are not allow-
able or allocable to Federal contracts according to the Federal cost principles
and (2) profit.
Our analysis of contractor and subcontractor costs was significantly hindered
by inadequate cost accounting systems and the lack of utilization records for
equipment. When there was insufficient data, we generally chose an option
which would increase estimated cost and decrease markup. We based our method-
ology for determining equipment utilization on the average annual usage hours
described in the U.S. Army Corps of Engineers' Construction Equipment Ownership
and Operating Expense Schedule, dated June 1985.
The delivery orders and individual services and items selected for detail
analysis are not a statistically valid sample of the universe of delivery
orders nor of the related services and items under the ERCS contracts. Thera-
fore, we have not projected our findings to all delivery orders. The markup
percentages in this report apply only to the labor categories and items of
equipment specifically reviewed. It is possible that a contractor could incur
a loss on some items depending upon circumstances. Although our findings
cannot be statistically projected to all delivery orders, we believa that our
sample was sufficient to indicate (1) problems with contract administration,
and (2) the potential effect of procurement weaknesses.
See the Scope and Methodology section of this report for further details.
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SUMMARY OF FINDINGS
Responding to the expressed urgency of program needs, EPA negotiated multi-
million dollar ERCS contracts in spite of numerous circumstances which resulted
in a poor negotiation environment. Although concerned about the level of
competition for the contracts, procurement officials concluded that competition
was sufficient and that prices were reasonable based on price analysis tech-
niques. Given this situation and identified problems on the previously used
notice to proceed contracts, EPA officials believed that they exercised the
apparently most viable alternative available at the time and executed the
negotiated ERCS contracts. However, because EPA had not developed adequate
information regarding the nature, scope, time frames, or resource requirements
which would actually be required under the ERCS cleanup contracts, Agency
officials were in no position to make the best procurement judgments and deci-
sions. Although we found no direct violations of statutes or regulations in
the award of the contracts, we believe that some decisions were made because
EPA emphasized program needs over sound procurement practices. Consequently,
the ERCS contracts may not be cost effective because, for most of the services
and items reviewed, there were substantial markups between the costs and the
fixed rates paid by EPA.
The cleaning up of hazardous substance releases generated a new industry which
is still evolving. At the time of the ERCS procurement, the EPA program office
responsible for hazardous waste cleanups wanted to award large contracts to
firms which could provide a full range of emergency cleanup services over
large geographical areas. In this situation, EPA encountered market conditions
where advance contract planning was critical, yet difficult. From the start,
EPA was faced with a limited market where few firms could do the work anvision-
ed under the contracts. In addition, EPA's specific knowledge was limited in
such critical areas as the level and type of resources required to accomplish
emergency cleanup actions, and the actual costs of such resources. Without
such information and a clear understanding of contractors' customary procedures
and practices, EPA was not in the best position to properly negotiate ERCS
contracts with a potential value of $185 million.
Procurement officials determined that adequate price competition existed for
the ERCS contracts. Accordingly, the contracting officer did not request
detailed cost information, but used price analysis techniques to evaluate
the reasonableness of the fixed rates. Based on this evaluation, procurement
officials were convinced that the proposed rates were reasonable for the
market and that EPA was achieving cost efficiencies through volume discounts.
Although our review confirmed that ERCS rates generally fell within the range
of rates being charged for other cleanup actions, competition and available
pricing data for this procurement were minimal. Therefore, we question whether
it was in EPA's best interest to award such significant contracts using price
analysis techniques as the sole basis for evaluating the reasonableness of the
proposed fixed rates.
Our efforts to assess the overall reasonableness of the ERCS contracts were
hindered by the lack of adequate competitive pricing data and cost records.
It can truly be said that neither we nor the contractors can determine with
any certainty what level of profits are made on ERCS contracts. Our initial
review of the four prime contractors disclosed that one contractor had incurred
losses on all four delivery orders selected for review. In our opinion, the
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losses resulted primarily from poor business decisions made by the contractor
and not from inherent aspects of the contract. In fact, our preliminary exami-
nation indicated that for the four delivery orders reviewed, the contractor
had received a 50 percent markup on labor, which is slightly higher than the
average labor markup found on the other delivery orders reviewed.
At the other three contractors, we performed the detailed analysis of records
necessary to compare estimated costs with charges being levied against EPA
under the ERCS fixed rates. For 9 of the 12 delivery orders reviewed, EPA paid
40 percent more for labor than our estimate of the contractors' total cost.
We were not able to make the same analysis on equipment because the specific
equipment providers were not always identifiable from the record. Consequently,
we determined the incremental hourly, daily, weekly, and monthly estimated
costs for specific types of contractor and subcontractor owned equipment.
Average markups on equipment varied considerably depending upon (1) whether
the equipment was owned by the contractor, the subcontractor or rented, and
(2) which rate, hourly, daily, weekly or monthly, applied. For contractor and
subcontractor owned equipment, the average markup for the different negotiated
fixed rates reviewed ranged from 321 percent on hourly rates to 143 percent
on monthly rates. Average markups for (1) specially modified, (2) rented,
(3) provisional rate, and (4) small equipment items were generally similar.
During our audit we found instances where labor was billed at more than double
the cost and equipment was billed at more .than 100 times its estimated cost.
Other inflated charges were found in per diem, transportation, disposal, and
materials.
Tbe mechanisms used to date by EPA and its contractors to pay for site cleanups
under the ERCS contracts have potentially resulted in an artificial pricing
structure. By artificial, we mean a pricing structure non-competitively bid
in which fixed rates were inflated far in excess of any amounts which could be
supported by actual cost. Unless appropriate corrective actions ara taken now,
these artificial prices threaten to become the base for all future prices.
The time has come for EPA to take control of this situation. An expanded
cleanup program means the pressure is on to expedite cleanup actions. At the
same time, however, EPA must do it efficiently and economically. EPA cannot do
so without getting a better understanding of the true costs of cleanups. With
an estimated level of emergency removal actions approaching 200 per year, the
importance of developing a competitive contractor environment where cleanups
are done at a reasonable price is paramount to the success of EPA efforts.
FINDING NO. 1 - EPA NEEDS TO IMPROVE COMPETITION FOR ERCS CONTRACTS
Various factors limited the level of competition for the ERCS contracts.
The limiting factors included restrictions and difficult contract specifica-
tions in the Request for Proposal (RFP). Although EPA had valid reasons for
the restrictions and difficult specifications, the composite result of these
factors and the infancy of the industry virtually eliminate effective compe-
tition. In addition, although procurement officials were disappointed at the
level of competition on the ERCS contracts, they concluded that competition
was sufficient to proceed with the negotiations. We believe that EPA
emphasized program goals and objectives at the expense of good procurement
practices. We are recommending specific actions that EPA take should take to
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increase competition on future emergency removal contracts by ranoving barriers
which limit competition and encouraging greater participation by firms in
Federally funded cleanup actions.
FINDING NO. 2 - EPA NEEDS TO OBTAIN REASONABLE CONTRACT RATES
EPA procurement officials operated in a poor negotiating environment during
the ERCS procurement because price competition, offeror independence, and
price analysis were all inadequate. To award the contract, these officials
relied primarily on their knowledge of prevailing market rates in determining
that proposed contract rates were reasonable. Had more complete information
or actual cost data been available, EPA would have been able to assess the
reasonableness of the proposed fixed rates by comparing them with anticipated
costs. We are recommending that EPA (1) not rely solely on price analysis
when there are not at least two independent, responsible offerors for a
specific contract at the Best and Final stage, (2) treat certain rates, guides
and proposals as inadequate bases for price analysis, (3) attempt to obtain
adequate cost data from offerors in any situation where price analysis is not
clearly adequate as a basis for negotiation, (4) require as a condition for
each ERCS contract that the contractor maintain adequate cost data for all
equipment, labor and materials, (5) use provisional fixed rates, if adequate
price analysis or cost data do not exist, and (6) pay particular attention to
the reasonableness of proposed rates for items which have received heavy usage
in past ERCS performance.
FINDING NO. 3 - USE OF FIXED RATES SHOULD BE LIMITED
EPA often paid unreasonable prices for subcontracted, rented or purchased
services under the ERCS contracts. This occurred because EPA used a fixed
rate structure to pay for the services regardless of where the services were
obtained or what costs were involved. Prime contractors established sub-
contract fixed rates as a percentage of the ERCS fixed rates. This method
allowed the prime contractors to retain a percentage of the ERCS fixed rates
and did not consider subcontractor cost and markup factors. In addition,
the fixed rate structure permitted contractors (primes and subs) to have exces-
sive markups on rented equipment and purchased materials. Procurement offi-
cials believed that a single fixed rate schedule for each contractor (prime or
sub) would simplify the negotiation and administration of the ERCS contracts.
We are recommending that EPA limit the use of fixed rates to the labor services
and equipment which are under prime contractor exclusive control or ownership.
The costs for labor, equipment and materials which are- subcontracted, rented,
borrowed or purchased for the ERCS contracts should be reimbursed on a cost-
plus-award-fee basis.
FINDING NO. 4 - EPA NEEDS TO BETTER PLAN TO OBTAIN AND UTILIZE DATA IN
NEGOTIATIONS
EPA's program and procurement staffs did not adequately plan and execute the
solicitation, review, and negotiation phases of the ERCS procurement. There-
fore, EPA did not ensure that necessary information was obtained and used to
appropriately develop ERCS' contractual provisions to safeguard the interests
of the Federal government. Specifically, effective use was not made of expe-
rience gathered under previous procurements in determining equipment categories
to be included in the ERCS contracts. Appropriate action was not taken to
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identify and correct problems identified in previous Notice to Proceed
contracts. Additionally, necessary information regarding company procedures
and practices was not always obtained and used in negotiating clear, concise
contractual provisions setting forth the nature and extent of services to be
provided for the established rates. As a result, contractor charges to the
ERCS contracts have been substantially inflated. We are recommending that
(1) EPA staff better plan and execute major procurements, (2) EPA include
provisions in upcoming ERCS contracts which prohibit payment for certain items,
and (3) upcoming ERCS contracts be clarified in certain areas.
FINDING NO. 5 - EPA NEFDS TO CHANGE ITS METHODS FOR PROCURING TRANSPORTATION
AND DISPOSAL SERVICES
Contractual provisions requiring ERCS prime contractors to competitively pro-
cure transportation and disposal services on a cost reimbursable basis have
not worked. Overall, there are not effective incentives for zone contractors
to properly plan and execute subcontracts for services at the lowest cost.
This has resulted in increasing EPA's transportation and disposal costs.
Additionally, the use of the prime contractor to oversee all services related
to a cleanup has served to preclude EPA from becoming aware of inadequate
work. We are recommending that EPA (1) award one master cost-plus-award-fee
contract for the procurenent of ERCS transportation services in all zones
and (2) determine how to obtain preferred rates from disposal facilities for
disposition of hazardous waste.
FINDING NO..6 - EPA SHOULD IMPROVE CONTRACT MONITORING
Contracting officers did not monitor the ERCS contracts on a regular basis.
As a result, the ERCS contractors did not (1) always comply with the terms of
the contract, (2) provide services in a cost effective manner, and (3) comply
with Federal laws. Specifically, the ERCS contractors (primes and subs)
did not comply with (1) the Minimum Personnel Qualifications required by the
contract, (2) the Purchasing and Subcontracting Agreement of the ERCS contracts,
and (3) Federal labor laws. Ue are recommending that EPA (1) improve contract
monitoring by actively reviewing contractor compliance with contract terms
on a routine basis and (2) establish a monitoring board which includes program
and procurement personnel from both headquarters and the regions.
Agency Comments
On August 29, 1986, EPA provided comments to our original draft audit report.
Subsequently, on September 4, Agency officials provided a revised version of
their earlier comments. This revised version considered changes to the draft
report which had been agreed upon during discussions between Agency officials
and the auditors. These agreed upon changes were made to provide for better
reporting balance and to clarify the intent and context of the draft report's
findings and conclusions.
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Due to the voluminous nature of EPA's response, we have not included the
complete response as an attachment to this report. Instead, we have para-
phrased EPA's comments after each main section of the report and provided our
evaluation thereon. Should any reader of this report wish to have a complete
copy of the EPA response and our detailed analysis of it, the documents would
be made available on request.
In general, the Agency did not agree with many of the draft report's findings
and some of the recommendations. In some instances, the Agency proposed alter-
native corrective actions. Agency officials did agree with the findings (part
of Finding No. 4 and Finding No. 6) regarding ambiguous contract provisions
and a lack of adequate contract and on-site management. In their comments,
they pointed out several programatic initiatives which have been taken to
improve management of the ERCS contracts. The Agency also highlighted other
areas in the report where it considered that there was agreement, stating:
In your report you have acknowledged:
0 the "expressed urgency of program needs" that impelled us to enter
into large-dollar ERCS contracts in spite of a "poor negotiation"
environment (we executed those contracts and achieved the emergency
response cleanup actions.);
0 that we exercised the "apparently most viable alternative available
at the time" in executing the ERCS contracts;
0 that you "found no direct violations of statutes or regulations in
the award of the contracts"; and that
0 your "review confirmed that ERCS rates generally fell within the
range of rates being charged for other cleanup actions."
Most importantly, the Agency believed that there was basic agreement on future
contract strategy for the removal program:
We recognize the need to increase competition and move away from
total reliance on four large contracts that were designed primarily
for response to classical emergencies. Our program and procurement
offices are now far along in implementing a strategy that will
result in many smaller and less technically demanding contracts,
including some on a site-specific basis. We believe this approach
more effectively addresses the nature of the removal program as it
has evolved over the past three years.
The Agency, however, had problems with many of the examples used as the basis
for the audit report's conclusions. It stated that many of the examples in
the report were misleading or in error. Of particular concern was the method-
ology used to develop the examples and conclusions. The Agency stated that
the report used a small and select sample of sites and equipment to create the
overwhelming impression that contractors were making enormous profits.
According to its comments:
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Contractor profitability on hazardous waste cleanup projects costing
millions of dollars cannot be determined simply by extrapolating
from a few specific pieces of equipment (for which accurate data
does not exist). The fact is that not only do we not know contractors'
profits, we don't know all of their costs and expenses or their
equipment utilization rates. Without this information, no meaning-
ful, supportable assessment of overall profitability is possible.
The Agency also objected to the use of the U.S. Army Corps of Engineers'
Construction Equipment Ownership and Operating Expense Schedule, arguing that
the schedule has no applicability to composite rates and that the schedule's
rates were based on full utilization, an average of 1,500 hours per year. The
Agency concluded that "when one considers the thousands of pieces of equipment
among all the equipment sources accessed under the ERCS contracts, it is clear
that much equipment is sitting idle much of the time." Therefore, it was
misleading to base calculations of markup on the premise that all equipment
was being utilized full time.
Agency officials also believed that the negotiations and award of the ERCS
contracts were well founded, and questioned what alternatives would have
reflected more sound judgments and decisions. They argued that much of the
information which the audit report cited as not having been available, could
never be available for procurements like ERCS. Accordingly, procurement
officials used price analysis, a technique which is recognized in Federal
regulations as acceptable and permissable. The Agency believed that rates
negotiated into the ERCS contracts were, as a whole, equal to or better than
rates charged in the industry. Furthermore, they noted that the audit report
acknowledged that the ERCS rates were representative of going rates in the
industry and that the level of profit on the ERCS contracts could not be
determined with any certainty.
In summary, EPA officials stated that the audit report failed to recognize
the impact of the emergency nature of the removal program on procurement and
on-site management decisions. They stated:
A fair and objective assessment of those decisions cannot be made
without recognizing the procurement and program officials are
unavoidably constrained by urgency and overriding concern for
protecting human health and the environment. . . .
Finally, it must be recognized that in framing the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
(CERCLA) Congress delineated its requirements for cost-effectiveness.
CERCLA section 104(c)(4) clearly requires that remedial actions
achieve cost-effectiveness, balancing the need for protection of
public health and the environment with the availability of fund
moneys. No such requirement exists in CERCLA section 104(c)(l) in
defining tn~e scope of removal actions. In fact, Congress provided
in CERCLA section 104(h) that should it be necessary, emergency
procurement powers could be authorized. This provision points out
the unique view held by Congress of the-scope of Superfund; Congress
recognized that emergency response cannot always be achieved in a
cost-effective manner. This is not to say that cost is not a factor
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in the removal program. Only that protection of public health and
the environment is the paramount consideration.
Additional Agency comments are included after the specific sections to which
they pertain.
Auditor Evaluation
We are pleased with the various corrective actions the Agency has taken or
plans to take on the award and management of the new ERCS procurements.
However, we are concerned that the Agency's proposed actions do not go far
enough and EPA might obtain similar results as those noted herein on the new
procurements. We are convinced that a study of the problems identified in
this report and the implementation of our recommendations will result in
better-, cost effective ERCS contracts in the future.
The Agency's listing of points of agreement in their comments could be mis-
leading because they are taken out of context. The quoted language includes
phrases which we inserted into the revised draft audit report to provide better
balance. We do not agree that the negotiations were adequate or that the
provisions of the contracts as executed were appropriate. We ^p_ agree that
EPA needed the contracts to provide emergency response services.
We did not reach any conclusions on profits made by contractors. We do not
believe our sample was sinal 1 , as it included 19 percent of total obligations
at the time of audit. Furthermore, the rates audited applied to all delivery
orders, not just those sampled. The report did note that, in many instances,
•nuch of the total markup accrued to subcontractors rather than prime
contractors.
We agree that we do not know contractors' profits, all of their costs and
expenses, or their equipment utilization rates. Based on the best information
available, we found that high markups were common. We wish to point out that
any extraordinary cost incurred by a contractor in an emergency situation
would be recorded in its accounting records, and therefore, included in our
computations. Given that EPA officials lacked and continue to lack profit,
cost and utilization information, we question their ability to determine the
reasonableness of the rates. We believe we adequately demonstrated the
deficiencies in the ERCS procurement process.
We reviewed the Agency's information regarding errors of "fact, context, rele-
vance, and method of approach." Where necessary, we have modified our report.
However, the overwhelming majority of the Agency's criticisms were erroneous
or without supporting evidence.
We computed the average estimated cost for selected pieces of equipment in a
given year, regardless of the location or circumstances under which the equip-
ment was provided. This generic method of analysis was necessary because
neither contractors nor EPA maintain records which identified the specific
equipment item or the source of the equipment (i.e., contractor owned, subcon-
tractor owned, rented, or leased) used on specific cleanups.
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Although we did not use the U.S. Army Corps of Engineers' rate schedule, we
did use the Corps' estimated utilization factors because the companies had no
utilization records and we had no better basis upon which to rely. Our cost
estimates were independently developed. These utilization rates are not based
on full utilization, which would be 2,080 hours based upon 40 hours a week for
52 weeks. We know of no documentation of unusually long idle periods for ERCS
equipment.
Our audit demonstrates that EPA did not adequately use available information
in negotiating and awarding the ERCS contract, as detailed in Finding No. 4.
The "limited historical experience" included hundreds of removals performed
under Notice to Proceed contracts. We found that a number of equipment items
showing high usage in prior removals were not included in the fixed price list
for the ERCS procurements. We found that a number of problems in removal
contracting that were identified in audit reports which were issued before the
award of the ERCS contracts were not resolved during negotiations. We found
no evidence that EPA analyzed response times required for prior removals. We
believe much better contracts would have resulted from adequate analysis and
use of available information.
The audit demonstrated that, in many instances, prime contractors obtained
emergency response services from subcontractors at lower rates than the fixed
rates in the contract. Although we did not determine profit levels, we did
find that enormous markups over cost were common. We believe that EPA needs
to recognize that it is the largest client for this industry, and therefore,
rates accepted by EPA set an example for other clients. EPA's market position
in this field makes it incumbent upon its negotiators to make special efforts
to assure that EPA is not paying unreasonable markups, and not'simply be
satisfied that the rates are comparable to those paid by others.
We believe that cost data were (and are) needed because (1) emergency removal
of hazardous substances was an infant industry, (2) EPA was the major industry
client, and (3) there was a low level of competition for the contracts. Given
the unavailability of cost data, EPA should not have negotiated fixed rates for
three years at the time of award. While fixed rates were undoubtedly necessary
for the first year of the contract, options for additional years should not
have been exercised unless companies agreed to maintain and make available to
EPA the cost data necessary to demonstrate the reasonableness or rates established
in the ERCS contracts. Without such action, EPA's efforts to obtain cost data
have been largely unsuccessful.
Our report acknowledged that the removal program must respond to emergencies.
It in no way minimized the need to protect human health and the environment.
Qur recommendations were carefully framed to allow for responses that fully
meet the time and technical requirements identified by the program in fulfill-
ing its statutory mandate. Our report clearly recognizes the special procure-
ment needs of the removal program. We do not challenge the need for ERCS
contracts. However, we found many areas which needed improvement in order to
meet the needs of the program at the lowest feasible cost.
We also recognize that CERCLA does not require the removal program to balance
"the need for protection of public health and welfare and the environment at
the facility under consideration, and the availability of amounts from the
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Fund" (CERCLA, section 104(c)(4}). Our audit did not address the decisions of
which responses were appropriate, once it was determined that a removal action
was required. The CERCLA cost limitation relevant to the subject matter in
our report is in Section lll(a): "The President shall not pay for an admini-
strative costs or expenses out of the Fund unless such costs are reasonably
necessary for and incidental to the implementation of this title." We believe
the Congress intended for EPA to complete necessary removals at the lowest
feasible costs given the time and technical constraints associated with the
removals. Section 104(h) of CERCLA, cited in the response, specifically states
that emergency procurement powers are "subject to the provisions of Section
111 of this Act." If such powers are deemed necessary, it provides tor regula-
tions to be promulgated governing such procurements. EPA has not promulgated
such regulations.
In conclusion, we wish to restate one of our primary reasons for performing
this audit, which was to "obtain information which will assist the Agency in
designing and executing future contracts for similar services." l^'e believe
that this report contains valuable information for use on the new EKCS procure-
ments. It is clear that many Agency assumptions on contractor practices and
sole reliance on price analysis techniques did not result in the most cost
effective contracts. In light of our findings, it is essential for EPA to
use cost data to negotiate fixed rates in the new procurements. If such
information is not currently available and it does not appear to oe, the Agency
should move as quickly as possible to use provisional rates until cost data can
be obtained. Negotiation of new fixed rates based on price analysis or the
rates established in the current contracts should be avoided for the long run
and prompt action should be taken to implement the recommendations in our report,
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ACTION REQUIRED
In accordance with EPA Order 2750, the action official is required to provide
this office with a copy of its response within 90 days of the issuance of the
audit report. Since this report daals primarily with procurement matters, we
believe the Assistant Administrator for Administration and Resource Management
should take the lead in coordinating the Agency response to this report.
We have no objection to the release of this report. Should you have any
comments regarding this report, please contact me or Mr. Ernest Bradley,
Assistant Inspector General for Audit.
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BACKGROUND
Removal Actions
Section 104 of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA commonly referred to as Superfund) authorized
EPA to take action whenever there was a release or threat of release of
hazardous substances which might present an imminent and substantial danger
to public health or welfare.
Removal actions represent short-term responses designed to alleviate imminent
threats while remedial actions represent responses of longer duration leading
to permanent restoration of the site.
An immediate removal action is undertaken only if a response is needed within
hours or days to prevent or mitigate significant harm to human health or the
environment, and such action may not otherwise be provided in a timely manner
by the responsible party. Immediate removals are limited by Section 104(c)(l)
of CERCLA to six months in duration or one million dollars.
EPA uses contractors to undertake removal actions. Contractors are required to
provide personnel, materials, and equipment specified for each cleanup action.
ERCS Contracts Background
For the first few years after Superfund authorization, EPA fulfilled its clean-
up responsibility by utilizing interim emergency procurement procedures which
permitted contracting for cleanup services under Notice to Proceed contracts.
These types of contracts did not usually specify labor, equipment or other
rates when initiated. Instead, these contracts identified the tasks to be
accomplished and authorized a specific party to commence work. It was intended
that rates and other terms would be negotiated as soon as possible. In prac-
tice, cleanup operations were often completed or well underway before negotia-
tions were finalized.
The ERCS contracts provided an alternative approach for obtaining cleanup
services. Although Notice to Proceed contracts may still be used in special
circumstances (e.g., when a response is needed in less time than provided in
an ERCS contract), nearly all initial cleanup actions which involve EPA are
now provided through ERCS contracts.
On December 29, 1981, a solicitation was issued for a National Services
Technical Assistance Team contract that included cleanup services and technical
assistance services. After the solicitation was issued, EPA determined that
the combined contract might create a conflict of interest situation. EPA was
concerned that the objectivity of the contractor's technical assistance would
be jeopardized if the same company conducted the cleanup. In March 1982, the
solicitation was cancelled.
EPA decided to separate the contracts. Since cleanup services could be obtain-
ed .under the existing mechanism for Notice to Proceed contracts, EPA proceeded
to obtain the technical advisory contract first. After the contract was in
place, EPA proceeded to obtain contracts for cleanup services.
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General Information About ERCS Contracts
On March 17, 1983, the ERCS contracting officer made the following
determination concerning the method of procurement:
the proposed procurement is for services for which it is imprac-
ticable to secure competition by means of formal advertising. . . .
Formal advertising is not feasible or practical for this procurement
because the nature of the requi remen-t makes it impossible to
draft for an invitation for bids adequate specifications or any
other adequately detailed descriptiqn of t'ne required services.
On April 19, 1983, an RFP was announced i-n the Commerce Business Daily.
Although the RFP was ultimately sent to 235 companies, only 7 submitted propo-
sals. One proposal was subsequently withdrawn. Between November 1983 and
January 1984, four ERCS contracts were awarded from the six offers to provide
cleanup services for four separate geographic zones in the country,, These
four contracts ranged from $26 to $66 million and could amount to a total of
$185.9 million over the possible three year contract term.
Each ERCS zone contract was awarded for a one year period with the option to
extend the contract for two separate one year periods. Each contract was a
combination of contract types and included fixed rates and cost reimbursable
items. In addition, each contract included a performance incentive feature
which allowed the prime contractor to receive a monetary reward for "perform-
ance which is determined to be exemplary" on specific delivery orders. EPA is
in the process of awarding new ERCS zone contracts for a possible four year
period beginning in December 1986.
The ERCS contracts initiated a "management network system" for analyzing and
responding to cleanup assignments. Actual cleanup services were authorized
only by individual delivery orders on a case-by-case basis. Each delivery
order was placed against an ERCS contract only after actual needs became known.
This mechanism allowed for quantities of specified labor and equipment to be
ordered at fixed rates which were designated in the ERCS contracts. More
detailed contract information is provided below.
Management Effort (Cost-Pius°Fixed-Fee)
Each ERCS contract required that various managerial services be performed.
This effort included all managerial, financial, administrative, and
clerical functions which were necessary to initiate, support and track
specific cleanup activities. Under the ERCS contracts, this management
effort was reimbursed on a cost-plus-fixed-fee basis. Contracted amounts
consisted of cost estimates for direct labor, miscellaneous other costs,
and applicable provisional rates for fringe benefits, overhead, and
general and administrative (3&A) expenses, plus fixed fees.
Cleanup Effort (Fixed Rate, Indefinite Quantity)
Each ERCS contract contained negotiated fixed rates for similar categories
of labor and equipment, various types of materials, and miscellaneous
other items. Contractors were to include overhead and G&A costs and
profit in each proposed labor and equipment rate. Each ERCS contract
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provided for a minimum dollar order amount. The contract fixed rates
for labor, equipment and material would apply regardless of the quantity
that EPA ordered.
Labor And Equipment CostsL With Fixed Rate Provisions
Actual cleanup work could be performed under the ERCS contracts by
(1) the prime contractor, (2) permanent contract team subcontractors
(subcontractors making prior arrangements to assist the prime contractor
in cleanup operations), or (3) subcontractors who were not part of the
permanent team. The negotiated fixed rates apply to all specified labor
and equipment services regardless of who provides the services.
Labor And Equipment Costs Without Fixed Rate Provisions
Labor and equipment categories without fixed rates are reimbursed at
provisional rates. Originally, these rates were to be negotiated within
90 days of each delivery order completion. To date, however, these rates
have not been negotiated and remain provisional.
Other Major Reimbursement Provisions
The ERCS contracts stated that costs for transportation and disposal of
hazardous wastes must be subcontracted by the prime contractor. The
contracts also stated that most material costs, including those of the
prime contractor, must be treated as reimbursable costs. In addition,
the prime contractor was allowed to bill a handling charge on all
(1) material costs, (2) costs for waste transportation and disposal, and
(3) costs of any subcontracted services without fixed rates.
Contract Responsibility
The Emergency Response Division, under the Assistant Administrator for
Solid Waste and Emergency Response, was the program office which provided
detailed specifications on the kind and quantities of goods and services
which were needed in the ERCS contracts. Program officials from the
Emergency Response Division were assigned to provide technical direction
and monitor the ERCS contractors' work. The Procurement and Contracts
Management Division, under the Assistant Administrator for Administration
and Resources Management, was responsible for selecting the most appro-
priate type of contract, negotiating the contract, administrating all
contract activities, and ensuring that contracting was done as authorized
by law and regulation.
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SCOPE AND METHODOLOGY
The audit of the ERGS contracts was performed under the authority provided by
the Inspector General Act of 1978 (Public Law 95-452), as amended. We perform-
ed the audit in accordance with the Standards for Audit of Governmental Organi-
zations, Programs, Activities, and Functions, issued by the Comptroller General.
As required, we evaluated the significant administrative controls pertaining
to the planning, negotiating, awarding, and administering of the ERGS contracts.
The weaknesses which were noted are included in the Summary of Findings section
and more fully discussed in the Findings and Recommendations section of this
report. Nothing else came to our attention as a result of the specified
procedures that would lead us to believe that controls which were not specifi-
cally tested were not in compliance with applicable laws and regulations. Our
audit began in February 1985 and the field work was completed in April 1986.
Reason For Audit
Our audits of Notice to Proceed contracts had questioned and set aside substan-
tial costs because the billing rates used by the contractors were not based on
actual costs and there was insufficient documentation on which to evaluate
their reasonableness. We were concerned that the billing rates in the Notice
to Proceed contracts may have been used for comparison purposes during the
negotiation of the fixed rates for the ERGS contracts. We were also concerned
because many contractors based their rates on the prevailing industry rates
and there was little evidence of competitive pricing. There was also the
possibility that the advent of GERCLA and the infusion of large amounts of
Federal funds had effectively established the going price for cleanup services.
Scope Of Work Performed
In February 1985, we initiated a preliminary survey of the negotiation and
award of the four ERGS zone contracts. Our survey included a review of the
development of the ERGS concept and the special circumstances which existed
at the time that the ERGS contracts were awarded. The survey focused on the
procedures used to negotiate the fixed rates for the cleanup part of the
contract.
On September 26, 1985, we issued a draft survey report. The survey identified
weaknesses in the procedures used to negotiate and award the ERGS contracts.
We concluded that there was inadequate price competition in at least two zones
and price analysis should not have been used as the sole basis for evaluating
the reasonableness of the fixed rates. There were some reservations for the
other two zones, but the competitive circumstances were different. While the
survey had noted weaknesses in the procurement process, we had not determined
the reasonableness of the negotiated fixed rates nor evaluated the overall
efficiency, economy, and effectiveness of the ERGS contractual provisions.
To address these issues, we reviewed the general policies and procedures used
by the four prime contractors to carry out their responsibilities under the
ERGS contracts. We were particularly interested in examining the contractors'
costs associated with providing ERGS contract services. We studied the require-
ments of the four contracts and requested that procurement officials clarify
the meaning and intent of the contracts in areas which were vague or
contradictory.
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Originally, we judgmentally selected four delivery orders to review for each
of the four zones. These 16 delivery orders were selected on the basis of
dollar value and diversity. In order to obtain a good cross section of
subcontractors, we selected as many delivery orders as we could that involved
different subcontractors. Each of the delivery orders exceeded $250,000, and
at the time of selection, was among the largest dollar value delivery orders
completed in each zone. The largest delivery orders were most likely to show
the maximum cost efficiency obtained by EPA because long tarn equipment rental
rates were discounted. Delivery orders of short duration would utilize the
most expensive, least cost efficient hourly and daily equipment rental rates.
Our initial review at one ERGS contractor disclosed that the contractor had
not recovered all its expenses on the four delivery orders selected for review.
These losses occurred primarily because the contractor was unable to recover
its total indirect expenses on subcontracts. Some of the losses were the
result of subcontracts with permanent team members. The contractor agreed to
subcontract rates which resulted in losses. We suspect that the contractor's
negotiators did not understand how indirect expenses were distributed and
recovered. Because of these overall losses, we did not perform the same level
of analysis on the contractor's 4 delivery orders as we did on the remaining
12 delivery orders. The examples and conclusions regarding the reasonableness
of the fixed rates contained in this report are based on the results of
detailed analysis of the 12 delivery orders at the other three contractors.
From our final sample of 12 delivery orders, we judgmentally selected individ-
ual services and items in order to compare the estimated costs with the
charges to EPA under the ERCS contracts. In our selection process, we empha-
sized labor services and equipment items which either were frequently used or
had a high dollar impact on our sample delivery orders. We also included some
less expensive and specially modified equipment items. We included both
services and itsms which were billed at negotiated fixed rates specified in
the contracts and those which were billed at provisional rates.
We aTso reviewed a sample of subcontractors for the three contractors where
detailed analysis was performed. The sample included (1) four permanent team
subcontractors, (2) two transportation firms, (3) two waste disposal firms,
and (4) three security firms. The sample also included one firm that provided
both transportation and disposal services, and one firm that provided top soil.
We reviewed contractor and permanent team subcontractor charges and related
costs on the delivery orders for labor, equipment, per diem, and materials. We
also reviewed contractor and subcontractor procurement practices, pay policies
and personnel qualifications to determine if they were in compliance with the
ERCS contracts.
At the transportation and waste disposal firms, we determined: (1) whether
they were properly licensed, (2) if they had been paid for services claimed
under the delivery orders, and (3) whether the manifests reconciled with the
billings. In addition, we reviewed their general pricing policies.
For security firms, we determined if the firms actually provided the guards or
subcontracted the work to another firm. All'of the firms provided the guards
themselves. We reviewed invoices to determine the total amounts and the
billing rates for the services.
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In order to obtain information on the development and award of the ERGS
contracts, we interviewed the responsible officials in the Procurement and
Contract Management Division and the Emergency Response Division. We also
reviewed (1) EPA and contractor (negotiation and contract) files and (2)
contractor cost proposals.
In addition, we reviewed the audit reports on the Notice to Proceed contracts
issued by our office between September 1982 and December 1983. He identified
reported problems with the previous contracting method and reviewed contract
files to determine if those problems had been addressed and corrected in the
ERCS procurement.
According to the July 1985 Status Report on emergency response delivery orders,
EPA had obligated slightly more than $59 million on 290 delivery orders. The
total value of the 12 delivery orders in our sample was about $11.3 million.
At the time, our sample represented 4 percent of the issued delivery orders
and about 19 percent of the total obligated dollar amount.
The 12 delivery orders that we selected are not a statistically valid sample
of EPA's universe of delivery orders under the ERCS contracts, and do not
allow a projection of our findings to the total ERCS procurement. Rather,
our review was designed to evaluate specific issues raised in the survey report
and an August 2, 1985 letter from the Assistant Inspector General for Audit
to the Director of the Procurement and Contract Management Division. While
our findings cannot be statistically projected to all ERCS delivery orders, we
believe that our sample was sufficient to indicate (1) problems with contract
administration, and (2) the effect of procurement weaknesses identified
during the preliminary survey.
Method Of Analysis
The contractors and subcontractors did not have a cost breakdown of their
rates. The companies generally did not have adequate cost accounting systems
that identify cost data to support their ERCS fixed rates. Consequently, it
was necessary for us to construct the contractors' estimated costs using
financial records and other data provided by the contractors. All known
associated direct and indirect costs were included.
Whenever possible, we followed the Federal Contract Cost Principles and
Procedures (41 CFR [Code of Federal Regulations] 1-15) which were in effect
when the contracts started. In some instances, we were not able to follow
the cost principles because of the inadequacies of the contractors' cost
accounting systems. In those instances which are described below, we usually
used estimated data provided by the contractors.
1. Indirect Costs
Each of the three prime contractors that we reviewed proposed indirect cost
rates for use on their ERCS contracts. We completed a separate audit on
the indirect costs proposed by one contractor. We used the rates which
were accepted in that audit report when calculating the contractor's costs.
For the other two contractors, we were not able to express an opinion on
their proposed indirect costs because of deficiencies in their accounting
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systems and the methods used by them to develop their rates. For the
purpose of this audit, the contractors' proposed rates were used when
computing estimated costs. Our preliminary indications were that the
proposed rates were overstated and substantially so in the case of one
contractor. Therefore, the use of the contractors' proposed rates was
the most conservative approach. We also reviewed the indirect costs for
two major subcontractors and computed estimated rates so that we could
include an indirect cost factor in our computation of their estimated
costs.
2. Labor
To compute labor costs, we identified the employees of the contractors
and selected subcontractors who worked on the delivery orders that we
reviewed. These employees were classified by the labor categories in the
contracts and we computed an average pay rate for each category for each
company. We added the applicable indirect costs to the pay rates and we
compared the resulting computed hourly labor rates to contract rates. In
addition, we compared the contractors' total labor costs for 9 of the 12
delivery orders against the total labor charges billed to EPA.
3. Equipment
Owned Equipment - The contractors did not know their actual costs asso-
ciated with owning and operating their equipment. In order to estimate
aquipment costs for the three reviewed contractors, we used their financial
records. We concentrated on frequently used equipment items for the
selected delivery orders. In order to compare the contractors' costs
to their ERCS rates, we computed estimated costs for a total of 76 items.
In addition, we computed the costs for leased and small equipment itarns,
and contractor-owned equipment that had been specially modified by the
contractor.
The estimated rates for contractor-owned equipment were computed by using
applicable cost factors including depreciation, repair and maintenance,
insurance, personal property taxes, vehicle licenses and highway use taxes.
Depreciation was taken directly from the contractors' and subcontractors'
depreciation schedules.
When a contractor owned multiples of one item, the depreciation of all the
items was averaged. Repair and maintenance expenses were not usually
identified with individual equipment items in contractor records. We
included this expense by applying a portion of repair and maintenance in
the same ratio as accumulated depreciation. Our estimation method assured
that older items of equipment were assigned a larger portion of repairs
and maintenance.
In some cases, actual costs were used for insurance and taxes. If actual
costs were not available, insurance and taxes were prorated based on either
original purchase price, unit replacement value or accumulated depreciation.
The use of accumulated depreciation as a method for allocating insurance
and taxes resulted in a higher cost figure than would normally be realized.
This method did not have a material effect on the estimated costs. If
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anything, our estimated costs might be slightly overstated in a few
instances. Other cost elements were based on actual costs.
After annual cost estimates were computed, we estimated hourly, daily,
weekly and monthly costs. The contractors and subcontractors did not
maintain equipment utilization records that could be used to compute the
hourly cost for the equipment. As an alternative, we used the annual
usage hours in the U.S. Army Corps of Engineers' Construction Equipment^
Ownership and Operating Expense Schedule, dated June 1985. The anrnJeTl
usage factor ranged from 1,500 to 1,550 hours depending on the average
construction season in each of the three zones.
According to the Corps of Engineers' schedule, the average hours of use
per year were determined by reducing the maximum available hours (40
hours per week, 52 weeks per year) to allow for lost time dua to weather,
holidays, equipment maintenance and repairs, mobilization and demobiliza-
tion, and miscellaneous downtime. The contractors' estimated annual costs
were divided by the appropriate number of annual average operating hours
in the Corps of Engineers' schedule to arrive at the estimated hourly cost
for each type of equipment.
The daily, weekly and monthly estimated costs were based on the estimated
hourly cost: 8 hours equaled a day; 5 days equaled a week; 4.33 weeks
equaled a month. Our method is consistent with the Corps of Engineers'
method for determining the annual average hours of use and includes the
same lost time factors in our daily, weekly and monthly costs.
Leased Equipment - To compute the cost for leased equipment, we used the
actual lease cost and added a factor for G&A expenses. The computed hourly
costs were compared to the ERCS hourly rate. In some cases, the total cost
of the leased equipment was compared to the total charge for the equipment
on a single delivery order.
4. Per Diem - The actual incurred subsistence costs were compared to the
amounts charged to EPA.
Agency Comments
Agency officials objected to the methodology used to compute the estimated
costs on which the conclusions were based. The Agency stated that the report
took exception to the competitive basis for the awards and the price analysis
performed on the fixed rate items. Therefore, the report sought to prove that
the rates being charged under the contracts were unreasonable based on what the
auditors had computed to be "estimated costs." Agency officials also stated
that the report did not address the issue of whether EPA was paying more or
less than other clients of the same contractors or whether the rates in the
contract were higher or lower than those of other firms in the cleanup industry,
Selection Of Delivery Orders
The Agency stated that the findings were based on a partial review of 12
of 461 delivery orders and did not include any delivery orders from one
of the zones. Examples were used repeatedly from the same contractors
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or subcontractors and sometimes data were taken from fewer than the 12
delivery orders specifically reviewed.
Calculation Of Markup
The Agency stated that the report did not consistently use the term
"markup". It indicated that the "markup" computed on subcontractor items
was misleading and should have been computed as two separate markups at
the subcontractor and prime contractor levels. Markup on small equipment
items was calculated as the difference between acquisition cost and the
total billed amount for a delivery order, which did not account for
indirect costs, subcontractor profit or estimated useful life.
The Agency stated that the calculation of markup was also deficient for
these reasons:
1. The estimated labor costs were computed using a simple average
rather than weighted average.
2. All indirect costs applicable to equipment were not included, such
as indirect labor, utilities, building depreciation, and costs
associated with storage and other equipment handling functions
that were part of the contractors' overhead rates.
3. The "estimated cost" for equipment included depreciation when the
item was not fully depreciated. If the item was fully depreciated
a usage charge was not calculated.
In addition, the depreciation method used by the contractor for tax
purposes was used in the "estimated cost" calculation. If the
accelerated method was used, it would distort the costs.
Comparability Of Findings To Contract Situation
The selection of data was very limited and is not comparable to contract
situations. For example:
1. The "estimated cost" considers what the cost is in a specific
instance (ownership cost, rental cost, subcontractor cost) whereas
the ERCS rates are composite rates which are applicable in all
situations.
2. The annual equipment utilization hours based on the Corps' schedule
were not applicable at small scale cleanup operations.
Report P resentati on
The procurement officials also questioned our reliance on contractor
developed workpapers without verifying the data. In addition, rental
items were often rented for periods in excess of their actual use on EPA
sites and may not have been used sufficiently to recover all rental costs.
If contractors charge EPA direct for costs that they normally charge as
indirect to other clients, the preaward audits should have identified
this.
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Auditor Evaluation
The audit report does not "seek to prove" that the rates negotiated under the
ERCS contracts were unreasonable. The audit report presents what was found
during our review. One primary purpose of the audit was to assist the Agency
in designing and executing future contracts for similar services. The purpose
was not to determine whether EPA is paying market rates. Market rates in an
emerging industry do not necessarily ensure reasonableness in relation to the
cost of services. Additionally, since EPA is a major consumer of cleanup
services, we believe that it should be able to obtain better than market rates
and establish its role as a leader for promoting economy and efficiency in
cleaning up hazardous substances.
Selection Of Delivery Orders
We selected 12 delivery orders, which at the time of the audit, were among
the largest in dollar volume. As stated in the report, EPA had obligated
slightly more than $59 million on 290 delivery orders when we made our
selection. The total value of the 12 delivery orders in our sample was
about $11.3 million. At the time, our sample represented 4 percent of
the total number of delivery orders issued and about 19 percent of the
total dollar amount obligated.
The report used examples from various contractors and subcontractors in
three of the four zones. The reason for excluding the contractor for the
fourth zone was clearly explained in the audit report. We also included
three transportation companies and three disposal companies in our
review. Two of the transportation and two of the disposal companies wera
discussed in the report. He have no reason to believe that the companies
selected were not representative of other companies which were not speci-
fically reviewed.
Calculation Of Markup
The term "markup" is used consistently to mean the difference between
estimated costs and the billed rate. In some places, we have combined
both subcontractor and prime contractor costs to demonstrate an overall
effect. All applicable indirect costs were included in our estimated
costs. We included a schedule showing the "layering" effect of subcon-
tractor markup. We do not show a markup for the small equipment items.
Instead, we simply showed the difference between purchase prices and
billed amounts on selected delivery orders. While the differences shown
relate to only one delivery order, these items might well be used on more
than one delivery order producing much greater differences between
purchase prices and billed amounts.
Estimated labor costs were computed using a weighted average labor rate.
When the total estimated labor costs per delivery order were computed,
employee actual wage rates and hours were used. When the estimated
average labor cost for a specific labor category was computed, the same
wage and hour information was used.
All known overhead costs applicable to equipment were included in our
estimated cost computations. We do not believe that using the contractors'
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actual depreciation methods distorted the costs. If the accelerated
depreciation method was used on recently purchased equipment, a large
portion of the acquisition cost would be expensed in the early years,
thereby increasing our estimated equipment costs. Conversely, if an item
was almost completely depreciated, the contractor would have already
recovered, through customer billings and tax write-offs, most of the
acquisition cost. Therefore, the contractor had no additional cost to
recover. Using the contractors' actual depreciation methods neither
overstates nor understates equipment costs. The only acceptable methods
for calculating depreciation costs are those allowed by generally accepted
accounting principles and the U.S. Internal Revenue Service.
If an item was fully depreciated, a usage allowance might be appropriate
depending upon circumstances discussed in Federal regulations. However,
a usage allowance is not a cost to the contractor, and therefore, is not
appropriate for inclusion in our estimated costs. It was not the purpose
of the audit to determine a reasonable rate for the use of equipment.
Comparability Of Findings To Contract Situation
We reviewed equipment costs from various sources to show the effect of the
composita rates in a variety of situations.
The ERCS contractors did not maintain equipment utilization logs. In
lieu of the actual data, we used usage factors of 1500 to 1550 hours
which were developed by the U.S. Corps of Engineers. We recognize that
some equipment may be used less, and some more. In the absence of actual
utilization records, we believe that the Corps' usage factors are the
best available basis for estimating utilization.
Report Presentation
We used the best available information the contractors had available.
These included audited financial records and interviews with contractor
officials.
If a contractor rents a piece of equipment for a longer period than it is
needed at an ERCS cleanup site, EPA should not pay for the additional
costs. EPA has no obligation to participate in costs resulting from poor
business decisions by the contractor.
A preaward audit is designed primarily to render an opinion on proposed
costs and review the overall adequacy of the contractor's accounting
system. A preaward audit would not normally show how the contractor
would allocate costs during the project period.
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FINDINGS AND RECOMMENDATIONS
Because the Issue of reasonableness of costs paid by EPA on Superfund removals
has an overriding Impact on our findings, we are prefacing our findings with
our observations on the matter.
EXCESSIVE COSTS PAID FOR SUPERFUND REMOVALS
Although we have no reason to believe that rates established 1n EPA contracts
exceeded those normally charged by cleanup contractors, we believe EPA paid
excessive amounts for Superfund removals under the ERCS contracts. In our
opinion, the rates discussed below are the high side of what should be expected
even for emergency type cleanups requiring as short as two hour response time.
For extended cleanup activities which do not require such response times, like
the delivery orders we reviewed, the rates are clearly unreasonable when
compared to actual costs being incurred. In analyzing contractor records, we
estimated that contractors on the average were reimbursed for their labor
costs plus a 40 percent markup. Additional markup also was paid for overtime
and holiday hours.
TOTAL CONTRACTOR LABOR CHARGES
(In Thousands Of Dollars)
800
700-
600-
500-
400
300
200
100
0
COST
BILLED
FOR 3 ERCS ZONES
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Similarly, equipment markups were excessive. Contractor/subcontractor records
showed an average markup (on fixed contract rates) ranging from 321 percent on
hourly rates to 143 percent on monthly rates. High markups also occurred for
provisional rate Items, specially modified equipment, rented equipment, small
equipment Items, and materials. In addition, EPA paid excessive costs for per
diem, as well as transportation and disposal.
AVERAGE PERCENTAGE MARKUP ON SELECTED
CONTRACTOR/SUBCONTRACTOR OWNED EQUIPMENT
400
300
j200
UJ
O_
100
HOURLY RATES 3211 DAILY HATES 2351 MEEKLY RATES 271* MONTHLY RATES 143X
WITH NEGOTIATED FIXED RATES IN 3 ERGS ZONES
The contractors did not base their proposed rates on actual costs and their
accounting systems were Inadequate to develop the actual costs. In order
for us to determine if the negotiated rates were reasonable, we used the
contractors' financial records to estimate the costs. All applicable costs
were used in the computations. Even though the costs used are only estimates,
we believe that they are representative of the actual costs and provide a good
basis for comparison purposes. For further Information on the methodology
used to develop our cost estimates, see the Scope and Methodology section of
this report.
Labor
The total labor costs for nine delivery orders in three zones were estimated
and compared against the billed charges using the negotiated rates. These
delivery orders averaged a 40 percent markup over the contractors' costs.
The markups ranged from 14 to 103 percent per delivery order.
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Total
Estimated
labor Costs
$ 332
119,116
41,166
48,142
116,714
99.434
5,247
84.423
17,386
$531,960
Total
Billed
Labor
Differences
$ I3
147,:
378
,392
54,279
65.572
163,029
138,818
(7,620
131,840
35.298
$744,226
Amount
$ ; 46
28,276
13,113
17,430
46,315
39,384
2,373
47,417
17,912
$212,266
Markup
14%
24%
32%
36%
40%
40%
45%
56%
103%
~4"0%
A review of the contractors' payroll policies Illustrates the Inconsistencies
between the contractors' actual costs and the negotiated rates. These areas
will be discussed Individually.
labor Rates
The average wages paid to employees 1n many Instances were far less than
the negotiated rates. Actual wages paid to employees working on 9 of
the 12 delivery orders reviewed were analyzed to determine the average
rate per labor category. After adding the overhead costs to the average
wages, there was still a large difference between the estimated labor
costs Incurred by the contractors and amounts billed to EPA using the
fixed contract rates.
AUDITED LABOR RATES
vs
NEGOTIATED LABOR RATES
Response Manager
Foreman
Cleanup Technician
Chemical Enginter
Hydrologist
Industrial Hygienist
Geologist
Clerk
Equipment Operator
Laborer/Driver
HOURLY RATE <*>
•NEGOTIATED
The average contract rates exceed the estimated labor costs in most cases.
The fixed rates allow the contractors to cover their costs and provide a
substantial margin over the costs.
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Overtime/Holiday Pay
All of the contracts provided overtime labor rates and one had holiday
labor rates. However, two of the contractors did not (1) pay overtime
rates, (2) pay overtime to legally designated employees, or (3) pay over-
time at the legally required minimum amount. In addition, one contractor
did not have special holiday pay rates even though its contract provided
for it.
One contractor paid its employees at straight pay rates for overtime
hours prior to October 1, 1985. Subsequently, the contractor began using
an overtime rate which was less than one and one half the regular rate of
pay. This policy is not in compliance with the Fair Labor Standards Act.
In both instances, the contractor billed EPA the overtime rates in the
contract.
When overtime pay was not paid for overtime hours actually worked, the
markup averaged 45 percent. When overtime was underpaid, the markup
averaged 39 percent. Some examples of the overtime rates (with the
applicable overhead costs) and their relationship to the contract rates
are illustrated.
Category
No Overtime:
Truck Driver
Cleanup Technician II
Chemical Engineer
Clerk
Response Manager
Underpaid Overtime:
Foreman I
Foreman II
Foreman III
Cleanup Technician I
Cleanup Technician II
Truck Driver
Estimated Overtime
Costs Contract Rates Markup
$24.18 $27.30 13%
24.65 31.50 28%
41.54 58.80 42%
14.14 21.50 52%
35.58 64.10 80%
32.11 36.00 12%
27.75 36.00 30%
30.44 42.00 38%
19.06 30.00 57%
20.81 33.00 59%
18.43 30.00 63%
One ERCS contractor billed the holiday rate in its contract, but did not
pay a special holiday premium rate for holiday work.
Category
Clerk I
Hydrologist II
Cleanup Technician I
Equipment Operator II
Response Manager
Estimated Holiday
Costs Contract Rates Markup
$29.45 $29.00 <2>%
54.67 66.00 21 %
24.69 32.00 30 %
32.38 43.00 • 33 %
46.28 66.00 43 %
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The policy of overtime pay varied with each contractor and subcontractor.
For example, a review of security services on one delivery order demon-
strated that the number of hours defined as overtime varied based on the
firm's definition of overtime. The security firm paid its anployees
overtime for hours in excess of 40 per week; the security firm charged
the contractor overtime for hours in excess of those subcontracted for.
Lastly, the contractor billed EPA overtime rates for hours in excess of
eight per day in accordance with the ERGS contract. The hours were billed
according to the definition at each level.
Audited Hours for Hours Billed Hours Billed
Security Guards to Contractor to EPA
Regular
Overtime
* Security firm did not have timesheets to support 34 hours billed to
the contractor.
Subcontractors
The negotiated labor rates apply to all subcontractors who provide
employees covered under the fixed rates. These rates apply to all tiers
of subcontracts. Consequently, each layer of subcontracting included
another layer of cost and markup.
Equi pment
The negotiated equipment rates and their estimated costs have wider differences
than the labor rates. Contractors frequently did not base their rates on
actual costs and did not know what their actual costs were. Our estimate of
the contractors' costs revealed that large markups were evident on all types
of equipment: contractor owned, specially modified, rented, and small equip-
ment items.
Team Member Equipment
Equipment owned by the prime contractors or their subcontractors had
wide variances between their estimated costs and the negotiated rates.
The markups were significant whether the equipment was charged on an
hourly, daily, weekly, or monthly basis. The average percent of markup
on selected items of contractor/subcontractor equipment with fixed rates
in three ERCS zones follows:
Hourly Daily WeeJOy Monthly
Contractor Owned Equipment 338% 310% 258% 150%
Subcontractor Owned Equipment 304% 279% 2_83% 135%
Average Markup 321% 295% 271'% 143%
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To evaluate the extent of markup on any individual delivery order, one
must carefully consider the impact of time. Many cleanups are of short
duration. On such jobs, equipment is generally billed on hourly or
daily rates. As shown above, markup on equipment for such jobs will be
higher than average. Our review, however, looked at some of the largest
and longest cleanups which had been completed. Many items of equipment
on these cleanups were billed on a weekly or monthly basis. Thus, on an
overall basis, the markups on these jobs lower than average. For example,
we reviewed 22 equipment items used by a contractor on three delivery
orders. The total billed amounts for these items exceeded the total
estimated cost by 150 percent ($147,040 * $97,754) as shown below:
Equipment Amount
Description Billed
Contractor Owned
Passenger Van $ 2,741
Pickup Truck 4,666
4-Wheel Drive Pickup 2,473
Decontamination Trailer 8,500
Office Trailer 5,130
2-inch Pump 4,725
Subtotal $ 28,235
Subcontractor Owned
4-Wheel Drive Pickup $ 2,205
Pickup Truck 6,610
Dozer 350* 32,832
Backhoe 215* 49,889
Front-End Loader 1155 7,395
Backhoe 580 8,826
Passenger Van 126
Front-End Loader 950* 17,848
Dozer 450* 25,288
Backhoe 880* 4,617
Office Trailer 52
Front-End Loader 955* 3,570
Front-End Loader 951* 27,301
Galley Trailer* 10,150
ATC 3-Wheeler * 2,450
250 KW Generator* 17,400
Subtotal $216,559
Total $244,794"
Estimated Markup
Cost Amount
$ 1,809
5,369
22,841
28,096
3,487
3,099
43
5,970
7,472
1,312
14
715
5,447
2,009
468
2,969
$91,120
$ 1,683 $ 1,058
1,542 3,024
817 1,656
1,409 7,091
750 4,380
333 4,392
$ 6,634 $ 21,601
$ 396
1,241
9,991
21,793
3,908
5,727
83
11,878
17,816
3,305
38
2,855
21,854
8,141
1,982
14 ,431
$125,439
Percent
63%
184%
203%
503%
584%
U319%
326%
22%
23%
44%
78%
112%
185%
193%
199%
238%
252%
271%
399%
401%
405%
424%
486%
138%
$97,754 $147,040
150%
* These items of equipment were billed at provisional rates which are
subject to negotiation.
In individual cases, markups on equipment were substantially greater or less
than average. For example, we made the following analysis for a few items at
selected subcontractors.
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Item
Range of
Estimated Costs
Range of
Billed Rates
$ 6.29
$26.85
$ 2.95
$ 6.82
$ .16
$ 4.64
$ .10
- $1,000.67
- $4,650.42
- $ 510.94
- $1,181.22
- $ 3.46
- $ 100.46
- $ 17.32
Range of Markups
$ 756
$5,457
$1,365
$3.100
$ 126
$3,000
$ 945
27%
116%
442%
369%
6,775%
6,473%
15,900%
- <31>%
17 %
- 167 %
- 162 %
- 3,542 %
- 2,886 %
- 5,356 %
4 Wheel Drive Pickup
Front-end Loader 963
Stakebed Truck (2-ton)
Backhoe 580
Hand Tools
Decontamination Trailer
Trash Pump (2-inch)
A review of the total costs for these items show the impact of these high
markups. The trash pump was purchased in 1983 for $541 and depreciated
over 5 years. No repair or maintenance costs were recorded for it. The
amount billed at the negotiated rate for the pump on one delivery order
totaled $4,025. The subcontractor purchased the decontamination trailer
in 1977 for $1,345 and depreciated it over 10 years. The cost of repairs
and maintenance through 1985 totaled $5,278. On one delivery order, the
billings totaled $12,366.
Personal protection equipment had negotiated rates also. Levels B and C
types of protection equipment were used on the delivery orders we reviewed.
We compared the estimated costs of personal protection equipment from four
delivery orders to the amount billed on those delivery orders. A comparison
of costs and rates paid for protection equipment is shown on page 31.
The amount billed for Level B equipment was 281 percent higher than the
estimated cost of the equipment. The amount billed for Level C equipment
was 185 percent higher, as shown below:
Delivery
Order
1
2
3
4
Total
Level B Protection
Level C Protection
Amount
Billed
Estimated
Cost
$ 100
26,087
8,675
-0-
$34,862
$ 12
4,925
4,208
-0-
$9^45"
Markup
864%
430%
106%
-0-
281%
Amount
Billed
Estimated
Cost
$19,188
14,183
17,258
25,979
$76,608
$6,309
4,736
5,840'
10 ,004
$267889
204%
199%
196%
160%
185%
Specially Modified Equipment
Specialty items fabricated or adapted by one contractor for cleanup use
had particularly high markups. One contractor specialized in adapting
standard equipment, available from construction equipment manufacturers
or other vendors, to develop cleanup equipment. This contractor altered
standard items or used standard items in special ways. The estimated
markup was excessive, considering the small cost to alter the item or
make the minor manufacturing adjustment.
One specialty item example is the heavy equipment safety package. A
backhoe or front-end loader was adapted by adding the safety package to
protect the operator from hazardous materials. The package included a
manufactured frame for plexiglass; two pieces of plexiglass (one three-
quarter inch thick and one one-quarter inch thick); an air supply tank;
a respirator; installed stainless steel lines to the air tank; a bottle
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PERSONAL PROTECTION EQUIPMENT
LEVEL B
AVERAGE ESTIMATED $27-71
DAILY COST
ERCS KATE $150-00
$16.93
$65.00
SPECIALIZED ITEMS
LEVEL b
SELF-CONTAINED
BREATHING APPARATUS
LEVEL C
FULL-FACE, AIR
PURIFYING RESPIRATOR
COMMON ITEMS
CHEMICAL RESISTANT CLOTHING
(Suns, GLOVES, BOOTS*)
*BOOTS USUALLY PROVIDED BY EMPLOYEES
DISPOSABLE CLOTHING
(Suns, GLOVES, BOOTS)
HARD HAT
RADIO
-31-
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rack; a valve and hose; a fire extinguisher and mounting; an (optional)
air conditioner. The estimated cost of the heavy equipment safety
package ranges from $.75 per hour to $129.90 a month over tha life of
the package. The contractor charges range from a provisional rate of
$10.00 per hour to $1,025 per month. This provides the contractor with
markups ranging between 1,233 percent and 689 percent, respectively.
Following are examples of other specialty equipment items:
Range of Range of
Item Estimated Costs Billed Rates Range of^Markups
Diaphram Pump (2-inch)
Stainless Steel $ ,82 - $ 142.02 $ 14 - $ 975 1,607% - 587 %
High Pressure Water Laser* $ 3.42 - $ 27.36 $ 56 - $ 450 1,537% - 1,545 %
Drum Shredder* $23.87 - $ 190.96 $375 - $3,000 1,471% - 1,471 %
Hydraulic Drum Grappler $ 9.45 - $1,636.00 $ 22 - $1,584 133% - <3>%
*Provisional Rates - This rate is subject to negotiation.
Rented Equipment
When contractors and subcontractors rented equipment, the markups were
still substantial but less than when they used their own equipment. To
illustrate the impact, we reviewed one contractor's total equipment costs
on four delivery orders. The costs totaled $22,865 while billings to EPA
totaled $42,258. This resulted in an 85 percent markup (122 percent for
contract items and 46 percent for the provisional items).
When the subcontractors rented equipment, both the subcontractors and
contractors received markups on rented equipment. For example, one
subcontractor incurred costs of $16 per day to rent a pickup truck.
The subcontractor charged the prime contractor $45 per day. The prime
contractor charged EPA $58 per day, a net markup of 262 percent over the
basic $16 cost.
The difference between rented costs and ownership costs varied greatly.
For example, a subcontractor used two 3-inch trash pumps on one delivery
order; one was owned and one was rented. There was a wide disparity
between the owned and rented rates.
Daily ERCS
Cost Rate Markup
Rented $47.03 $105 123%
Owned $ .58 $105 14,263%
Small Equipment Items
Small equipment items had negotiated rates which the contractors used for
billing purposes. We compared the purchase price of these items against
the billed amount on one delivery .order. The billings exceeded the
purchase price as shown below:
-32-
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Purchase Billed
Equipment Item Price Amount
Emergency Lighting $ 348.00 $2,180.20
Non-Sparking Tools 399.00 2,085.00
125 Ib Dry Chemical 1,635.00 3,960.00
Fire Extinguisher*
* Provisional Rate - This rate is subject to negotiation.
Per Diem
The contract provided a fixed rate for per diem. Some contractors and
subcontractors paid their employees' food and lodging expenses directly.
However, the prime contractors billed per diem at the contract rate,
instead of the actual expenses which were usually less. A review of
seven delivery orders of one contractor and two subcontractors disclosed
that EPA paid an additional $25,452 over costs for per diem. The differ-
ences between actual and billed per diem amounts v;ere as follows:
Delivery Total Billed Pi fferences
Order Cost Amount Amount Ma_rku_p_
1 $ 45,540 $ 41,175 $<4,365> <10>%
2 15,222 14,880 <342> <2>%
3 36,508 37,890 1,382 4 %
4 57,496 61,551 4,055 7 %
5 44,844 48,900 4,056 10 %
6 29,984 35,100 5,116 17 %
7 23,377 38,927 15,550 67_ %
$252^,971 " $278J423_ $2_5_,_452_ 1£ %
Transportation And Disposal
Transportation and disposal did not have fixed rates but were subcontracted
at cost. However, the costs incurred for these services were not always cost
effective. A review of transportation and disposal services totaling
$1,156,946 disclosed that $240,528 was unnecessarily incurred due to poor
procurement practices.
Transportation
Kyiape
A rey^e-w of the transportation services on one delivery order disclosed
that-^he services were not procured at the lowest price available. The
contractor obtained three quotes for the transport services ranging from
$400 to $500 per load. The highest quote was selected. In addition, the
trucks of the selected firm could legally haul 50,000 pounds. However,
on this job the average weight per load was only 43,901 pounds resulting
in the need for an additional 54 loads. (On this same job, when the
trucking company was paid by the weight transported, the average load was
•33-
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49,819 pounds.) The final cost of the transportation for this delivery
order was $224,051. If the contractor had selected the lowest bidder and
paid for the hauling by the weight transported, the cost would have been
$158,048, resulting in a savings of $66,003.
Disposal
Disposal services were also not procured cost effectively. The disposal
services were reviewed for the same delivery order discussed in the pre-
ceding paragraph. The ERCS contractor (1) awarded the disposal services
subcontract by telephone and (2) told us it entered into an oral contract.
At the time, the disposer's price list for the type of contaminated soil
at this cleanup site was 3.5 cents per pound. However, the price quoted
for the delivery order was 4 cents per pound. About midway through the
site cleanup, this price was increased to 4.5 cents per pound. As a
result, the final cost to EPA was $837,301. If the price list cost of
3.5 cents was used, the cost would have been $690,320, or $146,981 less.
Another disposer was used on two other delivery orders both involving PCB
(polychlorinated biphenyl) contaminated solids. The disposer charged
preferred high volume customers as little as $100 per ton for disposal of
PCB contaminated solids. Nonpreferred customers were charged between
$120 and $180 per ton. On one delivery order EPA was charged $100 per
ton, while on the second delivery order it was charged $180 per ton.
During that time period, other customers were charged rates varying from
$140 to $180 a ton. On the high rate delivery order, EPA was charged
$61,974 (344.3 tons x $180 a ton) as opposed to the lowest preferred
customer charge of $48,202 (344.3 tons x $140 a ton). Thus, EPA overpaid
$13,772 due to the lack of consistently obtaining preferred customer
rates.
Conclusion
The preceding schedules and examples illustrate the markups paid by EPA in
excess of costs shown on contractor records. These amounts resulted from the
environment in which the ERCS contracts were developed, awarded, and adminis-
tered. The lack of competition and adequate information about contractor
policies, practices, and composition of costs laid the foundation for unreason-
able rates. The contracts' vagueness permitted varying interpretations and
possible abuse of the contract terms. Lastly, the lack of contract monitoring
opened the door to violations of the contract terms. As a result, EPA negotia-
ted rates which appear unreasonable when compared to contractors' costs. The
environment which led to this is discussed in the findings that follow.
Agency Comments
"The audit report uses illustrations from an extremely small and select sample
of sites and items of equipment (all of which the report acknowledges as not
being a statistically valid sample) to create an overwhelming impression that
contractors are making hundreds (even thousands) of percent profit on the
contracts. There is absolutely no evidence that our contractors are making
the enormous profits implied in the audit report."
•34-
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"Many of the illustrations, unfortunately, are misleading or in error." The
Agency supplied information on a number of illustrations it believed to be
misleading or in error. In particular the response took issue with the accu-
racy of our examples related to a drum punch and two decontamination trailers.
"The decision was made by procurement officials to develop and use composite
rates because the ERGS rates were established based upon industrywide price
comparisons. The amount of subcontractor cost and profit are a matter of
agreement between the prime and the subcontractor. It has been recognized
that separate agreements on rates between the prime and the different subcon-
tractors can result in a variance in profit for the prime. Therefore, the new
contracts will specify separate rates for the prime and subcontractors when
those variations are determined to be unreasonable for inclusion as a composite
fixed rate."
Auditor Evaluation
While the number of sites sampled was small, the rates examined apply to all
sites. Additionally, our sample included more than 19 percent of obligations
incurred for Superfund cleanups performed under ERGS. We reviewed equipment
items which received heavy use on the selected delivery orders. The markups
shown in this report are representative of the differences between allowable
contractor/subcontractor costs and established billing rates whenever the
selected equipment items were used. We believe the items reviewed were
sufficient to demonstrate the level of markups being experienced on selected
delivery orders. In performing this review, we reached no overall conclusions
on the level of profits being made by EPA contractors.
With respect to the validity of illustrations used in our draft report, we have
carefully reviewed each of EPA's comments, checked the computation of each
example and found on an overall basis that few corrections were necessary in
the final report. In a few instances, however, we found that contractor
records upon which we relied contained errors and omissions. With the addi-
tional information provided us by EPA, we were able to identify such situations
and make appropriate corrections for the final report. As shown below, this
was the case for both the drum punch and one of the decontamination trailers.
Drum Punch
The Agency's comments regarding the drum punch example are correct in that
the draft audit report compared the cost of a hand-held drum punch to tha
charges for a larger equipment-mounted drum punch. Our procedure during
the audit was to review the daily report which indicated equipment itans
used on-site and compare them to the contractor's accounting records
(primarily depreciation sii6adules). in the case of the drum punch, the
depreciation schedules didi&ot list this item. When we asked a contractor
official for other supporting documentation, we were provided an invoice
for $18.25. We further confirmed with the on-scene coordinator's (OSC)
supervisor that the invoiced drum punch was in fact used on EPA clean-up
sites. Based on this data, we prepared the draft audit report.
Upon receiving EPA's response that a different type of drum punch was
used on the job in question, we inquired further and confirmed that the
contractor had fabricated a special drum punch. The contractor did not
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have any documentation which showed the costs to fabricate the drum punch
in question. A company official stated that the company capitalizes all
assets over $500 (e.g., records the cost in a capital asset account and
depreciates the cost of the asset over its useful life).
During our audit, we found that the company prepared "asset sheets" for
all fabricated items which we reviewed. (An asset sheet shows the fabri-
cation cost and the depreciable life of the item.) All of the other
fabricated items reviewed were valued in excess of $500 and were recorded
on the company's depreciation schedules. However, there was j]£ asset
sheet for the drum punch and the drum punch was not recorded on the
depreciation schedule.
In this regard, company officials told us that the cost to fabricate the
drum punch was recorded in the equipment maintenance pool. The company
classifies the maintenance pool as indirect costs. Therefore, if this
information is correct, the cost to fabricate the drum punch is an
indirect cost which was expensed (written off) in the fiscal year in which
the drum punch was fabricated. Recoating the drum punch is also done in
the maintenance shop and the associated cost to recoat the punch is treat-
ed the same way as the fabrication costs. Consequently, the company does
not have any di rect cost for fabricating and recoating the drum punch.
We allocated all maintenance costs as indirect expenses when computing
our estimated equipment cost. Therefore, all fabrication costs which
were recorded in the maintenance pool and not separately identified in
a capital asset account are part of our estimated costs. We believe
that our method is consistent with the way that the company treated the
cost to fabricate and recoat the drum punch. Therefore, without dupli-
cating costs either expensed in a prior fiscal year or already allocated
by us as an indirect cost, we concluded that the contractor does not have
any separate, identifiable fabrication cost for the punch, to compare to
the ERCS rate charged to EPA for the drum punch. Therefore, we consider
the total fixed-rate charges for this item to represent markup. We
have modified our report to reflect this fact.
Decontamination Trailer
With respect to one decontamination trailer, the response indicates that
the auditors did not include some $30,000 for equipment and conversion
costs. In subsequent discussions, we found that the $30,000 of conversion
costs had not been properly identified with the decontamination trailer.
Instead, the costs were identified as a separate vehicle in the deprecia-
tion schedule. (It should be noted that the depreciation schedule had
been audited by the contractor's CPA fir-m which found no deficiencies.)
We recomputed the cost of this decontamination trailer taking into account
the increased capital cost and found the resulting markup to be 503 percent.
Our computations on the other decontamination trailer were correct.
We appreciate EPA's comments as they assisted us in correcting some errors in
our report. However, even after the corrections were made, the issues remain
the same. EPA is paying substantially more for Superfund cleanups than the
costs incurred by our contractors. To date, no documentation showing the
reasonableness of industrywide price comparisons have been shown us.
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FINDING MO. 1 - EPA NEEDS TO IMPROVE COMPETITION FOR ERGS CONTRACTS
Various factors limited the level of competition for the ERCS contracts. The
limiting factors included restrictions and difficult contract specifications
in the RFP. Although EPA had valid reasons for the restrictions and difficult
specifications, the composite result of these factors and the infancy of the
industry virtually eliminate effective competition. In addition, although
procurement officials were disappointed with the level of competition on the
ERCS contracts, they concluded that competition was sufficient to proceed with
negotiations. We believe that EPA emphasized program goals and objectives at
the expense of good procurement practices.
The Office of Federal Procurement Policy Act (Public Law 93-400) states that
it is the policy of Congress to promote economy, efficiency and effectiveness
in procurement activities of the Federal government by:
Establishing policies, procedures, and practices which will require
the Government to acquire property and services of the requisite
quality and within the time needed at the lowest reasonable cost,
utilizing competitive procurement methods to the maximum extent
practicable;
Title 41 CFR 1-1.302-1 states that irrespective of the method of procurement,
competitive offers shall be solicited from all qualified sources as are deemed
necessary by the contracting officer to ensure full and free competition.
Restrictions In The Request For Proposal
There were restrictions in the RFP that greatly contributed to the lack of
competition for the ERCS contracts. These restrictions are discussed below.
Limited Number Of Prime Contracts
The RFP stipulated that EPA would only award four prime contracts, one
each for four large and distinct geographic zones. The RFP also required
the offerers to be able to provide substantial resources within very
short timeframes. It is unlikely that a small or medium size business
would have the capacity to accept a contract the size of ERCS.
Accordingly, we believe that EPA's decision to limit the number of
contracts, thereby creating very large geographic response zones, limited
the number of potential offerors. The four zones are described below and
shown in Table 1:
1. the northeastern section of the United S^&fces including Puerto Rico
and the Virgin Islands (EPA Regions l-S);^-
•yi-
2. the southeastern section of the United States (EPA Region 4);
3. the states bordering the Great Lakes states except New York and
Pennsylvania (EPA Region 5);
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4. the states west of the Mississippi River except Minnesota Including
Alaska, Hawaii and the Pacific Islands (EPA Regions 6-10).
Table 1
U.S. Environmental Protection Agency
Emergency Response Cleanup Services Zones
zone 4
Mandatory Composite Rates
The RFP stipulated that each proposed fixed rate must apply regardless
of whether the prime contractor or a subcontractor performed the service.
The contracting officer told us that this requirement was a practical
necessity for various reasons including the fact that it would have been
extremely difficult to negotiate or administer a contract if different
rates were applicable to each cleanup company. This requirement for
composite rates imposed a significant obligation on all potential offerers
to expend considerable time and funds to negotiate agreeable rates with
potential subcontractors. Accordingly, the requirement may have
discouraged proposals.
Mandatory Subcontracting Of Transportation And Disposal Services
The RFP stipulated that the transportation and disposal of hazardous
wastes must be subcontracted. EPA initially decided to use fixed rates
whenever feasible. According to the contracting officer, the transpor-
tation and disposal of hazardous wastes, however, was not susceptible
to the proposing of fixed rates because they "are far too dependent upon
unknown and variable conditions." Therefore, it was decided to make
transportation and disposal costs reimbursable items. In addition, it
was decided not to allow prime contractors to use their own transportation
=38-
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and disposal facilities, "To avoid the appearance of collusive bidding
or other possibilities of prejudicing the competitive process." Thus,
the contracts required the zone contractors to competitively subcontract
the transportation and disposal of hazardous wastes.
Contract file documents indicated that transportation and disposal costs
accounted for approximately 35 percent of historic cleanup costs. The
contracting officer speculated that there may have been firms that did not
submit an ERCS proposal because they did not want to be precluded from
using their own transportation and disposal facilities.
OriginalIneligibility To Receive A Second ERCS Contract
The RFP stated that in no event would any one firm be awarded more than
one prime zone contract. This determination was based on the possibility
that an ERCS contractor might have contributed to the hazardous waste at
a cleanup site (a conflict of interest situation) and EPA would have to
obtain services from another zone contractor. In addition, EPA officials
believed that this restriction would increase the number of companies
which would submit proposals. On June 22, 1983, however, EPA modified
the RFP to permit a single offerer to be awarded more than one zone
contract.
This restriction was eliminated from the RFP five days after the original
due date for offers. By that time, most offerors would have already
prepared their proposals and would have had great difficulty in estab-
lishing the necessary network of subcontractors for other zones.
Combined proposals for more than one zone were not permitted. Offerors
had to submit a separate proposal for each zone contract sought.
Considering the fact that no firm submitted more than one proposal, we
believe that the original restriction still reduced the total number of
proposals by discouraging the offerors from competing against each
other for more than one contract.
Difficult Contract Specifications
The RFP required offerors to have an extraordinary level of response capability.
They were required to provide all the personnel, materials and equipment neces-
sary to conduct emergency removals and initial remedial measures for oil and
hazardous substance releases. Offerors were requested to propose fixed rates
for 22 different personnel categories and 104 equipment items. In addition,
the RFP requested rates for four personnel categories and 16 equipment and
material items for oil spills. Successful offerors were required to provide
these extensive resources, including heavy equipment, "at any zone '
a 24-hour per day basis, seven (7) days a week within the response time
specified." -
The response times varied for different locations within each zone ranging
from 1.5 to 24 hours from the receipt of a written or verbal delivery order.
For example, the contractor responsible for the northeastern section of the
United States would be required to have equipment, materials and personnel
in San Juan, Puerto Rico within 2 hours. The contractor responsible for the
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western half of the United States would be required to respond in Oahu, Hawaii
within 3 hours and Alaska within 24 hours. These response times are very
difficult to meet.
The RFP also requested that the offerers provide a high level of management
and administrative support services. For example, successful offerors would
act as agents for EPA and subcontract for all transportation and disposal
services in accordance with procedures that EPA outlined. EPA also anticipated
that extensive subcontracting efforts would be needed to fulfill the level
of services required by the contract. Successful offerors were expected to
retain, maintain and support a zone network of cleanup personnel, equipment
and materials to be available on a 24-hour basis.
In addition, the RFP required the designation of a full-time program manager
and listed 13 specific duties, some of which are listed below:
0 retain and manage the distribution of cleanup resources;
0 control and account for all costs;
0 develop a uniform recordkeeping system;
0 prepare and submit all required reports (four mandatory reports and
five optional raports);
0 develop, implement and manage a quality assurance program and
separate plan for each cleanup;
0 obtain special services in a timely and cost effective manner;
0 implement a comprehensive program safety plan.
EPA clearly wanted a single point of accountability. The RFP stated that
companies wishing to do business together were encouraged to prepare their
proposals on a prime contractor/subcontractor basis. Joint ventures, teaming
agreements, and other similar arrangements were permissible only if the
companies formed one corporate entity to bear total and complete contract
responsibility.
In conclusion, the RFP required offerors to (1) propose single fixed rates
for equipment and services which could be requested under the most extreme
conditions and circumstances, (?) provide a high degree of managerial and
administrative support, and (3) be the sole point of accountability for the
entire removal action. It is reasonable to conclude tnat offerors would
increase xfttsjr proposed rates to account for the risks involved with the
acceptance^1" a contract requiring substantial response capabilities within
limited tirt&frames.
Competi ti on Virtual1y £1imi nated
The two factors discussed above -- (1) restrictions in the RFP, and
(2) difficult contract specifications -- had a tremendous impact on elimi-
nating competition for the ERCS contracts.
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Limited Industry Capability
The size and complexity of the ERGS contracts as structured by EPA,
in conjunction with the infancy of the industry, meant that very few
companies had the capability of providing all of the required services,
and extensive subcontracting relationships that would be necessary. This
situation was summarized by the Acting Director of the Emergency Response
Division on May 31, 1983:
Providing cleanup services for emergency responses to hazardous
substance releases is a relatively new and evolving industry . . .
it is estimated that currently there are only six commercial firms
with an adequate capability for providing a full range of hazardous
release response services. However, the Agency's interim removal
source list contains over 300 separate firms with partial cleanup
capabilities that have expressed interest in being considered by EPA
for future cleanup work.
We asked both program and procurement officials if there had been any
analysis of prior removal actions to determine (1) the routine or average
level of response which was used, (2) the frequency of high level response
(classic emergency), and (3) the response timeframes necessary to carry
out EPA's responsibilities. We were told that no analysis had been
done. Regional program officials were asked to provide, and did provide,
their estimates for response requirements for each zone. These estimates
were included in the RFP.
Response times varied for different locations within each zone ranging
from 1.5 to 24 hours from the receipt of a verbal or written delivery
order. We reviewed response times for four delivery orders and found
that at EPA's direction, three of the four responses did not follow the
timeframes specified in the contract. For example, on two delivery orders
EPA did not require the contractor to be on-site until two and five
days after issuance of the delivery orders. In both instances, the
contractor's response manager was on-site, but removal equipment did not
arrive until two days later.
The level of response and response timeframes would have a great effect
on the number of proposals submitted. Small or medium size firms located
in the northeastern section of the United States were unlikely to submit
a proposal on a contract which required services in San Juan, Puerto Rico
within 2 hours. This likelihood was affirmed when the only offeror for
the northeastern zone was one of the largest cleanup firms in the United
States.
It is the contracting officer's responsibility to ensure that requirements
which might unnecessarily reduce the number of offerers are excluded from
the proposal. Since EPA had been using contractors to provide immediate
removal services since 1981, the contracting officer had a source of data
on which to evaluate the program office's specifications. Our review
shows that the quick response time which was included in the RFP was not
used for all cleanup actions. As a minimum, the contracting officer
should have instructed the program office to provide supporting analyses
or data for its specifications. This step might have indicated that the
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high level of response requested in the RFP was not always necessary and
othar less costly options could have been considered.
Restrictive Subcontracting Relationships
All of the firms who submitted proposals made arrangements with other
companies to provide subcontracting services. As noted in the contract
files, the only firm which submitted:a proposal for one zone made subcon-
tractor arrangements with most of the small cleanup firms located within
that zone. These firms agreed to an""exclusive arrangement" not to assist
any other potential prime contractor within that zone.
Since each such arrangement eliminated a potential subcontractor for
any other offeror, and since the number of potential subcontractors was
limited, each subcontracting relationship reduced the possibility that
any other party could put together enough subcontracting relationships
to fulfill the ERCS requirements. Accordingly, in at least one zone,
the type of subcontracting relationships that evolved limited the number
of contractors who could muster enough subcontractor relationships to
make a viable proposal. In a memorandum to the file, the contracting
officer acknowledged this effect and commented on the legal issue:
While such arrangements obviously limit the amount of competi-
tion the Government might enjoy, this is considered to be an
individual business decision made by all companies involved,
and does not violate the requirement for an independent price
determination, nor does it rapresent an act of collusion.
Interrelationships Between Bidders
The RFP was sent to 235 parties. As a result of the discussed factors,
only seven companies submitted proposals. Six of the seven proposals
contained reciprocal prime contractor/subcontractor relationships (i.e.,
two firms were either the prime contractor or a subcontractor to each
other -- see Table 2). After one proposal was withdrawn, there were only
single proposals for two zones and two proposals for each of the other
two zones. Because of the limited number of offerers and the reciprocal
prime contractor/subcontractor relationships, it is debatable whether any
two offerers prepared their proposals independently from one or more of
the other proposals.
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TABLE 2
ERCS BIDDERS
AND THEIR SUBCONTRACTING RELATIONSHIPS WITH EACH OTHER
ZONE A ZONE B ZONE C ZONE D
Prime Bidders
Company No.
Prime Bidders
Included as
Subcontractors
Company No.
*WINNER
**WITHDREW
1*
5
2
7
3
7
4*
2
5**
1
6*
7
2
7*
6
3
2
Two specific interrelationships existing at the time that the ERCS
contracts were negotiated are discussed below. Ue have obscured the
zones and companies as best possible to protect confidential business
information.
Company 2 Interrelationships
Company 2 was either the prime contractor or a subcontractor in four
of the six final proposals. The company submitted a proposal for
one zone and was included as a subcontractor on proposals for each
of the other three zones.
Company 7 Interrelationships
Company 7 was the prime contractor or a subcontractor in four of the
six final proposals. The company submitted the only proposal for
one zone and was a subcontractor on a proposal in each of the other
three zones. Company 7 submitted a proposal as the prime contractor
in Zone D which had the largest anticipated contract. The company
was physically located in another zone and wanted to have a presence
in its own zone. Consequently, Company 7 approached Company 6 to
submit a proposal as the prime contractor and use Company 7 as a
subcontractor. Company 6 did not have previous experience conducting
immediate removals at hazardous waste sites. The company proposed
to subcontract most of t'ne actual cleanup work. Company 6 prepared
its proposal in close alliance with Company 7. Company 6 believed
that such an alliance would be detrimental to receiving the contract.
In order to alleviate the EPA negotiating team's concern for their
close alliance, Company 6 hired a local fire chief, who had emergency
response experience, to answer questions on the technical aspects of
the proposal.
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In an internal memorandum, Company 6 stated that the fire chief's
presence would downplay the importance of Company 7 on the team.
After completing initial negotiations with EPA, Company 6 established
pricing goals in order to negotiate rates with its six key subcon-
tractors. The pricing goals were the same for all tha subcontractors
except Company 7's, which were higher. Various Company 6 memoranda
indicate the influence Company 7 had on Company 6's relationship
with other subcontractors and the rates it proposed to EPA.
A notation in the files, dated December 20, 1983, indicated that the
proposed equipment rates on the cost data worksheets were prepared
with Company 7's "guidance" and should not be used for subcontract
negotiations. Other Company 6 annotations stated that (a) Company
6 used Company 7's rates across the board to prepare its proposed
rates, (b) that Company 7 would be paid at 95 percent of the fixed
rates negotiated with EPA, and (c) that Company 6 renegotiated lower
equipment rates for categories of equipment that were not provided
by Company 7. Company 6 "tried to limit . . . revisions to equipment
that . . . [Company 7] will probably not provide."
Program Goals Emphasized At Expense Of Good Procurement Practices
The ERGS procurement was complex and difficult. It took almost one year to
develop the RFP and almost six months to negotiate the four contracts. As
previously noted, the Federal regulations state that it is the contracting
officer's responsibility to ensure full and free competition. In addition,
41 CFR 1-3.801-2 states:
Each contracting officer is responsible for performing or having
performed all administrative actions necessary for effective
contracting. The contracting officer shall exercise reasonable
care, skill, and judgment and shall avail himself of all of the
organizational tools (such as the advice of specialists in the
fields of contracting, finance, law, contract audit, engineering,
traffic management, and cost or price analysis) necessary to
accomplish the purpose as, in his discretion, will best serve the
interests of the Government.
Procurement and program officials did not always agree on procurement decisions.
In at least one instance, a major factor limiting competition was the result
of the decision to limit the number of contracts to four, which was contrary
to procurement officials' recommendation. We were told that the size and
number of contracts/zones were discussed among EPA officials prior to issuing
the RFP. The program officials wanted one or two nationwide contracts because
they would be easier to administer and monitor.
Procurement officials disagreed. They wanted ten contracts, one per EPA region,
to obtain better competition. One procurement official stated:
We knew the size of ERCS [zones] would limit competition. We were
uncomfortable with the situation. There was no other competition
out there. The contract [zone] was too big. By its very nature,
it limited competition.
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Program and procurement officials compromised on four zones, but subsequent
events raised the issue again.
When program officials first submitted their ERCS procurement request, the
projected level of effort for waste removal services was estimated at $10
million per year across the country. This capacity was later increased to $60
million per year and finally to $120 million per year. One month before the
ERCS proposals were due, a senior procurement official wrote:
Under the ERCS procurement as it now exists, this potential $120
million would reside under four prime contracts, one for each of four
geographic zones. Providing such a magnitude of cleanup and removal
services under the one contractor per zone concept presents several
potential problems, some of which could adversely impact the Agency's
ability to carry out its responsibilities under Superfund. . . .
It is our recommendation that the Agency award several prime contracts
in each of the four zones rather than a single contract per zone.
Procurement officials were concerned that under the ERCS concept of four
zones/four contractors, EPA would not have the ability to consider contractor
capabilities or cost efficiencies on a site-by-site basis. In addition,
these officials anticipated a large volume of subcontracting under ERCS
including the subcontracting of entire removal projects. Under these circum-
stances, the contractor, rather than EPA, could select the firm undertaking the
cleanup.
A senior procurement official was also concerned about cost documentation and
stated:
We would expect cost documentation to be more difficult to monitor,
obtain, audit, and verify. These same conditions would increase
the likelihood of overcharges on rental equipment, subcontracted
services, and purchased materials and supplies.
As late as June 9, 1983, 30 days after the ERCS RFP was published and 5 weeks
before the offerers' proposals were due, procurement officials were promoting
the use of "pre-negotiated agreements" in lieu of the ERCS zone contracts.
These officials believed that pre-negotiated agreements had considerable
advantages over the ERCS contracts.
On June 12, 1983, a senior program official responded to the suggestion to
replace the ERCS contract mechanism:
I ... see no major benefit in withdrawing the current RFP
procurement action. . . . Indeed, as program manager I would find
withdrawing the current RFP to be untimely, and dLi_sjtupJti_ve to the
implementation of the removal program. The field is" ready to imple-
ment the ERCS Zone Contract. Resources are being expended on
developing an ERCS User's Manual. Several meetings with field
personnel have taken place and we feel comfortable with the contract
package we have been working with for over a year, ... I recommend
the ERCS Zone Contract proceed on an expedited basis.
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On June 16, 1983, procurement and program officials formally agreed to go
forward with the procurement of four zone contracts at the capacity of $60
million per year. The remaining $60 million per year response capacity was
to be secured through several smaller contracts under a separate solicitation.
Until late 1985, however, no action was initiated to solicit proposals for
smaller cleanup contracts.
A substantial portion of the money would be set aside for small and disadvan-
taged businesses. EPA expected this_procedure to increase the number of
contractors available for use by EPA and alleviate some of the other concerns.
However, EPA has not awarded any of the-smaller ERCS contracts to date and
only the four zone contractors are available for immediate removal action.
We believe that limiting the number of contracts, thereby creating very large
geographic response zones, is a prime example where program needs were empha-
sized at the cost of good procurement practices. Procurement officials clearly
believed that the number and size of the zones would reduce competition.
However, the program officials' concern over their ability to administer and
monitor more removal contracts was given greater weight and the number of
contracts was limited to four.
In addition, observations on certain prime contractor/subcontractor relation-
ships should have caused the contracting officer to pursue other options. The
contracting officer observed that Company 5 and 7's offers were "very similar"
and that Company 7 had not submitted a proposal for the zone in which nearly
all of its resources were located. Further, the contracting officer believed
that Company 6 and Company 7 were discussing equipment rate negotiations
conducted between each company and EPA. Company 7 would say to the contracting
officer, "Look, we are above [EPA's cost objective] on this item, but way
below on that item." The contracting officer had not previously discussed
the item mentioned by Company 7 with Company 7. Instead, the contracting
officer had discussed the item only with Company 6; thus, Company 7 should^not
have known about the cost information.
Procurement officials clearly expected that the ERCS RFP would require substan-
tial subcontracting for all necessary labor and equipment. Consequently, some
discussion between offerers was anticipated and the reciprocal prime contractor/
subcontractor relationships were not completely unexpected. The contracting
officer also expected Company 6 and 7 to discuss equipment rates to some extent
because Company 6 did not own any cleanup equipment of its own and would rely
on Company 7 to provide equipment.
In our opinion, the contracting officer's observations were sufficient to
indicate that it was questionable whether the single proposals for two zones
were independently prepared. Procurement officials should have considered
canceling the RFP for these two zones and evaluated other options. However,
the contracting officer was aware that the contracts were needed in order to
meet EPA's new program objective to aggressively initiate removal actions. Ue
believe that the program office's need for the contracts was a major factor in
the decision to award the contracts.
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Conclusion
The overall environment which existed at the time that the ERCS contracts were
procured was an unusual one, which made it significantly unlikely that all
firms would independently propose their best prices or negotiate in good faith.
Although 235 parties requested the ERCS RFP, only seven firms submitted
proposals for the four contracts. The various factors which limited the level
of competition must be considered in order to evaluate the merits of awarding
these contracts under the circumstances that existed.
The magnitude and the difficulty of the proposed contract, the interrelation-
ships among six of seven offerers, and the other limiting factors previously
discussed, raise significant questions as to whether all proposed prices were
submitted independently in a competitive environment. In particular, two
companies had ample opportunity to become familiar with each other's proposal
through their reciprocal prime contractor/subcontractor relationship. The
similarity of their proposals shows that they shared common positions. When
we consider that there was no competing proposal for either company in their
respective zones, EPA has less assurance that each company proposed competitive
rates or negotiated in good faith.
We have indicated that better planning and more aggressive actions by procure-
ment officials would have improved the ERCS procurement process. However,
we believe that the underlying cause was the emphasis on program needs and
goals at the expense of good procurement practices. Recently, the General
Accounting Office (GAO) issued an audit report on EPA's general use of employee
service contracts^ and drew a similar conclusion:
GAO believes that EPA is emphasizing the accomplishment of program
goals and objectives at the expense of sound contract nanagement.
According to EPA officials, this emphasis is a direct result of the
need to respond rapidly to protect the public, deal with emergencies,
and meet legal deadlines. While GAO agrees that EPA's program
objectives are important and that extraordinary contracting measures
might be needed in limited numbers of cases, it is also important
that EPA adhere to the requirements of federal procurement regu-
lations. If properly followed, these regulations are designed to
provide EPA the contracting flexibility it needs and ensure that the
government receives good value for its contracting dollars.
Agency Comments
The Agency believed that it had done a good job in maximizing competition on
the ERCS contracts and that contracting for cleanups on a zone basis signifi-
cantly enhanced competition when compared with the procedures which were used
previously. In addition, the Agency stated that while the results of the
solicitation process may not have fulfilled its expectations, the results still
The Environmental Protection Agency Should Better Manage Its Use of
Contractors TGAO/RCED-85-12, January 4, 1985)
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permitted award of contracts in all zones based upon what was overall an
effective competition.
The Agency supplied extensive additional comments on our finding justifying
its zone ERGS procurement decisions. We have summarized what we consider the
Agency's major points as follows.
Limited Number Of Prime Contracts
Procurement and program personnel, after extended discussions, mutually
agreed that the award of four zone contracts provided the best balance
between the Agency's resource limitations and procurement officials'
efforts at maximizing competition. Procurement officials believed that
a sufficient number of firms possessing adequate capabilities existed
to establish competitive networks of contractors within each of the four
zones.
Mandatory Composite Rates
Agency officials stated that the use of composite rates required offerers
to expend considerably less time in discussions with their subcontractors
than would have been necessary had specific rates for each subcontractor
been required.
Mandatory Subcontracting Of Transportation And Disposal
Agency officials commented that their method of procuring transportation
and disposal services — having the ERCS contractors perform competitive
solicitations as a part of their cleanup activities -- maximized
competition. Otherwise, 35 percent of the contracts would have been
awarded noncompetitively.
Original Ineligibility To Receive A Second ERCS Contract
Agency officials stated that, although contractors were initially barred
from receiving more than one ERCS contract, this requirement was subse-
quently changed. Considering that significant proposal preparation work
had already been completed by the time of this change, additional prelimi-
nary proposal preparation did not need to be duplicated. Offerers clearly
were afforded ample time to submit additional proposals.
Difficult Contract Specifications
Agency officials commented that cleanup contractors had in the past
provided both to industry and the Government the type of services the
audit report considers to be beyond their capability. The companies were
"full service" contractors, performing cleanups and arranging transporta-
tion and disposal. Further, management tasks such as controlling and
accounting for costs, and maintaining a uniform system of records, are
matters of good business practice, required of any firm that intends to
remain viable.
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Limited Industry Capability
The Agency stated that procurement officials had identified 15-20 firms
which could provide the needed capabilities on a zone or multi-zone basis.
Procurement officials believed that thesa firms could supplement their
capabilities by subcontracting with any of 300 firms which had been
identified as having partial capabilities. Procurement officials believed
that a sufficient number of firms possessing adequate capabilities existed
to establish competitive networks of contractors within each of the four
ERGS zones.
Restrictive Subcontracting Relationships
Agency officials stated that there was no evidence to support the opinion
that exclusive agreements were used in more than one zone.
Interrelationships Between Bidders
The Agency stated that it was not surprised that larger firms which
prepared proposals as prime contractors in one zone were engaged as
subcontractors in other zones. The objective of prime contractors was to
assure response capabilities adequate for total zone coverage. The Agency
added that the mere existence of these contractor interrelationships did
not compromise the independence of the proposals submitted.
The Agency concluded that the various fi mis knew each others commercial
rates and that a subcontractor's rates would be known to its prime.
However, the Agency believed that (1) the rates that a prime contractor
intended to propose to EPA, (2) a prime's overall bidding strategy,
(3) a prime's subcontractor network, and (4) other crucial details of
a prime's proposal, would not be disclosed to any other firm.
Program Goals Emphasized At Expense Of Good Procurement Practices
Agency officials disagreed with our conclusion that program goals were
emphasized at the expense of good procurement practices. They stated
that just prior to beginning negotiations program officials were concerned
that major modifications to the zone ERCS RFP would be disruptive to
implementation of the removal program. However, they were willing to
consider supplemental contracting arrangements. Agency officials quoted
(from the same June 14, 1983 memorandum quoted in the audit report) a
senior program official who wrote:
I suggest that after this contract mechanism [four ERCS
zone contracts] has been implemented for a period of six
months, we evaluate its effectiveness in supporting the
Emergency Response program. Concurrently, I also recommend
that our staffs explore the appropriateness of PNAs [prene-
gotiated agreements] as a back-up emergency contracting
approach. If the ERCS procurement does not result in a
contract for each ERCS zone, or if awarded ERCS contracts
are not achieving the desired results, a contingency con-
tracting approach would be needed and perhaps PNAs [prene-
gotiated agreements] would be an appropriate alternative.
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Agency officials concluded that in no event were contracts awarded because
program considerations were given primary importance. Alternative contrac-
tual methods were available which could have been used had compelling
reasons, such as evidence of collusion, been present.
Auditor Evaluation
We believe our report adequately demonstrates that EPA did not do a good job
in maximizing competition the ERCS contracts. The facts are that (1) the
Agency only had seven bidders to the original ERCS zone contracts, and (2) even
with the Agency's actions to stimulate competition, only five firms are under
consideration for the four zone contracts currently being recompeted. With
these facts in mind, the Agency's argument on the sufficiency of competition
is weak.
For each contract, only one or two firms made offers. Our report lists factors
that limited competition. It is true that a portion of the work is on an
emergency basis. However, it is also true that a significant portion does
not require response within emergency timeframes. By failing to provide
contract mechanisms which differentiated between these response needs, EPA was
vulnerable to paying premium rates for all removals regardless of how quickly
a response was required. Our comments on the detailed points made by Agency
•officials follow.
Limited Number Of Prime Contracts
While awarding four zone contracts provided a modicum of competition, the
geographic boundaries established were so large as to minimize competition
The resources necessary to assemble an extensive subcontracting network
over a large geographic zone and meet all the other requirements of the
solicitation would be a great burden for a small firm. The investment
required in preparing an adequate proposal, with the knowledge that there
would be a high probability of no return due to competition from larger,
more experienced firms, would be a substantial disincentive to making an
offer.
Mandatory Composite Rates
We concede that composite rates allowed prime contractors to spend less
time negotiating with their subcontractors once the contracts were
awarded. However, we have demonstrated that the Government paid in
some cases a high price for this easing of negotiations. Paying for
subcontracted services on a cost reimbursable basis would have avoided
the need for continual renegotiations with subcontractors.
Mandatory Subcontracting Of Transportation And Disposal
We disagree that the contract succeeded in maximizing competition on this
35 percent of the contract. In Finding No. 5, we demonstrate that there
has not been good competition in the selection of transportation and
disposal firms.
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Original Ineligibility To Receive A Second ERGS Contract
The Agency has not demonstrated that there was sufficient time for those
already bidding in other zones to compile additional proposals. Creating
an adequate subcontracting network after many of the desirable subcon-
tractors had already affiliated with their offerers could pose a very
great burden. We note that the new ERCS zone solicitations do not contain
the zone award limit and some offerors have proposed in more than one
zone.
Difficult Contract Specifications
We reiterate that the number of bidders for the new round of ERCS zone
contracts is less than the number of bidders for the original ERCS zone
contracts. In addition, only two of the four ERCS contractors were
experienced "full service" firms. One firm was specifically created
so it could bid on this procurement, and another was an environmental
engineering firm which had never independently performed an emergency
cleanup. With its leading role as the largest client of this industry,
EPA should seek to enhance the capability of various firms to provide
these services.
Limited Industry Capability
We requested documentation on the "15-20" firms which the Agency indicates
were identified by procurement officials. None could be provided. We
have seen no evidence that so many firms had full capabilities over such
broad geographic areas.
Restri cti ve Subcontracti ng Relati onshi ps
Because any one offeror had exclusive subcontracting arrangements with
many of the leading response contractors in a geographic area with
specified minimum response times, it would have been very difficult for
another potential offeror to establish an adequate network of subcon-
tractors.
Interrel ati onshi ps Between Biciders
We have documented from the company's file one successful bidder which
shared much information about its proposal, including information on
rates, with a successful bidder in another zone. The bidder from the
other zone was a key subcontractor for this prime contractor's proposal.
Program Goals Emphasized At Expense Of Good Procurement Practices
The quote from a senior program official further demonstrates our point
that programmatic decisions were overriding good procurement practices.
The program's willingness to have a greater number of contracts,
providing a more competitive environment, was clearly highly qualified.
More than three years later, no additional contracts are yet in place.
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Recommendati ^
To ensure that the objectives of both the program and procurement offices are
met, EPA needs to improve its procurement planning procedures to ensure that
conditions do not exist which would unnecessarily limit full and free competi-
tion on future ERCS proposals. In addition, EPA needs to actively take steps
to expand the number of responsive, responsible contractors available to
conduct emergency removals and initial remedial actions. Listed below are our
recommendations followed by Agency and auditor comments.
1. We recommend that EPA emphasize to the contracting officer and senior
management officials the need for better procurement practices on future
ERCS proposals.
Agency Comments
The Agency stated that everyone involved in contracting for ERCS procure-
ments works diligently to ensure that sound procurement practices are
used at all times. Management personnel are continuously involved in
work reviews to confirm that exacting standards are met. This approach
to ERCS procurements has been true of the program since its inception.
Auditor Evaluation
We are not convinced that sound procurement practices were used at all
times in regard to ERCS procurements to date.
2. We recommend that EPA increase the number of zones to better correspond to
the geographic concentration of past cleanup sites and the availability
of cleanup contractors in their proximity; areas outside the contiguous 43
States should be treated separately (separate contracts or separate rate
schedules).
Agency Comments
The Agency commented that the zone ERCS contracts are being supplemented
by regional ERCS contracts but that this approach cannot be used in all
regions due to workload limitations.
Auditor Evaluation
On September 5, 1986, we obtained from Agency officials their latest
projections for regional ERCS contracts. Currently, the Agency antici-
pates 18 regional ERCS contracts with a total potential value of
$57 million. This compares with a total potential value of $306 million
for the four new ERCS zone contracts currently being planned. While we
recognize the planned award of regional ERCS contracts as a step forward,
we believe that the Agency is still planning to rely too heavily on the
zone contracts. Thus, we believe our recommendation is necessary.
3. We recommend that EPA analyze responses conducted under the current ERCS
contracts to determine and categorize the different response levels and
timeframes which were used. On the basis of the analysis, negotiate
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separate contracts or multi-level/multi-rate contracts to correspond more
closely to various levels of response found to be needed in the field
(lower rates for routine removals when some planning time is available and
premium rates for life threatening emergencies).
Agency Comments
The Agency stated that the original ERCS solicitation identified an
estimated mix of emergency and routine response times. Offerors were
: informed that the Government would not require contractors to meet
minimum response tines in all cases.
Auditor E v a1ua tipn
Providing an estimated mix of emergency and routine response times in the
original ERCS contracts was not adequate. Contractors were aware that
the actual mix could differ substantially from the estimate and the rates
would not be adjusted for that. Therefore, they would be inclined to
propose based on the worst case scenario to ensure the profitability of
the contract. We believe it was not in the best interests of EPA to
include emergency and routine responses in the same contracts at the same
rates.
4. We recommend that all ERCS RFPs prohibit the use of "exclusive subcontrac-
ting arrangements" by offerers.
Age ncy Comments
The Agency stated that it is not in a position to mandate such a
prohibition. Such agreements are legal and the result of individual
business decisions.
Audi tor Eva!uati on
We recognize that such agreements may be legal in some circumstances where
not constrained by the RFP. However, EPA can prohibit such exclusive
agreements in an RFP when it appears they could unduly limit competition.
In the case of ERCS, we believe exclusivity agreements potentially serve to
reduce competition.
5. We recommend that EPA use other contract mechanisms such as pre-negotiated
agreements, finn-fixed-price or cost-plus-award-fee contracts when feasible,
Agency Comments
The Agency commented that such contracting mechanisms were already being
developed. Prenegotiated agreements, now called regional ERCS contracts,
are being negotiated. Firm-fixed-price and cost-plus-incentive-fee
contracts are being prepared for use at dioxin sites in Region 7. In
addition, an Invitation for Bids for transportation and disposal of
hazardous wastes at a site in Region 3 recently opened, and award of a
firm-fixed-price contract is imminent.
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Auditor Evaluation
The regional ERCS contracts are a step forward. However, as noted in our
evaluation after Recommendation No. 2, EPA's reliance on the anticipated
regional ERCS contracts is minimal when compared to the anticipated value
of the new zone contracts. We believe that EPA's reliance on the four
zone contracts should be limited to bona fide, life threatening,
classic type emergencies. Other contract arrangements or .Tiethods should
be used for other types of removals. In our opinion, EPA needs to do
considerably more in this area than is currently planned.
6. We recommend that EPA develop additional contractor experience or exper-
tise through special limited (single site) or mini-response contracts
where the level of difficult or quick response time is not a major factor.
If necessary, EPA should provide safety and technical support in order to
use contractors with limited response capabilities to develop a pool of
responsive, responsible contractors.
Agency Comments
The Agency stated that this effort is ongoing under the regional ERCS
contracting effort. A number of these contracts are being reserved
exclusively for small and small disadvantaged contractors. Contracts
to clean up specific contaminants are in preparation for use at the
Region 7 dioxin sites. The Invitation for Bids mentioned in the Agency's
comments to Recommendation No. 5 involves a cleanup action at a single
site in Region 3.
Audi tor Eva1uati on
The planned Agency efforts, are consistent with our recommendation.
However, the comments do not address the second part of the recommendation
7. We recommend that EPA evaluate the need for technical and administrative
support currently included in the ERCS contracts (management effort)
and, if warranted, obtain these services from firms which specialize in
providing these services.
Agency Comments
The Agency commented that management effort tasks required by the ERCS
contracts are essential, and are an integral part of any cleanup con-
tractor's business. They cannot be severed. Award of separate contracts
for such services is impracticable.
Auditor Evaluation
The Agency comment does not indicate that a detailed evaluation of our
recommendation has been made. We have not challenged the need for the
tasks, but believe it is possible some are severable. We note that one
of the present zone contractors is an environmental engineering firm,
which performs little actual cleanup services.
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FINDING NO. 2 - EPA NEEDS TO OBTAIN REASONABLE CONTRACT RATES
EPA procurement officials operated in a poor negotiating environment during the
ERCS procurement because price competition, offerer independence, and price
analysis were all inadequate. To award the contract, these officials relied
primarily on their knowledge of prevailing market rates in determining that
proposed contract rates were reasonable. Had more complete information or
actual costs data been available, EPA would have been able to assess the
reasonableness of the proposed fixed rates by comparing them with anticipated
costs. :
When adequate price competition exists, Federal Procurement Regulations
(41 CFR Chapter 1) encourage the use of price analysis techniques to evaluate
the reasonableness of price proposals. As discussed in Finding 1, we have
concluded that various factors combined to preclude effective competition in
the ERCS procurement. The EPA contracting officer, however, made a determi-
nation that adequate price competition existed for the fixed rate part of
the ERCS contracts. Accordingly, the contracting officer did not request
detailed cost information. Aside from this determination, a procurement
official stated that the Contracts Division knew the contractors did not have
cost information. If the Contracts Division had determined that cost analysis
was required and it was unable to obtain the needed cost information after it
requested the information, then the Contracts Division would not have been
able to award the contracts.
The contracting officer used price analysis techniques to evaluate the reason-
ableness of proposed fixed rates. Based on this evaluation, the contracting
officer negotiated final fixed rates and awarded the four ERCS contracts. The
Federal Procurement Regulations define price analysis and when it is appropriate.
Title 41 CFR l-3.806(b) states that "Government procurement is primarily
concerned with the reasonableness of the price which the Government pays and
only secondarily with the eventual cost and profit to the contractor." However,
41 CFR l-3.807-2(a) states:
Some form of price or cost analysis should be made in connection
with every negotiated procurement action. The method and degree
of analysis, however, is dependent on the facts surrounding the
particular procurement and pricing situation.
Title 41 CFR 1-3.807-2 describes price analysis techniques and contrasts them
with cost analysis techniques:
Price analysis is the process of examining and evaluating a
prospective price without evaluation of the separate cost elements
and proposed profit of the individual prospective supplier whose
price is being evaluated. Price analysis may be accomplished in
various ways, including the following:
(i) The comparison of the price quotations submitted;
(ii) The comparison of prior quotations and contract prices with
current quotations for the same or similar end items . . .
it must also be recognized that such comparison may not detect
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an unreasonable current quotation unless the reasonableness of
the prior prices was established ....
Price analysis techniques should be used to support or supplement cost
analysis wherever appropriate.
Cost analysis is the review and evaluation of a contractor's cost or
pricing data .... It includes the appropriate verification of cost
data, the evaluation of specific elements of costs, and the projection
of these data to determine the effect on prices ....
Title 41 CFR l-3.807-3(f) provides guidance on whether price analysis or cost
analysis should be used. The Regulation states: "When there is adequate price
conpetition . . . cost or pricing data shall not be requested regardless of
the dollar amount involved." Title 41 CFR 1-3.807-1(1) (i) and (iii) define
"adequate price competition" as follows:
Price competition exists if offers are solicited and: (A) At
least two responsible offerers (B) who can satisfy the purchaser's
(e.g., the Government's) requirements (C) independently contend
for a contract to be awarded to the responsive and responsible
offerer submitting the lowest evaluated price (D) by submitting
priced offers responsive to the expressed requirements of the
solicitation. Whether there is price competition for a given
procurement is a matter of judgment to be based on evaluation
of whether each of the foregoing conditions (A) through (D) is
satisfied. Generally, in making this judgment, the smaller the
number of offerors, the greater the need for close evaluation.
A price is "based on" adequate price competition if it results
directly from such competition or, if price analysis (not cost
analysis) shows clearly that the price is reasonable in compa-
rison with current or recent prices for the same or substantially
the same items procured in comparable quantities under contracts
awarded as a result of adequate price competition (e.g., exercise
of an option in a contract for which there was adequate price
competition if the option price has been determined to be
reasonable ....
Reliance On Price Analysis
The contracting officer made a determination that the negotiated prices were
based on adequate price competition for each of the four ERCS contracts. For
example, the contracting officer's summary of negotiations for one zone contract
stated that "it is considered that adequate price competition exists in [a
zone] since at least two responsible offerors responded to the solicitation."
Accordingly, the contracting officer did not make any attempt to obtain specific
cost data. Instead, the contracting officer relied on the technique of price
analysis to set EPA's price objectives for the ERCS contracts and evaluate the
reasonableness of each proposed fixed rate. For example, in the contracting
officer's summary of negotiations for this zone, the price analysis which was
performed is described as follows:
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A price analysis was performed on the fixed-rate cleanup portion
of the two offers received for [the zone]. Proposed rates for
labor and equipment were compared to the rates proposed by the
other [final] 5 ERGS offerors, as well as to standard commercial
price lists on file in HPO [headquarters procurement office] for
similar items of equipment. The proposed rates were also
compared to rates currently or recently being paid under Notices
to Proceed, and to industry rental guides such as the Rental
Rate Blue Book and Rentals Unlimited pursuant to FPR 1-3.807-1. . . .
In addition to the rate comparisons mentioned in the contracting officer's
summary of negotiations, other rate information!was available which the
contracting officer had access to at the time of the negotiations. For
instance, rate information was available for planned removal actions and
cleanups performed by contractors for the Coast Guard under basic ordering
agreements. Prior audits had determined that some of the rates which were
being paid under EPA's Notice to Proceed contracts met the requirements for
catalog prices of commercial items sold to the general public.
We examined labor and equipment rates from other cleanup actions that was
available to the contracting officer at the time of the ERGS negotiations.
We concluded that the negotiated ERGS rates generally fell within a range of
those rates charged by contractors for certain other cleanup actions. The
contracting officer may have informally compared the ERGS rates with the rates
of these other cleanup actions (such as, those performed under basic ordering
agreements and planned removals). There was no documentation in the contract
files to support these comparisons. Based on the documented and informal rate
comparisons, procurement officials stated that they considered the negotiated
ERGS contract rates in line with market prices.
We will examine the usefulness of each of the four price standards mentioned
in the contracting officer's summary of negotiations.
Notice To Proceed Prices
In our opinion, the prices which were contained in Notice to Proceed (NTP)
contracts do not provide a valid basis for evaluating the reasonableness of
proposed fixed rates. The primary reasons for our opinion were expressed by
the ERGS project officer in his "Comments on Draft Guidance Manual for Costing
Immediate Removal Actions," dated December 6, 1983:
One of the major weaknesses of the NTP contracting system has been
that rates for cleanup equipment, materials, and personnel were
usually negotiated with the contractor noncompetitively and after
the work was completed. I am concerned about how representative
these data may be of fair and reasonable prices.
This office audited the incurred costs of Notice to Proceed contracts and
identified numerous problems with the contractors and their billing practices.
Recurrent audit findings noted that: (1) contractors claimed catalog prices
which were only based on commercial rates of competitors; (2) poor or non-
existent cost records made it impossible to evaluate labor and equipment
costs; (3) contractors charged rates for small equipment items that cost only
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a fraction of the rental charge; and (4) EPA was charged for excessive markups
on subcontractor costs.
Standard Price Lists
The contracting officer attempted to compare the proposed fixed rates for
each of the 22 labor categories with standard price lists from five cleanup
contractors (two of these same five contractors ultimately received ERGS
contracts). However, rates were not shown in any of these standard price
lists for seven of the 22 labor categories in the ERCS RFP. Furthermore, four
labor categories listed in the RFP were contained in only one standard price
list. We have concluded that there was little or no comparative standard for
half of the labor categories in the ERCS contracts except for the prices which
were contained in the other ERCS proposals (we will consider the comparability
of these proposals in a subsequent paragraph).
Industry Rental Guides
The contracting officer also attempted to compare the proposed equipment rates
with the rates in industry rental guides. However, rates were not shown in
the contracting officer's guides for 50 of the 104 equipment categories. In
addition, some of the RFP's descriptions of equipment items were so general
that price proposals could not be meaningfully compared with rental guide
rates. For example, the contracting officer's Summary of Negotiations for one
zone contained the following remark: "... there were many types of items
which could fit our description, with hourly rates ranging from $6 to $225."
Furthermore, some of the rates that were shown in the rental guides were merely
suggested or generic rates (i.e., the actual rates would differ depending on
various factors, such as the model of the equipment, etc.).
Furthermore, one of the rental guide's rates included costs, such as interest
on investment, that are not allowed by 41 CFR 1-15.205-17. A proposed clari-
fication of the Federal Acquisition Regulations (48 CFR 31.105) states:
Unallowable costs would not be rendered allowable based on the
use of construction equipment cost schedules .... For example,
schedules need to be adjusted for Government contract costing
purposes if they are based on replacement cost, include unallow-
able interest costs, or use improper cost of money rates or
computations. Contracting officers should review the computa-
tions and factors included within the specified schedule and
ensure that unallowable or unacceptably computed factors are
not allowed in cost submissions.
Accordingly, we have concluded that there was little or no comparative price
standard for nearly half of the 104 categories of equipment in the ERCS con-
tracts, except for the prices which were contained in the other ERCS proposals.
Comparability Of Proposed ERCS Rates
The primary price analysis technique, which was used by the contracting officer
to evaluate the reasonableness of proposed fixed rates, was to compare the
rates of the ERCS offerers. The rates of the initial seven offerers were
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compared, and the subsequent rates of the offerers' best and final proposals
were also compared. We question whether adequate price competition existed
among these seven firms. In particular, we question whether the successful
proposals for two zones were based on adequate price competition. Our concern
is based on several considerations.
First, the ERCS contracts were not formally advertised contracts where a firm
might be expected to submit its best and most reasonable prices in its initial
proposal. In contrast to this type of competitive procurement, the ERCS RFP
stated that, "Technical quality shall be considered more important than cost
or price" (emphasis added). The RFP also stated that the "Selection of an
offer for negotiation and award shall be accomplished in accordance with FPR
1-3.805." This regulation states in part that:
After receipt of initial proposals, written or oral discussions
shall be conducted with all responsible offerers who submitted
proposals within a competitive range ....
Accordingly, each firm knew that extensive negotiations would take place and
that contract award would not be based primarily on proposed prices. In this
context, we question whether each firm's initial proposal reflected genuine
price competition. The unreasonableness of the initially proposed equipment
rates of one company is indicated by the comments of EPA's Technical Evaluation
Panel (TEP):
The Technical Evaluation Panel has found evidence that the equipment
rates proposed to the Government are extremely excessive [emphasis
added]. This evidence points out that not only is the Government
subject to potential overcharges, but also that a precedent for
establishing new standards of expenditure in the cleanup industry
will far exceed that which the TEP believes is presently the accepted
norm.
Aside from the indications that firms might not have submitted reasonable
initial proposals, we noted that there was minimal or no competitive incentive
for two of the companies to negotiate in good faith. For one zone, only one
proposal was submitted and 41 CFR 1-3.807-1(1)(i) states that "Price competi-
tion exists if .... At least two responsible offerers . . . independently
contend for a contract" (emphasis added). Since only one company contended
for this contract, it did not have any pressure from other offerers to nego-
tiate lower rates.
In another zone, only two firms submitted proposals, and one of the firms
withdrew its proposal before the other's final negotiation session. We
question how much competitive pressure remained for the remaining offerer to
negotiate lower and more reasonable fixed rates under these circumstances.
In this connection, we note the contracting officer's statement in the summary
of negotiation for this contract: "As a result of lengthy negotiations, [the.
company's] best and final offer included a reduction of over $9.3 million for
the cleanup effort."
The fact that there was such a large concession as $9.3 million for a contract
with the potential of $37.3 million raises concern regarding (1) the competi-
tiveness and reasonableness of the company's first proposal, (2) the compara-
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bility of the initial seven ERCS proposals, (3) the merits of maintaining that
the seven proposals reflect adequate price competition, and (4) the justifica-
tion for performing a price analysis by comparing the seven proposals to
evaluate the reasonableness of each individual proposal.
These concerns are reinforced by comments made by the contracting officer.
She did not believe the best and final offers of two companies represented
their best proposals, and advised the companies that there would not be an
award unless they lowered their proposed prices. She reopened negotiations
"at the eleventh hour" and obtained additional reductions of about $2 million
from one company and $440,000 from the other. The $440,000 was in addition to
an earlier reduction of $9.3 million made by the same company.
Accordingly, the facts that (1) the initial proposals were not submitted for
formally advertised contracts when a firm might normally be expected to submit
its best offer, (2) proposed prices were not the primary basis for award, and
(3) significant price concessions were obtained both before and after the
scheduled final negotiation session, indicate that the proposed prices may not
have been reasonable or based on meaningful competitive considerations.
We also question whether all of the six final offerers "independently contended"
for the four ERCS contracts within the meaning of 41 CFR l-3.870-l(b)(l)(i).
In Finding 1, we discussed the interrelationships which existed among the
offerors and the special circumstances which reduced the level of competition.
Aside from these considerations, the contracting officer treated all proposals
as if they were for the same contract, rather than evaluate each proposal in
light of the specific zone for which it was submitted. We question the merits
of comparing seven proposals which were submitted for four different geographic
areas of the country. The contracting officer addressed this subject in summa-
rizing the negotiations for one zone's ERCS contract:
[This zone] had only one offeror. However, adequate price
competition is considered to exist for the purposes of determining
the reasonableness of the proposed fixed rates pursuant to
FPR l-3.807-l(b)(l). The other three zones being procured by the
same RFP are considered to be essentially the same requirement except
for estimated quantities and geographic coverage. The geographic
differences are believed to be minimal as our 2 1/2 years of procure^
ment experience with this industry has demonstrated that prices do
not vary significantly from one area of the country to another. The
estimated quantities [for this zone] are very close in [another
zone], and the scope of this procurement is so large in each zone
that price differentials should not be substantial by reason of
estimated volume. In all zones, a large amount of subcontracting
is anticipated. Therefore, as adequate price competition existed
under [3 zones] of RFP WA 83-H030, and prices thereunder were
determined to be fair and reasonable, comparison of rates obtained
in those zones is considered to satisfy the requirements of FPR
1-3.807-1 (b)(l)(iii).
Given that the ERCS contracts are similar, the contracting officer's principal
rationale for comparing the ERCS proposals is that prices in Notice to Proceed
contracts "do not vary significantly from one area of the country to the other."
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We compared eight frequently used Tabor categories in three zones (located in
the Northeast, Southeast and Midwest) to determine if the actual average labor
rates varied between geographical locations. The rates of the three zone
contractors and three major subcontractors were used. As can be shown in the
following schedule, the rates did vary between zones with variances between 5
and 104 percent.
ZONE WITH LOWEST RATE ZONE WITH HIGHEST RATE
LABOR CATEGORY
Laborer
Foreman 2
Equipment Operator II
Cleanup Technician I
Cleanup Technician II
Response Manager
Foreman 3
Truck Driver
ZONE
Midwest-sub
Northeast
Northeast-sub
Northeast
Northeast
Southeast
Southeast
Southeast
RATE
$ 5.50
8.00
7.02
5.67
7.17
10.58
8.50
5.77
ZONE
Northeast
Southeast
Midwest
Southeast-sub
Midwest
Southeast-sub
Midwest-sub
Midwest
RATE
$ 5.78
9.81
8.73
7.55
11.50
19.25
16.01
11.75
RANGE
5%
23%
24%
33%
60%
82%
104%
In summary, we do not agree that the seven initial ERCS proposals reflected
adequate price competition or that the prices in these proposals should have
been used as standards of reasonableness for the other proposals. Our judgment
is based on the importance we attribute to the following combination of factors:
1. No more than two of the seven offerers competed for a specific contract.
2. The interrelationships among the offerers (subcontracting, composite
rates, etc.) reduced the likelihood that each of them competed indepen-
dently with each other on prices.
3. The contractors' knowledge that (a) extensive negotiations would be held,
and (b) contract award would not be based primarily on proposed prices,
reduced the likelihood that the proposed prices would be competitive or
reasonable.
4. This expectation is strongly supported by the facts that EPA's Technical
Evaluation Panel found one company's initial equipment rates to be
"extremely excessive,11 and another company's price reductions amounted
to nearly 27 percent of its final maximum contract potential (concessions
of nearly $10 million for a contract which could total $37.3 million).
5. There should be significant cost differences for cleanup services in
different parts of the country, and these differences reduce the value
of comparing ERCS proposals for different geographic regions.
Based on the above considerations, we question the use of proposed rates of
ERCS offerers as a major component of price analysis. This is particularly
true for the two zones with only one final offeror.
Negotiation Of Rates
We reviewed the negotiations conducted with one contractor in detail. During
the initial negotiation session, EPA representatives identified to the
contractor 15 equipment items anticipated to have high usage during cleanup
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actions. This determination of high usage items was different from the usage
assumptions contained in the RFP.
We compared the total costs proposed by the contractor for these 15 equipment
items for the base year, including the option to increase quantity. The total
costs were estimated using hourly, daily, weekly, and monthly rates proposed
by the contractor times the estimated usage rates for each of these four time
periods as contained in the RFP. The contractor increased the proposed costs
for all 15 items in its next "proposal, the best and final.
During a subsequent session, the contracting officer negotiated down the costs
for all 15 items. However, 10 of the 15 high usage items remained at costs
higher than those in the earlier proposal.
The magnitude of the charges in the estimated base year costs for items
identified as high usage is shown below:
HIGH USAGE EQUIPMENT ITEMS
Percent of Change in Costs Number
Proposed to Final Rates of Items
-55% to 0% 5
1% to 55% 4
56% to 150% 3
over 150% _3
Total 15
The total potential dollar increase for the base year for the 15 high usage
items, based on usage factors in the RFP, was $410,195. This was a 50%
increase over costs associated with the earlier proposed rates.
Our analyses indicated that the ERCS contractor increased the costs for the
equipment items identified by EPA in negotiations as high usage items. By the
last negotiation session, the winning contractor's competition had withdrawn
its proposal. Therefore, the contractor had no competitive incentive to nego-
tiate lower rates. Even though the negotiations resulted in some price
concessions, the contractor gained from the negotiations on the equipment
items representing the high estimated usage.
Conclusion
We have concluded that since there was limited competition among the offerers,
price analysis above did not ensure the reasonableness of the final negotiated
rates. Furthermore, the pricing factors used by the contracting officer in
performing price analysis had limited usefulness.
Agency Comments
Agency officials stated that fair and reasonable prices were negotiated for
the ERCS contracts for all four zones. Officials contend that in two zones
price reasonableness was achieved through adequate price competition. In the
other two zones, officials determined price reasonableness by comparing rates
proposed with those found to be reasonable as the result of price competition.
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The fact that initial proposals may have been unreasonable is irrelevant.
Final proposals in all four zones were fair and reasonable as evidenced by the
magnitude of concessions made by the offerers.
Use Of Price Standards
The Agency's response indicated that overall, procurement officials
determined that proposed rates were reasonable by comparing them with
rates accepted as reasonable on Notice to Proceed contracts, commercial
price lists, and industry rental guides. Additionally, procurement
officials used rate information from Coast Guard basic ordering agreements
and EPA planned removal actions, which were negotiated on a competitive
basis. In addition, prior audits found that rates in some Notice to
Proceed contracts qualified as established catalog prices for commercial
items sold to the public. The same was true of some standard price lists.
While industry rental guides were not complete, they were useful in pro-
viding baseline cost information. Unallowable elements of cost were
minimal compared to the total rate and other allowable costs.
Comparability Of Proposed ERGS Rates
The response stated that the report is incorrectly concerned about the
impact of emphasizing technical factors over cost factors on price compe-
tition and places far too much emphasis on initial rather than final
proposals. While offerers may not initially submit their best proposal
from either a cost or technical standpoint, negotiations with the govern-
ment permit offerers to improve their technical proposals and offer more
advantageous pricing to the Government.
Officials disagreed that two firms cited in the report had no incentive
to negotiate in good faith since they either knew or could have known
they were the only offerer in their respective zones. The Agency obtained
major price concessions from the two firms and achieved reasonable pricing
in each offerer's final submission. Concessions of $9.3 million,
$2 million, and $440,000 prove this point.
Officials disagreed that proposals may not have been independently
prepared because they indicated that the report does not have sufficient
basis to support this conclusion.
Officials also disagreed with the report's issue that the seven initial
ERCS proposals may not have reflected adequate price competition or that
prices in these proposals should not have been used as standards of
reasonableness for the other proposals.
Negotiation Of Rates
Officials disagreed that a contractor increased labor and equipment rates
after it knew EPA's negotiations objectives. The report's conclusion is
based on a very small sample of negotiated items. During negotiations,
EPA obtained concessions of $9.3 million and $440,000 from the contractor
whose contract potentially amounted to $37.3 million. They indicated
that a comparison of all rates between initial and final proposals shows
a downward trend.
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Auditor Evaluation
We disagree with many statements made by Agency officials in their reply.
In view of the significant differences that we found between costs and the
ERGS rates, we have concluded that the procedures that Agency officials used
to determine price reasonableness were inadequate. Our comments to specific
statements made by Agency officials follow.
Use Of Price Standards :
The response states that the procurement officials used rate information
from Coast Guard basic ordering agreements and EPA planned removal actions
to help determine that proposed rates were reasonable. While such inform-
ation was available, we saw no documentation to show that EPA used these
additional bases of comparison. Since negotiations were primarily about
126 fixed rates for labor categories and equipment items, we question
whether contracting officers could have had this level of detail "in
mind" sufficiently for effective use during negotiations.
Although prior audits showed that rates included in some Notice to Proceed
contracts qualified as established catalog prices for commercial items,
in a great many cases proposed prices did not qualify. Furthermore,
items which could meet the minimum conditions to qualify as catalog prices
carried no presumption of inherent reasonableness.
The Agency's response stated that the procurement officials used other
bases or sources of information if one source had rates appearing exces-
sive. The inadequacies of each basis of comparison are not necessarily
fully avoided because other inadequate bases were also used. In addition,
the infancy of this industry made it questionable whether the reasonable-
ness of prices could be determined based on market experience. With EPA
as a major industry client purchasing its services under these fixed
rates, we question whether there is a fully competitive marketplace or
whether the ERCS rates have become the basis for industry pricing.
Comparability Of Proposed ERGS Rates
Agency officials state that the report is incorrectly concerned about the
impact of emphasizing technical factors over "cost factors on price compe-
tition. Our report, however, did not question the relative weighting of
technical and cost factors.
Officials also replied that while offerors may not initially submit the
best proposal from either a cost or technical standpoint, negotiations
result in improvements in technical proposals and more advantageous
pricing to the Government. While we agree this is the general rule, our
report demonstrates that the Government did not always obtain more advan-
tageous pricing. In the instance described in the report, the procure-
ment officials did not believe the "Best and Final" offers represented
the most attractive proposal and reopened negotiations after receipt.
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Officials also stated that the report does not have a basis for question-
ing whether all of the six final offerers "independently contended" for
the four ERGS contacts. We believe the information we have presented in
our report regarding company interrelationships and exchanges of informa-
tion strongly suggests that the offerers did not independently contend
for the ERGS contracts.
The response further stated that the report's questioning of the merits of
comparing seven proposals submitted in four different geographical areas
is improper. The Agency's response included a table depicting minimum
hourly wages in four areas of the country prescribed by the Department of
Labor. In our opinion, this data further demonstrate our point. Since
the percentages shown in the table are variances, the actual differences
between the low and high zones are twice the percentages shown. The
table shows zone differences averaging over 19 percent and as great as
30 percent. Our use of actual wages similarly showed substantial varia-
tions between zones and individual firms. Thus, a comparison of rates
between contractors bidding in different zones across the country would do
little to establish the reasonableness of proposed labor rates.
Negotiation Of Rates
The Agency's response depicted the manner in which all rates increased
and decreased between initial and final proposals. Officials stated
there is a clear downward trend in the rates in all instances. The second
column of this table, however, shows 39 increases in rates.
In addition, our review showed that during negotiations, an EPA program
representative identified expected high usage equipment items that were
different from those indicated as high usage in the RFP. Four of the 15
items designated as high usage in the negotiations were not so identified
in the RFP. As our report states, the ERGS contractor increased its
prices from its earlier proposed rates for equipment items identified
during negotiations as high usage items.
Recommendations
We recommend that EPA not rely solely on price analysis when there are not
at least two independent, responsible offerers for a specific contract at
the Best and Final stage.
Agency Comment
Agency officials stated the ability to perform price analysis does not
depend exclusively on the presence of at least two independent and respon-
sible offerers for a specific contract at the Best and Final offer stage.
The recommendation would eliminate alternatives allowed in the Federal
Acquisition Regulation, thus eliminating important contracting tools.
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Auditor Evaluation
The Agency has not documented that price comparisons were performed with
contracts that had been awarded as a result of adequate price competition.
Also, given the infancy of the industry, we believe that minimum adherence
to regulatory requirements would not give adequate assurance of reasonable
prices. Thus, officials should not rely only on price analysis when there
are not at least two independent responsible offerers for a specific
contract at the Best and Final stage. ;
2. We recommend that EPA treat the following as inadequate bases for price
analysis:
a. Notice to Proceed rates,
b. Prior ERGS zone contract rates,
c. Industry rental guides which include costs that are unallowable for
government contracts, and
d. Proposals for ERCS contracts in different geographical areas.
Agency Comment
The Agency's response stated that the recommendation would eliminate
important pricing information. The first three items assure that pricing
on instant procurements is in line with prevailing market prices, while
the last item provides current price information which is comparable from
zone to zone and is crucial to reasonable pricing.
Auditor Evaluation
The bases cited are not sufficient to ensure reasonableness of negotiated
rates. To treat certain pricing information as inadequate does not mean
they must be ignored. Instead, the information should be considered, but
not relied upon when determining the reasonableness of proposed rates.
We believe an artificial pricing structure may have been created in this
industry. Accordingly, historical prices cannot be properly used as
benchmarks by which to judge the reasonableness of future prices.
We recommend that EPA attempt to obtain adequate cost data from offerers
in any situation where price analysis is not clearly adequate as a basis
for negotiations. Given the history of the interrelationships among
potential ERCS contractors, cost data should be obtained whenever there
is any indication of a lack of offeror independence, such as occurred in
the initial ERCS procurement.
Agency Comments
Officials agreed that cost data may be necessary when pricing data will
not support an adequate price analysis. They did not agree that there was
a lack of offeror independence in the original ERCS procurement.
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Auditor Evaluation
Our report presents information which strongly suggests the likelihood
of a lack of offerer independence in the original ERCS procurement. In
any situations where there are indications of less than independent
competition, we believe cost data should be used as a basis for
negotiations.
We recommend that EPA require as a condition of each ERGS contract that
the contractor maintain adequate cost data for all (a) equipment items
(including utilization logs), (b) labor categories, and (c) materials.
In addition, a retainage provision should be included to ensure compliance
with this condition and the Agency should strongly consider such compli-
ance as a major factor in determining whether to execute options to
extend or increase the ceiling of the contract.
Agency Comment
The Agency's response points out that current contract provisions already
require contractors to maintain documentation to support certain costs and
payroll charges. Furthermore, the contracting officer or his represent-
ative, have access to all such records.
Auditor Evaluation
The primary deficiency on maintenance of cost data is in the area of
equipment. The ERCS contracts do not currently require the maintenance
of such data. Our recommendation did not address access to records
because the Agency has adequate legal basis for access.
We recommend that in any instance in which a contract is awarded without
sufficiently adequate price analysis or cost data, EPA move as expedi-
tiously as possible to require that the fixed rates are provisional pending
submission of adequate cost data. When this is accomplished provisional
fixed rates should be subject to later negotiation and downward adjustment
retroactive to the contract effective date, when the contractor's markup
on individual rates exceed an established ceiling. In the event that
negotiations to finalize provisional rates reach an impasse, the contracting
officer should unilaterally make a rate adjustment under the Disputes clause,
A unilateral rate adjustment should be subject to resolution under a
standard disputes provision. In the future, option years should not be
exercised without the submission and evaluation of cost data predicated on
base year actual experience.
Agency Comment
Officials stated their policy is never to award a contract without
adequate price analysis or cost analysis, except under extremely urgent
circumstances which warrant the use of a letter contract (or Notice to
Proceed). If provisional rates under the ERCS contracts were used, they
would encounter the same problem experienced under the Notice to Proceed
contracts (no competitive incentive to control costs).
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Although contractors could be required to maintain adequate records by
contract provisions, the adequacy of records is subject to judgment and,
therefore, problematic.
Auditor Evaluation
We have modified our recommendation to rely on the contracting officer's
unilateral settlement rights rather than an arbitrary formula. However,
we do not accept EPA's apparent conclusion that it may be fruitless to
impose records requirements by contractual provision.
The differences between the Notice to Proceed contracts and the ERCS
contracts regarding use of provisional rates are: (1) the Notice to
Proceed contracts were sole source, while the rates under ERCS contracts
are competed, and (2) the Agency would set provisional rates under the
ERCS contracts, not the contractor.
6. We recommend that EPA pay particular attention to the reasonableness of
proposed rates for items which have received heavy usage in past ERCS
performance. In addition, EPA should agree to higher rates than
previously proposed by an offerer only if the reasonableness of the
higher proposed rates is well documented.
Agency Comment
Officials agreed with this recommendation. More accurate and detailed
actual utilization records are becoming available and this data will be a
prominent part of the ERCS rate price analysis for new procurements.
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FINDING NO. 3 - USE OF FIXED RATES SHOULD BE LIMITED
EPA often paid unreasonable prices for subcontracted, rented or purchased
services under the ERCS contracts. This occurred because EPA used a fixed rate
structure to pay for the services regardless of where the services were obtain-
ed or what costs were involved. Prime contractors established subcontract
fixed rates as a percentage of the ERCS fixed rates. This method allowed the
prime contractors to retain a percentage of the ERCS fixed rates and did not
consider subcontractor cost and markup factors. In addition, the fixed rate
structure permitted contractors (primes and subs) to have excessive markups on
rented equipment and purchased materials. Procurement officials believed
that a single fixed rate schedule for each contractor (prime or sub) would
simplify the negotiation and administration of the ERCS contracts.
As discussed in Finding No. 1, procurement officials expected that the ERCS
contract would require substantial subcontracting to obtain necessary labor
and equipment. All subcontractors or other firms proposed for regular use
under the contract and considered in the technical evaluation of the offerer's
capabilities were considered part of the "permanent contract team." The RFP
required the proposed fixed rates to be 'composite rates', which would apply
regardless of whether the prime contractor or permanent team subcontractor
performed the actual work. The intended use of the "composite rates" was
clarified in 1985, when the Director of the Procurement and Contracts Manag-
ement Division wrote:
This principle of fixed rate contracting holds true regardless of
whether or not the employees who perform the services are from the
prime contractor, a permanent contract team, or any other
subcontractor. . . . The same principle of fixed rate contracting
utilizeCd] for labor applies [to equipment] .... The prime
contractor is to be paid the agreed upon fixed rates for all
scheduled equipment in accordance with Exhibit C of the contract
irrespective of ownership.
Subcontracted Services
Each prime contractor negotiated different labor and equipment rates with its
team subcontractors. Generally, the prime contractor's negotiating strategies
were based on obtaining a percentage of the fixed rates. We found no evidence
that subcontractors' costs and markups were considered during the negotiation
process. Consequently, prime contractors did not have knowledge or interest
in subcontractors' markups, as long as the markups could be passed along to
EPA and the prime contractor could still retain a percentage of the fixed
rates.
One prime contractor paid its team subcontractors 93.4 percent of the fixed
rates for labor and equipment. We selected for review one of its team subcon-
tractors which had provided substantial services on three delivery orders.
We compared the subcontractor's 1984 rates to the prime contractor and
associated costs for selected labor and equipment items. The selected labor
classifications included equipment operators 1 and 2, technicians 1 and 2, a
driver, and a laborer. The equipment items included a pickup, 4-wheel drive, .
2-ton and dump trucks, a passenger van, an over-the-road tractor, a wheel type
front-end loader, and a backhoe. On the average, the subcontractor's estimated
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labor and equipment costs were respectively about 61 and between 34 and 59
percent of the average fixed rates paid by EPA. Thus, EPA paid about 63
percent more for labor than the subcontractor's labor costs and between 69
and 192 percent more for equipment than the subcontractor's equipment costs.
Although we cannot statistically project the labor and equipment markup
percentages to the actual costs paid by EPA, we believe that the percentages
are sufficiently representative to reasonably approximate cost and markup.
EPA paid $878,652 for the work performed by the subcontractor on the three
delivery orders. Using our estimated markup factors of 63 percent for labor
and 69 to 192 percent for equipment, we estimate that EPA paid between
$342,000 and $579,000 more than the subcontractor's costs (total markup)
depending upon the labor and equipment mix. Of the possible total markup, the
prime contractor's actual share was $54,936 and the subcontractor received the
balance.
A second prime contractor did not use a fixed percentage formula to pay its
subcontractors. However, we reviewed the 1984 rates for three different
subcontractors and found that the prime contractor usually did not pay the
subcontractors more than 80 percent of the ERGS fixed rates. The remaining
20 percent was retained by the prime contractor. On one delivery order, a
subcontractor billed the prime contractor $57,795 for labor and equipment.
The prime contractor billed EPA $70,864. The subcontractor's costs were not
available.
One subcontractor's rates, which were billed to the prime contractor for ERGS
work as shown in the following schedules were higher than some of the rates
listed in its catalog. The rates billed to the prime contractor were generally
80 percent of the contractor's ERGS rate.
Subcontractor
Labor Classification
Technician/Handler Level
Technician/Handler Level
Laborer
Equipment Operator Level
Welder/Electrician
Foreman Level 2
Equipment Operator Level
Foreman Level 3
Supervisor
ERGS
Rate
Billed
Rate
Catalog
Rate
Percent of
Increase Catalog
to Billed Rates
1
2
1
2
$21.00
26.50
18.00
25.00
30.00
30.00
30.00
34.00
50.00
$16.80
18.80
15.00
20.00
24.00
24.00
24.00
27.50
40.00
n/a
n/a
$15.25
17e75
19.75
19.75
17.75
19.75
22.75
13
22
22
35
59
76
The catalog rates listed were in effect in January 1984, when all the ERGS
contracts were in effect. The subcontractor's catalog was revised twice
through April 1985. However, with three exceptions, the catalog rates were
always lower than the ERGS subcontract rates. None of the catalogs differen-
tiated prices between the classification levels, but the subcontractor billed
the different classification levels under its ERGS subcontract. Also, the
subcontractor added the labor classification "Technician/Material Handler" to
the catalog in-June 1984.
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A third prime contractor did not use fixed markups. The markups varied
considerably from subcontractor to subcontractor and item to item. While
the prime contractor's average markup on subcontracted services was generally
reasonable (0 to 15%), the subcontractors' rates included substantial markups.
For example, the ERCS contract specified a daily fixed rate of $221 for a Case
580 Backhoe. The prime contractor had an agreement with one of its subcontrac-
tors to pay $200 per day for the same Case 580 Backhoe. The subcontractor's
estimated costs for providing the backhoe were only $60 per day. Consequently,
for a single day's use, EPA would pay an estimated $161, or about 268 percent
more than the subcontractor's estimated costs. Since the prime contractor
did not apply G&A expenses to its ERCS subcontracts, the prime contractor's
daily markup was $21 per day or about 13 percent of the total markup.
Average markups do not take into account the wide markup variances from item
to item and the amount of utilization for the different items. Continuing
with the same prime contractor/subcontractor arrangement for a Case 580 Backhoe
discussed in the preceding paragraph, we compared the actual charges on a
specific delivery order to the total estimated costs. Using the fixed rates
in the ERCS contract, EPA paid $11,176 for the Case 580 Backhoe as follows:
Three Months at $3,100 per Month $ 9,300
One Week at $992 per Week 992
Four Days at $221 per Day 884
Total Charge $11,176
Based on their agreement, the prime contractor paid its subcontractor $10,130
for the same backhoe:
Three Months at $2,810 per Month $ 8,430
One Week at $900 per Week 900
Four Days at $200 per Day 800
Total Charge $10,130
The subcontractor's estimated costs were computed as follows:
Three Months at $1,299 per Month
One Week at $300 per Week
Four Days at $60 per Day
Total Estimated Cost
Consequently, in this specific instance, EPA paid 152 percent ($6,739) more
than the subcontractor's total estimated costs. Since the prime contractor
did not apply G&A costs to ERCS subcontracts, the prime contractor's portion
of the markup was $1,046; the subcontractor's portion was $5,693.
A similar example occurred with a 2-inch trash pump. On one delivery order
the subcontractor charged the prime contractor $3,220 for the use of a 2-inch
trash pump. EPA paid $4,025 to the prime contractor for the same pump, a 25
percent markup. The subcontractor's estimated costs for the period billed
were $66. The pump was purchased in 1983 for $541 and its useful life for
depreciation purposes was five years. Consequently, EPA paid $3,959 more than
the subcontractor's cost. Of the total markup, the prime contractor received
$805 and the subcontractor received $3,154. Although these examples may appear
extreme, it was common for EPA to pay rates in excess of 150 percent over costs.
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Similarly EPA paid its subcontractors amounts substantially in excess of the
purchase price for small equipment items. The examples below were from one
subcontractor; the amounts paid by EPA represent the charges on a single
delivery order:
Equipment Item
125 Ib Dry Chem Fire Extinguisher
Non-Sparking Tools
Emergency Lighting*
Subcontractor's Paid
Purchase Price by EPA
$1,635 $3,960
399 2,085
348 832
* Net book value for this item is $0. The purchase price was fully
depreciated from 8/3/78 to 8/2/81 on the straight line basis.
The ERCS contract also provided fixed hourly rates for security guard services,
Most prime contractors obtained guard services from a local security firm near
the cleanup site. We reviewed the costs for three firms to provide security
services at four cleanup sites in three different zones. We compared these
costs to the amounts that EPA paid and found that it paid 49 percent more than
the security firms billed for their services:
1.
2.
3.
4.
Total
Paid by
Contractor
$ 8,489
29,435
13,921
11.937
$63,782
Paid
by EPA
$20,880
43,673
17,009
13,712
$95,274
Difference
$12,391
14,238
3,088
1,775
$31,492
Markup
Percent
146
48
22
15
Procurement officials had been alerted prior to the ERCS procurement that the
application of prime contractor fixed rates to subcontract tasks would create
high markups. Within the 14 months prior to ERCS negotiations, we issued nine
audit reports on Notice to Proceed contracts which included issues that were
subsequently relevant to the ERCS procurement. Two audit reports questioned
subcontract labor charged at prime contract rates as being unreasonables
because the rates included the prime contractor's overhead and other "loaded"
rate costs, which did not apply to subcontract labor.
In August 1985, we wrote to procurement officials specifically disclosing that
prime contractors were obtaining security services for considerably less cost
than the negotiated fixed rates. We were told that this situation was an
aberration from what EPA intended and that contracting officers would negotiate
contract modifications which would eliminate the fixed rate for security guard
services and provide for reimbursement based on actual costs. Although the
contracting officers made the change in early 1986, the modification was
effective only for the remaining contract period.
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Rented Equipment
Both prime contractors and subcontractors charged fixed rates for rented
equipment. Generally, for both the prime contractors and subcontractors,
the estimated incurred costs for leased or rented equipment were significantly
less than the applicable fixed rates.
We estimated the costs incurred by one prime contractor for all 24 items of
rented equipment used on four delivery orders. Our estimate included the
actual rental costs paid by the prime contractor and a general and admin-
istrative expense factor which was estimated by the prime contractor. When
compared to the fixed rates charged to EPA, we estimated that EPA paid 85
percent more than the prime contractor incurred. The prime contractor
incurred estimated costs of $22,865 and charged EPA $42,258.
One of the more significant examples of excessive markup on rented equipment
was an office trailer (8 ft. x 32 ft.). On one delivery order, EPA paid
$3,535, or $2,934 (488%) more than the estimated costs of $601 incurred by the
prime contractor. In another instance, the prime contractor reimbursed an
employee $1,446 for his passenger sedan. This prime contractor billed EPA
$2,651.
Subcontractors also rented equipment for use at cleanup sites. The subcon-
tractors used fixed rates to charge prime contractors which in turn used
different fixed rates to charge EPA. Generally, both the subcontractors and
prime contractors each received part of the markup on rented equipment. For
example, one subcontractor's cost was $16 a day to lease a pickup truck. The
subcontractor charged the prime contractor $45 per day. The prime contractor
charged EPA $58 a day, a net markup of 262 percent over the basic $16 cost.
We reviewed 15 other equipment items which the subcontractor had leased with
following results:
Subcontractor's ERCS Markup
Description Daily CosF Daily Rate" Rate Percent
Vibrating Compactor $305 $580 $864* 183
Trash Pump (4-inch) 58 143 157* 171
Scraper (TS-14) 305 742 816* 168
Trash Pump (3-inch) 47 84 105 123
Dump Truck 122 219 240 97
Lowboy w/ Tractor (less than 20 tons) 152 263 290* 91
Lowboy w/ Tractor (20-40 tons) 244 378 415* 70
Dozer (D-8) 487 734 807* 66
Air Compressor (250 FM) 91 136 150* 65
Steam Jenny 51 67 74 45
Front-end Loader 292 350 385* 32
T-4 Blade Dozer 244 275 300* 23
Vacuum Truck 305 318 350* 15
Dozer (HD-11) 341 350 385* 13
Gradall (G-1000) 609 475 522* <14>
* Provisional Rate - The rate is subject to negotiation.
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Materials
The ERCS contract also provided certain fixed material rates. We compared
materials used on four delivery orders to the prime contractor's inventory
list and selected a sample of seven common items. Three of these items had
fixed rates in the ERCS contract and the remaining four items had provisional
rates. The rates charged to EPA were 21 to 652 percent more than the prime
contractor's costs:
Contractor's Paid Markup
Item Cost By EPA Percent
Stainless Steel Pans $ 1.33 $ 10.00* 652
Sand 1.71 6.00* 251
Visqueen 25.50 65.00* 155
Pool Liner 134.45 240.00* 78
55 Gallon Drums 17E 15.47 22.00 42
Overpacks 67.21 90.00 34
Gallon Cans 1.07 1.30 21
* Provisional Rate - The rate is subject to negotiation.
Procurement officials told us that EPA wanted to closely monitor the actual
amount of cleanup services performed and quickly document the cost of cleaning
up the emergency situations. An attempt was made to identify frequently used
labor and equipment and establish a fixed rate for these items. Therefore,
prime contractors could be paid immediately at the established fixed rate
and other services could be paid provisionally. We were also told by the
contracting officer that the composite fixed rates were a practical necessity
for various reasons including the fact that it would be extremely difficult to
negotiate or administer a contract if different rates were applicable to each
cleanup company..
Allowing prime contractors to claim substantial quantities of subcontracted,
rented or purchased items and services at fixed rates which are substantially
higher than the actual costs for the items violates the test of reasonableness
contained in 41 CFR 1-15.201-3:
A cost is reasonable if, in its nature or amount, it does not exceed
that which would be incurred by an ordinarily prudent person in the
conduct of competitive business. The question of the reasonableness
of specific costs must be -scrutinized with particular care in con-
nection with firms or separate divisions thereof which may not be
subject to effective competitive restraints. ... In determining
the reasonableness of a given cost, consideration shall be given
to ... The action that a prudent businessman would take in the
circumstances, considering his responsibilities to the owners of
the business, his employees, his customers, the Government, and the
public at large; and (d) Significant deviations from the established
practices of the contractor which may unjustifiably' increase the
contract costs.
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Conclusion
The rate structure in the ERCS contract permitted contractors (prime and sub)
an unreasonable markup on many labor, equipment and material items. We find
no acceptable reason to routinely use a fixed rate structure for services and
other items which allows the contractors (prime and sub) to markup their costs
exorbitantly.
We recognize EPA's desire to (1) have a single point of accountability for
each cleanup, (2) closely monitor the actual amount of cleanup services
performed, (3) promptly pay the contractors and (4) immediately document the
cleanup costs. However, we also recognize that EPA's contract rate structure
was not cost effective in many instances. Procurement officials would have
realized the excessive markup and profit potentials if they had made better
use of the information available from the Notice to Proceed audits and obtained
reliable cost data from the offerers.
EPA must ensure that the procurement process obtains and utilizes the best
possible information on which to make judgments and negotiate prices. Fixed-
rate-contracts are not cost effective unless the fixed rates are reasonable
and reflective of the circumstances involved. The factors which limited the
ERCS procurement -- restrictions in the RFP and difficult contract specifica-
tions -- undoubtedly affected the contract pricing structure and the way
contractors conduct their business under the contract. Implementation of
the recommendations in Finding No. 1 would most likely reduce some of the
unreasonable charges brought about by the fixed rate pricing structure.
However, to ensure that this problem is eliminated, we make the following
recommendation.
Recommendation
We recommend that EPA limit the use of fixed rates to the labor services and
equipment which are under the prime contractors' exclusive control or ownership.
The costs for labor, equipment and materials which are subcontracted, rented,
borrowed or purchased for the ERCS contracts should be reimbursed on a cost-
plus-award-fee basis. The amount which EPA pays for any item on the cost-plus-
award-fee basis should be limited to the negotiated fixed rate for the same or
similar item. The award fee should be based on (1) the prime contractor's
effectiveness in obtaining and utilizing cost and pricing data for negotiating
subcontract prices, and (2) the reasonableness of the subcontract prices when
compared to the prime contractor's own costs.
Agency Comments
Officials said the report's conclusion that the rates in the present ERCS
contracts permitted the contractors an unreasonable markup on many items may be
founded if the validity of the reports estimates and assumptions withstand the
scrutiny of negotiations with the affected contractors. They agreed that the
procurement process must obtain and use the best possible information to make
judgments and negotiate prices. Officials believe this was done given the
infancy of the cleanup industry and the lack of cost data. Overall, they said
the ERCS contracts provide more cost effective terms and conditions than those
available to the private sector for emergency cleanups.
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Officials considered the report's recommendation that EPA limit the use of
fixed rates to the labor and equipment under the contractors' exclusive control
or ownership as consistent with their recent ERCS reprocurement solicitations.
However, some specific fixed rates for frequently used items that are owned by
Government approved subcontractors will be negotiated with the same require-
ments for cost data as the prime's fixed rates. All other items will be
reimbursed on a cost basis with the prime contractor's award fee determined
periodically predicated on the efficiency of its subcontracting program.
Officials also stated the request for proposals for new procurements will
limit the total charge for each specific equipment item used in a delivery
order to its current replacement cost plus any mobilization costs. Officials
believed this provision will help avoid future instances where EPA could pay
substantially more than the acquisition cost for a piece of equipment.
Officials also commented that primes and subcontractor fixed rates will contain
a certain amount of profit. However, when analysis shows excessive profit
rates, adjustments for alternative treatment will be made. Also, in new ERCS
procurements, the costs of certain small tools will be recovered indirectly.
New procurement provisions will also provide that equipment charges be limited
to its current replacement cost plus mobilization.
With respect to guard services, officials stated that, based on current audit
reports, contractors are incurring costs far below the fixed rates in the
contract. Lower costs were incurred because contractors used local sheriffs,
employees, etc. whose rates were lower than the contract rates. Therefore,
the current ERCS contracts have been modified to delete guard services from
the fixed rate list.
With respect to contractor (prime and sub) markups on rented equipment, offi-
cials said most of the items are provisional rate items that will be negotiated
at contract definitization. Current contracts eliminated a fixed rate for the
pickup truck and will make reimbursement based on the item's actual cost.
Auditor Evaluation
We are pleased that Agency officials have already begun action to implement
our recommendation. We have interpreted EPA's comments on fixed rates to mean
that they will consider individual fixed rates for subcontractors. Regarding
the changes under the new procurement, we question how well individual items
of equipment can be controlled and tracked to ensure that the total charge
under a delivery order will not exceed replacement plus mobilization costs.
Furthermore, if this restriction applies on a delivery order basis, contractors
would still be able to recover the purchase price of an equipment item many
times over by using the same piece of equipment on subsequent delivery orders.
We also wish to point out that the conclusions in this report contradict the
Agency's belief that the procurement process obtained and used the best possi-
ble information on which to make judgments and negotiate prices. In addition,
there has been no evidence provided to support the contention that the ERCS
contracts' terms, rates, and conditions are necessarily any better, or for
that matter any worse, than those available to the private sector.
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FINDING NO. 4 - EPA NEEDS TO BETTER PLAN TO OBTAIN AND UTILIZE DATA IN
NEGOTIATIONS
EPA's program and procurement staffs did not adequately plan and execute the
solicitation, review, and negotiation phases of the ERCS procurement. There-
fore, EPA did not ensure that necessary information VMS obtained and used to
appropriately develop ERCS1 contractual provisions to safeguard the interests
of the Federal government. Specifically, effective use was not made of expe-
rience gathered under previous procurements in determining equipment categories
to be included in the ERCS contracts. Appropriate action was not taken to
identify and correct problems identified in previous Notice to Proceed
contracts. Additionally, necessary information regarding company procedures
and practices was not always obtained and used in negotiating clear, concise
contractual provisions setting forth the nature and extent of services to be
provided for the established rates. As a result, contractor charges to the
ERCS contracts have been substantially inflated.
To obtain contractual equity, substantial EPA and contractor efforts must be
expended resolving contractual problems. For example, significant time will
have to be spent:
0 negotiating after-the-fact equipment rates,
0 identifying and resolving claims for itens of cost which contractors did
not incur or which were substantially in excess of costs actually incurred,
0 identifying and resolving items of cost inappropriately charged under the
contracts.
Alternatively, EPA may have to live with significantly inflated charges on
existing ERCS contracts. Such a dilemma could have been avoided had appropri-
ate steps been taken in the procurement process.
The planning and negotiating phases of contract procurement actions are complex
and complicated processes which require considerable attention and involvement
of both program and procurement personnel. The background section of Chapter
22 of the EPA Contracts Management Manual says:
. . . Procurement planning is the process by whicn the efforts of
all personnel responsible for the procurement of personal property
and non-personal services are coordinated and integrated through a
comprehensive plan. This involves analysis of the requirements and
the documentation of technical, business, policy, operational and
other procurement considerations into a comprehensive plan . . .
to achieve the end results of a particular program requirement.
The development and proper execution of such a plan require considerable knowl-
edge, work, and expertise on the part of program and procurement personnel.
For example, considerable knowledge of the market from which the agency intends
to obtain the services is necessary in order to maximize competition. In some
instances special approaches may be necessary to help develop an increased
market. Staff involved in the procurement also needs to make maximum utiliza-
tion of information regarding problems which occurred on previous contracts
for like services. This would assist in making sure necessary information is
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requested, obtained and analyzed so that clear contractual provisions are
developed to preclude problems in the future. In addition, reviews are needed
of contractual provisions to assure that any misunderstandings between the
Agency and contractor regarding the services and their prices are resolved by
the time the contract is awarded.
Analysis Of Previous Contracts
Program and procurement officials had not adequately utilized experience
available from previous procurements in planning ERGS. EPA had previously
issued hundreds of Notice to Proceed contracts to accomplish removals for
oil and hazardous substance releases. However, EPA staff had not adequately
analyzed these contracts in preparation for ERGS.
Previous EPA experience was not used in planning the required contractual
response times. As described in Finding No. 1, EPA staff had not analyzed
previous removal actions to determine the normal response times required for
cleanups. This precluded adequate consideration of possible contractual
alternatives which might have resulted in increased competition and produced
lower rates for removals not requiring such quick response capability.
Similarly, previous EPA experience was not appropriately used in deciding which
equipnent items should have fixed rates in the contracts. In planning for the
equipment rate portion of the ERGS contracts, EPA program officials provided
lists of equipment items which they believed would be required to accomplish
removals. Based on this input, the RFP for the ERGS contracts requested
separate rates be proposed on 104 different pieces of equipment.
Actual ERGS experience has proved this list was inadequate. Accordingly,
contractors had to request that provisional equipment rates be established for
more than 100 additional items of equipment during 1985. On an overall basis,
we found that funds paid for the provisional equipment items represented a
significant portion of total equipment charges. On one delivery order, the
charge made for provisional equipment totaled $119,094, 49 percent of total
equipment charges.
Our review of equipment with provisional rates showed that a number of high
use items had been left off EPA's initial list. This list did not include
such items as over-the-road tractors and trailers, Cat 215 backhoes, D-6 bull-
dozers, three models of front-end loaders, etc. A review of charges on
previous Notice to Proceed contracts showed, however, that these items had
been repeatedly used on removals. Accordingly, we have concluded that EPA had
not adequately analyzed previous EPA experience when it developed the equipment
lists in the RFP.
Since equipment with provisional rates represents a significant portion of
equipment costs charged to the ERGS contracts, substantial efforts will have
to be expended finalizing the rates. This process will be further complicated
by EPA's failure to obtain cost data supporting the provisional rates or
requiring contractors to maintain or develop such information. Negotiation
after-the-fact is always difficult, especially in circumstances where adequate
cost information is not available for use in negotiations.
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Analysis Of Previous Problems
In planning and carrying out the ERCS negotiations, EPA program and procurement
officials did not adequately identify and resolve potential problems such as
those that already occurred on previous cleanup contracts. During our audit
of selected ERCS delivery orders, we found that EPA was overcharged in many
of the same areas as previously identified in the audits of the Notice to
Proceed contracts. Specifically, repetitive problems occurred with respect to
(1) overtime, (2) holiday pay, (3) travel and per diem, and (4) equipment.
In reviewing the contract files, we noted that specific information regarding
the proposing contractor's policies and practices in many of these areas appar-
ently was not requested, provided, or properly utilized in developing ERCS
contract provisions.
Overtime
Procurement officials did not use prior experience or information obtained
from prior audits of Notice to Proceed contracts to identify problems in
overtime charges. Thus, procurement officials did not include a require-
ment in the original ERCS contracts that overtime compensation must be
paid to employees as a precondition to contract payments, even though
prior audit reports had disclosed the overtime payment discrepancy.
Nine Notice to Proceed contract audit reports wera issued. These reports
contained issues relevant to the ERCS contracts within 14 months prior
to the award of those contracts. Three of the nine reports disclosed
problems with overtime payments. Contractors did not reimburse employees
at the overtime premium rate in the same manner in which the overtime was
billed in each of these reports. Instead employees were paid at the
regular rate or given compensatory time. In one case, one contractor
charged its standard billing rates for work performed between 8:00 a.m.
and 4:00 p.m. on weekdays. The contractor charged overtime for all work
performed before 8:00 a.m. and after 4:00 p.m. on weekdays. However, the
contractor only paid overtime premiums to employees for work in excess
of eight hours a day during the week, regardless of the time period worked.
Procurement officials did ask each offerer to state its policy covering
overtime payments. Only one of the four offerers responded. The contrac-
tor stated that employees who were normally overtime exempt were paid
time and a half for overtime. The contractor further stated, however,
that some of its permanent team subcontractors did not usually pay over-
time premiums to professional employees. Procurement officials apparently
ignored the information and negotiated contract provisions which allowed
overtime payments for all labor in excess of eight hours, whether or not
employees were reimbursed at overtime rates.
Procurement officials apparently did not pursue obtaining responses from
the other three offerers. Despite this fact, these three contractors
received overtime reimbursement even though they did not pay their
employees an overtime premium in a variety of cases.
Our review confirmed that even though the contractors had claimed overtime
under the ERCS contracts, overtime wages were not paid to employees. In
most cases the overtime hours were worked, but the employees were paid
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the straight hourly rate for overtime hours worked. In these instances
the differential was quite significant. Overtime charges for response
managers and chemical engineers are prime examples of contract charges
without corresponding payments to employees. Response managers cost the
contractor $35.58 per overtime hour including overhead and G&A expenses;
EPA, however, paid the contractor $64.10 per hour. A chemical engineer
cost the contractor $41.54 per overtime hour including overhead and G&A;
EPA, however, paid the contractor $58.80 per hour. In these instances
the contractor made 80 and 42 percent markups, respectively, for overtime
hours for those positions.
When labor was subcontracted, the markup was compounded. One of the
subcontractors paid its salaried employees the regular hourly rate for
both regular and overtime hours. This subcontractor was able to increase
markups from 50 to 100 percent because overtime was never paid. The
contractor then claimed the fixed rate which included a markup to the
subcontractor's rates. For example, an industrial hygienist cost the
subcontractor $28.43 per overtime hour including overhead and G&A; EPA,
however, paid $55.30 per hour. A chemical engineer cost the subcontractor
$35.53 per overtime hour including overhead and G&A; EPA, however, paid
the contractor $58.80 per hour. Markup for these two labor categories
was 95 and 65 percent, respectively.
As a result, EPA paid $32,626, or 34 percent in excess of the overtime
costs, for one delivery order. Also, EPA paid $15,980, or 76 percent,
in excess of overtime costs for prime contract employees on two other
delivery orders.
On August 2, 1985, the Assistant Inspector General for Audits requested
a clarification for contract reimbursement of overtime where the employee
was not reimbursed. As a result of the inquiry, procurement officials
wrote modifications to the contracts about January 31, 1986, that required
contractors to pay overtime to employees as a precondition for overtime
contract payments for the remainder of the contract. This overtime pay
also had to be part of the individual employee's employment agreement and
consistent with previously established corporate practice.
Holiday Pay
During negotiations procurement officials asked each offeror its policy
concerning paying holiday premium rates. Each offeror responded that
holiday pay was paid at the same rate as overtime. In one case, procure-
ment officials ignored the information. Contractual provisions allowed
one contractor to claim holiday pay, even though the offeror had responded
that normally exempt employees were paid time-and-a-half for holidays to
a maximum of $18 per hour. In this regard, however, the contracting
officer stated that the contractor gave the impression that it paid a
holiday premium to employees. Other contracting officials stated they
"envisioned during negotiations that the contractor's labor costs for
such period (Saturday, Sundays, or holidays) would be higher."
Our audit showed this contractor handled holiday pay in accordance with
its stated policy. The contractor charged holiday pay to the Government,
but did not pay holiday premium wages to employees. Employees were paid
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the overtime rate, which was 1.5 times the regular rate, for all holiday
premium labor. The contractor billed EPA a higher rate for holiday pay
than for overtime pay. For example, a clerk I made $6.70 per hour for
regular labor and $10.10 per hour for overtime and noliday pay. The
contractor billed EPA in accordance with established rates at $18.00
for regular pay, $26.00 for overtime, and $29.00 for holiday pay.
A response manager made $15.87 per hour for holidays. The total cost
to the contractor including overhead and G&A expenses was $46.28. The
contractor charged $66.00 per hour. An equipment operator II made $11.10
per hour for holidays. The total cost to the contractor including over-
head and G&A was $32.38. The contractor charged $43.00 per hour. Overall
for four delivery orders, the total cost to the contractor including
overhead and G&A was $107,740. The contractor charged $140,103. Thus,
the contractor received $32,363, or 30 percent, over and above employees'
compensation for the four delivery orders reviewed.
At the start of the audit, the Assistant Inspector General for Audits
requested a clarification for contract reimbursement where the employee
worked on Sundays or holidays but did not receive premium pay for this
time. In response, the contract was modified on February 11, 1986, to
require the contractor during the remainder of the contract to bill holi-
day pay only when the contractor incurred the additional labor cost.
Travel And Per Diem
Procurement officials did not ask contractors how they would adjust travel
reimbursement charges when the full per diem charges wera not incurred.
They did not ask the question, even though previous audits disclosed that
contractors did not always incur full per diem costs. In this regard,
nine audit reports, that were relevant to the ERCS contracts, were issued
on Notice to Proceed contracts within 14 months prior to ERCS contract
awards. Three of-the nine audit reports disclosed that contractors billed
excessive travel costs. Two of the reports specifically stated that
contractors did not pay employees a per diem. Instead, contractors paid
travel expenses directly to vendors. In addition, the reports disclosed
that contractors provided the same facilities to their subcontract employ-
ees and billed the full per diem rate. Further, one contractor, in its
Travel Plan for the Cost Proposal, stated that employees were required to
utilize double occupancy when traveling. Procurement officials apparently
did not use this information and instead allowed a per diem rate that was
high enough to include single occupancy for employees.
,,.,,. .Clear contractual provisions were not developed, however, to deal with
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While another portion of the contract said:
If cleanup personnel are required to temporarily relocate, a
per diem of $60 per person will be charged for the base year.
If personnel do not require lodging for a given day, the per
diem for that day will be $30.
Similar clauses were included in the other contracts.
We found that in fact contractor travel was charged to EPA on a per diem
(per person per day) basis, as allowed by the contract. Actual costs,
however, were much lower than per diem charges, creating a profit for
contractors. The contractors charged EPA a $50 to $60 per diem rate,
depending upon the zone contract.
The contractors incurred lower cost than the per diem rate through (1)
providing meals and doubling up employees in hotel rooms and (2) paying
the subcontractors a per diem rate less than the contract billing rate.
Some contractors did not pay traveling employees a per diem. Instead,
they paid all allowable expenses incurred by employees directly to the
vendor (i.e., hotel, restaurant, etc.) or to a company representative
that paid all bills.
One contractor received added markup on travel because employees shared
hotel rooms, thereby reducing the cost. The contractor did not corre-
spondingly reduce the billing to EPA. Another contractor received more
than $25,000 (74 percent) in per diem reimbursement above the travel cost
for one delivery order. The contractor was paid $59,654 for per diem,
galley trailer, food purchases, and the cooks labor. In this instance
the contractor paid lodging costs directly to the hotel. Additionally,
the contractor paid employees $10 to cover meals which were not provided
on site. The contractor's total cost for this delivery order totaled
only $34,165.
At the start of the audit, the Assistant Inspector General for Audits
requested a clarification for contract reimbursement for per diem when
the employees did not receive full per diem. In response, contracts
were modified about January 31, 1986 to require the contractor for the
remainder of the contract to bill per diem only when the contractor
incurred the full per diem cost.
Equi pment
In preparing the ERGS RFP, EPA recognized the possibility that in some
instances usage charges for equipment could substantially exceed full
purchase price. Accordingly, the RFP asked each offeror to explain its
method when long-term use caused the usage charges to exceed the original
purchase price. In responding, two zone contractors indicated a willing-
ness to renegotiate in such instances. The other two zone contractors
simply did not respond. In reviewing the contracts, however, we found
no indication that equipment rates were subject to any renegotiation or
adjustment in such circumstances.
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During our review of contractor records, we found ERGS equipment rates
applied to items whose costs had been fully recovered under ERCS contracts
or items that were non-capital (less than one-year life), inexpensive
items, as well as expensive, long-life items. Following are examples
where contractors charged more than the cost of the item under the ERCS
contracts or recovered a substantial portion of the cost within a short
time.
One contractor purchased three all terrain vehicles for $1,900 and used
them at one site. Total charges for the three vehicles on two delivery
orders was $3,000, or $1,100 more than the vehicles cost. For one
delivery order alone, the charge to EPA was $2,000. After the completion
of the cleanup, the contractor stored the vehicles and subsequently used
two of them at another ERCS cleanup site. The contractor charged
approximately $1,000 for their usa on the second cleanup site. These
vehicles may still be usable for charging against other delivery orders.
Another contractor purchased an all terrain vehicle for $1,635. It
claimed a usage rate of $50 per day for a total charge of $1,313 over a
span of 51 days at a cleanup site. Consequently, 80 percent of the cost
was recovered at one cleanup site. This vehicle was then available for
use at other sites for which additional usage charges could be levied.
In another instance a contractor used a drum punch on a delivery order.
The contract did not include a fixed rate for the punch and the contractor
charged $53 a day for its use. On one delivery order, the punch was used
for a month. The contractor charged EPA $1,274: (1) $1,000 for one
month's usage, (2) $232 for two weeks and one day standby and (3) $42 for
two days of mobilization. The drum punch was fabricated in the company's
equipment maintenance shop. The company did not account for the drum
punch on its property records, maintain a depreciation schedule for it,
or maintain an "asset sheet" identifying its fabrication cost and expected
useful life. The fabrication and maintenance costs are apparently
included in the company's overhead expenses and are, therefore, allocated
to all equipment. There are no separate, identifiable costs associated
with the fabrication or maintenance of the drum punch. Thus, the $1,232
charge for usage and standby has no cost associated with it which was not
recovered elsewhere. We cannot determine what costs may have been
associated with the $42 mobilization charge (see Mobilization and Demobil-
ization of Equipment section of this finding).
Other significant examples of instances where EPA was charged substan-
tially more than actual equipment costs are shown in the section of the
report entitled Excessive Costs Paid for Superfund Removals.
\yien«
In future contracts EPA'a&smld clearly act to prevent such overcharges. The
question here is what should be done to re.nedy this situation on the already
existing ERCS contracts. Even though our review in the above areas indicated
tha EPA was substantially overcharged, we are uncertain whether the Agency
should seek to recover such overcharges on an after the fact basis.
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Substantial resources will have to be expended doing detailed review of
charges to individual delivery orders. Significant time will need to be spent
attempting to negotiate resolutions on a case by case basis. Should this be
done, however, given EPA's real chance to recover? The contractors generally
did charge the costs in accordance with contractual provisions.
Adequacy Of Contract Provisions
EPA officials did not always request or obtain the necessary information on
company procedures and practices to permit them to write clear and concise
provisions for the ERCS contracts. In reviewing contractor records, we
identified potentially significant problems resulting from unclear contractual
provisions with respect to management and mobilization and demobilization.
As a result, contractors claimed:
0 management costs properly charged elsewhere,
0 mobilization and demobilization costs on days when equipment was being
used.
The Federal Procurement Regulations are quite clear that contractual provisions
must be clear. For example:
Title 41 CFR l-1.307-l(c) states: "Purchase descriptions, as well
as other forms of specifications, must accurately reflect the needs
of the Government." (July 1, 1983)
Title 41 CFR 1-1.305 further clarifies: "'Specification' ... is
a clear and accurate description of the technical requirements for
a material, product, or service . . . ." (July 1, 1933)
The new Federal Acquisition Regulations, not in effect at the time the contract
was executed, are even more specific. Title 48 CFR l-10.004(b)(4) requires:
Purchase descriptions of services should outline to the greatest
degree practicable the specific services the contractor is expected
to perform. (July 1, 1985)
Management
Procurement officials did not ask the offerers what their established
practices were for billing commercial customers. As a result, the
management portion of the contract was written in vague terms allowing
inappropriate charges to the management portion that should have been
included in the contractor's overhead rate or handling fee. The manage-
ment portion of the contract encompassed various managerial services,
including all financial, administrative and clerical functions which
were necessary to initiate, support, and track cleanup activities. This
effort was reimbursed on a cost-plus-fixed fee basis. Contracted amounts
consisted of costs for direct labor, miscellaneous direct costs, and
applicable rates for indirect costs, plus fixed fees. The RFP's special
instructions for management effort states:
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It is envisioned that there will be a certain amount of management
effort necessary to complete all non-site-specific tasks under these
contracts. The proposed costs shall include the time of the Program
Manager . . . the cost of maintaining a 24-hour Zone Call Center
. . . , all costs associated with preparation of the routine reports
and invoices required by this contract, and the costs associated
with managing the Quality Assurance Program aspects of the contract.
The contract files documented the rationale for this provision:
Due to the large geographic area to be covered by each contract,
the probable use of a substantial number of subcontractors, and
the requirement for many routine reports and invoices under these
contracts, there will be a certain amount of non-site-specific
management effort required.
The contract did not prohibit a contractor from charging direct labor
to the management portion of the ERCS contract for the same type activity
that was indirectly charged to commercial customers. However, this
practice does not comply with the definition of reasonableness required
by Federal regulations. Reasonableness is defined by 41 CFR 1-15.201-3
which states in part:
A cost is reasonable if, in its nature or amount, it does not exceed
that which would be incurred by an ordinarily prudent person in the
conduct of competitive business .... In determining the reasona-
bleness of a given cost, consideration shall be given tot . . .
(d) Significant deviations from the established practices of the
contractor which may unjustifiably increase the contract costs.
temphasis added]
Federal regulations also clarify how direct and indirect costs may be
charged. Title 41 CFR l-15.203(a) states:
An indirect cost ... is one which, because of its incurrence for
common or joint objectives, is not readily subject to treatment as
a direct cost .... After direct costs have been determined and
charged directly to the contract or other work as appropriate,
indirect costs are those remaining to be allocated to the several
cost objectives. No final cost objective shall have allocated t.o it
as an indirect cost any cost, if other costs incurred for the same
purpose, in like circumstances, have been included__as__a direct cost
of that or any other fTmiT cost objective, [emphasis added1]
Of the three zone contracts we reviewed f^^Jetail , contractors charged
items to the management portion that shoutlThave been (1) charged to a
specific delivery order or (2) included in'"indirect costs.
For example, one contractor inappropriately directly charged the manage-
ment portion of the contract $51,777 for overhead type functions, such as
clerical and accounting duties. It is possible that a portion of the
charges were a function of the extraordinary administrative burden placed
on the contractor as a result of the ERCS contract requirements and -nay
be above the normal level of administrative effort for the contractor.
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However, a portion of these charges were ordinary indirect costs
associated with the cost of doing business.
Another contractor charged $60,717 for labor to the 1984 management
portion of the contract for functions which were charged indirect on all
commercial jobs. Similarly, the contractor charged $20,297 of such labor
to the management portion of the ERGS contract in 1985. Upon reviewing
employee time records, we found these individuals were claiming the EPA
activities directly under the management portion of the ERCS contract.
They were charging similar work for commercial customers to the company's
indirect costs. The contractor also charged $27,096 to finish paperwork
on several delivery orders. This cost should have been billed to the
individual delivery orders.
The third contractor also claimed labor costs on the management portion
for work which should have been charged as indirect labor. The contractor
charged direct costs of $13,077 for subcontract administration, accounting
and clerical labor costs. Under the contractor's normal accounting system,
these costs would have been charged indirectly because they usually could
not be identified with a specific project. This contractor claimed that
the $13,077 was for "above normal effort" for obtaining subcontracts and,
therefore, charged these costs directly to the management contract. In so
doing, the contractor violated the intent of the contract and recovered
costs for these type of functions (1) indirectly through the fixed rates
and the handling fee and (2) directly through the management contract.
The ERCS RFP stated that costs for the Management and administration
of team member subcontracts must be included in the fixed rates of the
cleanup portion of the contract. Management and administrative cost for
non-team subcontracts would be recovered through the site specific
handling charge.
In conclusion, the contract did not require that contractors charge
EPA according to the established billing practice of the contractor.
-Therefore, contractors charged tasks directly to EPA that they indirectly
charged to commercial customers. In changing from their normal policies,
the contractors charged directly for ERCS labor and then allocated
indirect labor for similar tasks performed for other contracts to the
ERCS contract in the overhead and G&A charges. By deviating from their
established billing practices, the contractors did not reasonably nor
equitably allocate costs.
Mobilization And Demobilization Of Equipment
EPA officials apparently did not obtain and evaluate necessary information
to negotiate appropriate contractual provisions for equipment mobilization
and demobilization. In this regard, EPA's ERCS RFPs simply requested
the offerors to indicate what their proposed mobilization and demobiliza-
tion rates were. No request was apparently made for the offerors to
provide further amplification or explanation of the services provided
under this category or nature of the costs being recovered.
In reviewing three of the zone contracts in detail, we noticed that
mobilization and demobilization costs varied. One contractor received
reimbursement through mileage surcharges for vehicles and major pieces
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of equipment. Another contractor received reimbursement for mobili-
zation by charging the full normal usage rates for vehicles and through
a surcharge of 35 percent of the rates established for major pieces of
equipment such as backhoes, front-end loaders, and cranes. The third
contractor was given not only mileage surcharges, but also was authorized
mobilization and demobilization surcharges of 40 percent of the regular
established rates for all other equipment items. Consequently, we were
charged for mobilization and demobilization of such unusual items as tool
sets, small pumps, etc. In this regard, however, we found no indication
that explanations were obtained regarding the appropriateness of mobiliza-
tion and demobilization charges for such small items.
We reviewed contractual provisions and accounting records that related
to mobilization and demobilization. Generally we concluded the costs of
the vehicles used to transport equipment and the driver were reimbursed
through direct charges to the ERCS contracts. In addition, costs of
loading or unloading equipment were recovered through direct charges or
the contractor's indirect cost rates. Accordingly, we were unable to
identify an appropriate cost basis for any mobilization and demobilization
charges.
Further, the mobilization/demobilization provisions of the contract were
silent concerning total daily charges and did not limit the total payment
for equipment use plus mobil ization/deiflobil ization charges. Accordingly,
we found instances where a contractor received payment for more than one
full day's equipment charge. In some instances, the contractors charged
EPA on the same day for mobilization, usage, and/or demobilization.
Therefore, the contractor recovered ;nore than 100 percent of the daily
usage rate, in some instances as high as 300 percent.
One zone contractor charged double or triple the daily rate for several
equipment items in one day. Following are examples:
1. EPA paid $550 for a mobile lab on August 31, 1984. The contractor
charged the daily rate ($275) twice - once for a day's usage and
again for mobilization.
2. In another case, the contractor charged $292.50 for a two-ton truck:
$80.50 for mobilization, $84.00 for demobilization, and $128.00 for
mileage. The daily rate for a two-ton truck was $95.00.
3. EPA paid $160.15 for one day's usage of a passenger van: $70.00
for the daily usage rate and $90.15 for mobilization plus mileage.
Without a complete understanding of the services contemplated
recovered costs, we do not have sufficient basis to make any judpent
on the appropriateness of these contractor charges. However, these
charges do not seem reasonable.
Conclusions
Throughout this finding we have pointed out instance after instance where the
lack of adequate information hindered the negotiation of the ERCS contracts.
Adequate data were not obtained regarding the (1) nature and type of services
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to be obtained; (2) resources necessary to provide such services; and (3)
customary procedures and practices used by firms who provide such services.
Additionally, available experience and data were not effectively used to nego-
tiate fair and reasonable contractual provisions to safeguard the interests of
the Federal government. Because of these problems, contractors were authorized
to charge costs against the ERCS contracts at inflated rates.
EPA is now faced witn a complicated situation. Not only does the Ayency need
to adjust the new ERCS contracts so these problems do not happen in the future,
but it also needs to make a realistic appraisal to decide whether there is any
substantial opportunity of recovering the excessive charges already paid.
This choice must be carefully weighed against the substantial efforts which
may be required to pursue these matters and the potential cost benefit which
might accrue from such cost recoveries.
Agency Comments
The Agency agreed that better planning could have occurred. However, the
Agency did plan but the planning was limited due to the fact that Superfund
was a relatively new program.
Analysis of Previous Contracts
The Agency stated that past experience is not necessarily a valid basis
upon which to determine response times, and that EPA must have tha
capability to respond immediately. The response times were based upon
such factors as location of potential removal sites and population
densities.
The Agency believes it adequately relied on past experiences in estimating
equipment categories and quantities. The steps followed were determining
categories using the Notice to Proceed source list, weighing these items
according to typical -on-site use and estimating actual usage by applying
the weight elements against average response project periods. The Agency
was aware that additional items might be necessary, and, therefore,
provided for provisional rates in the contract.
Analysis of Previous Problems
The Agency agreed that it did not anticipate the problems noted in over-
tina, holiday pay, travel and per diem. The Agency has since clarified
the contract language. On equipment, the Agency stated that profits on
a particular item at a site are not necessarily indicative of similar
profits on the contract as a whole. It is unrealistic to expect a
^•contractor to provide fully depreciated equipment free of charge.
Xvle-
/r Adequacy of Contract Provisions
The Agency agreed with the report on mischarges on the management portion
of the contract and unclear contract provisions on equipment mobilization
and demobilization charges. EPA will negotiate with the contractors
based upon audit reports to ensure that final costs are properly allocated,
Modifications have been made to ERCS to clarify mobilization, demobili-
zation and other charges.
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Auditor Evaluation
Analysis of Previous Contracts
We agree that the Agency must be able to respond immediately. Past
experience is- an indication of the range of response times likaly to be
needed. We believe that the lack of different rates or contracts for
different response times tends to force the paying of premium rates for
all responses.
We have demonstrated that adequate use was not made of the Notice to
Proceed experience in developing the equipment list. This failure is a
major factor why a substantial number of equipment items were charged at
provisional rates. We recognize that not all needed equipment items can
be anticipated but those with high historical usage certainly can.
Analysis of Previous Problems
We have not stated that profits on a particular item of equipment at a
specific site are indicative of the profits on the contract as a whole.
We do not expect a contractor to provide equipment free of charge, nor
would any of our recommendations lead to that result.
Recommendations
We recommended that EPA staff better plan and execute major procurements
such as ERCS. In this regard:
a. program staff must thoroughly analyze previous experiences to identify
the nature of services required, timeframes in which such services
are actually required, and specific resources which have been used
in the past.
b. program and procurement staff must carefully analyze problems
identified from previous experiences and take appropriate actions to
preclude such problems from reoccurring in the future.
c. program and procurement staff must obtain all information requested
from prospective contractors and appropriately utilize this informa-
tion to ensure that contract provisions adequately safeguard the
Federal interests.
We recommend that appropriate provisions be included in the upcoming
ERCS contracts to prohibit the payment of:
a. overtime or holiday pay unless the employees themselves are so
compensated in accordance with the contractors' customary practices.
b. travel costs or per diem in excess of costs actually being incurred.
c. equipment rental costs in excess of costs actually incurred in
purchasing and maintaining such equipment.
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Agency Comments
The Agency generally agreed witii the auditor's first two recommendations.
3. We recommend that upcoming ERCS contracts:
a. clarify the management portion of the contract to ensure that tasks
charged directly to the ERCS contracts are also charged directly to
the firm's other commercial contractors (i.e., not claimed as indirect
costs). If this is not possible, EPA should not pay directly for
management services.
b. clarify the nature of services and composition of costs to be charged
for mobilization and demobilization. In doing so, EPA should deter-
mine whether contractors can recover regular usage charges as well as
mobilization/demobilization costs on the same day.
Agency Comments
EPA agrees with the recommendation. The new ERCS will include a contract
clause identifying which cost categories are to be charged as program
management and which are to be excluded. Additionally, EPA has included
in the new ERCS solicitations special cost proposal instructions on mobili
zation and demobilization, as well as clear contract terms as to when
mobilization/demobilization rates apply.
Auditor Evaluation
Although the Agency agrees with the recommendation, the contracts are yet
to be negotiated.
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FINDING NO. 5 - EPA NEEDS TO CHANGE ITS METHODS FOR PROCURING TRANSPORTATION
AND DISPOSAL SERVICES
Contractual provisions requiring ERCS prime contractors to competitively
procure transportation and disposal services on a cost reimbursable basis have
not worked. Overall, there are not effective incentives for zone contractors
to properly plan and execute subcontracts for services at the lowest cost.
This ijias resulted in increasing EPA's transportation and disposal costs.
Additionally, the use of the prime contractor to oversee all services related
to a cleanup has served to preclude EPA from becoming aware of inadequate work.
In the cleanup portion of the contract, EPA initially decided to use fixed
rates whenever feasible. According to the contracting officer, the transpor-
tation and disposal of hazardous wastes, however, were not susceptible to the
proposing of fixed rates because they "are far too dependent upon unknown and
variable conditions . . . ." Therefore, she decided to make transportation and
disposal cost reimbursable items. She decided not to allow prime contractors
to use their own transportation and disposal facilities, "To avoid the appear-
ance of collusive bidding or other possibilities of prejudicing the competitive
process . . . ." Thus, the contracts required the zone contractors to competi-
tively subcontract the transportation and disposal of hazardous waste.
The zone contractors were to be reimbursed for the direct costs of the trans-
portation and disposal subcontracts plus a percentage handling fee. Therefore,
they had little incantive to obtain the best price. We found that the zone
contractors did not regularly use documented competitive procedures which are
required to obtain these subcontracts. This resulted in excess costs to EPA.
We also found that the zone contractors did not consistently ensure that these
services were properly performed by the selected subcontractors. The zone
contractors' level of control over the entire process made it difficult for
EPA to obtain timely knowledge of problems.
The number of contractors available for hazardous waste transportation and
disposal are substantially different. These two areas are discussed below.
Transportation Services
The market for transportation services is highly competitive, with many
companies licensed to haul hazardous wastes. This market condition should
enable the zone contractors to obtain the best prices for subcontracted trans-
portation services through competitive procurements. However, .our review of
procurement procedures used by the zone contractors to obtain transportation
services showed that competitive quotes were not always obtained and the lowest
bidder was not always selected.
Our review of four delivery orders of one zone contractor showed three trans-
portation subcontracts ranging from $29,628 to $66,482. For only one of the
three did the contractor have documentation that the subcontract was procured
competitively and the lowest bid selected. One of the transportation companies
was selected by location with no regard to price. There was no documentation
to support the selection of the third subcontractor.
Failure to arrange for transportation services in a timely manner may be one
reason why the best price was not always obtained. With respect to the above
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contractor, an EPA on-scene coordinator expressed concern that on one delivery
order the contractor waited nine weeks to secure transportation services. He
believed this may have resulted in a higher price than would have been paid
had the procurement been timely. The failure to arrange transportation
services in a timely manner also interfered with on-site operations and caused
delays, probably resulting in higher on-site costs and increased risks of
public exposure to hazardous substances.
Even when contractors obtained competitive quotes, they did not always award
the contract to the lowest acceptable bidder. On one delivery order, a zone
contractor obtained quotes by telephone from three transportation firms. The
three quotes ranged from $400 to $500 per load. The zone contractor verbally
accepted the highest quote, noting on the bid sheet that the accepted subcon-
tractor was more compatible with the disposal subcontractor and that the trucks
of the selected firm could legally haul 50,000 pounds. However, on this job,
which was bid per load, the average weight per load was only 43,901 pounds;
this resulted in the need for an additional 54 loads. (On this same delivery
order, when the trucking company was paid by the weight transported, the
average load was 49,319 pounds.) The final cost for transportation on this
delivery order was $224,051. If the contractor had selected the lowest bidder
and paid for the hauling by the weight transported, the cost would have been
$158,048 resulting in a saving of $66,003.
In addition to failing to consistently obtain the best available price, the
zone contractors also did not consistently ensure that the material to be
transported and the transport vehicles were properly prepared. On one removal
action, the hazardous material was not properly solidified for transport and
liners were not properly placed in the trucks. This resulted in leakage of
hazardous material during transport. The leakage was discovered by the
disposer when the trucks reached the disposal facility. The leakage resulted
in avoidable costs of $17,791 for the disposer to clean up the trucks and the
spill caused by the leaking trucks. The disposer told us that there were
several other incidents in which leaking trucks had arrived at his facility
from EPA Superfund sites.
The zone contractors maintain responsibility for all aspects of each removal
action, including transportation and disposal. They are reimbursed for the
direct costs of transportation plus a percentage handling fee. Also, a perform-
ance incentive pool is available which may be awarded in whole or in part for
exemplary performance. By use of an exemplary performance incentive, the zone
contractors have a disincentive to fully and timely disclose problems ^hich
arise to EPA. If the (1) on-sita contractor, (2) transportation contractor and
(3) disposal contractor were each separately accountable to EPA, then EPA would
be much more likely to be informed of problems andahaye the opportunity to
take prompt action to remedy the causes. Thus, tiVaRa"ffected contractor would
have an incentive to promptly report to EPA or itsMfent either (1) on-site
cleanup contractor deficiencies resulting in problems for the transportation
contractor, or (2) transportation contractor deficiencies resulting in problems
for the disposal contractor.
Our review indicated that the method of procuring transportation services needs
to be changed to prevent excessive costs and poor performance. A separate
contract awarded and administered by EPA should be considered for procuring
ERGS transportation services. The contractor would not have to necessarily
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be a transportation company, but should be knowledgeable about the hazardous
waste transportation market. A cost-plus-award-fee contract could be used.
Under this type of contract, incentives could be provided to the contractor
for procuring needed transportation services timely at reduced costs.
Disposal Services
There are only a limited number of permitted disposal facilities with accept-
able waste management practices, and each facility may only accept designated
types of hazardous waste. For PCB disposal, for example, there are only two
facilities available in the country. Given this market condition, carefully
designed procurement practices are required to obtain the best price available.
Under the ERCS contracts, we found that the best market prices for disposal
services were often not obtained. For example, we reviewed two disposal
subcontracts for $258,449 and $385,577 awarded by one zone contractor, and
found no documentation to support the selection of the disposal firms. In
one of these instances, the OSC was concerned that the contractor's selection
of the disposal facility .night not be cost effective.
Another zone contractor awarded a disposal service subcontract by telephone
to a firm whose price list indicated a price of 3.5 cents per pound for
disposal of the type of material being disposed. However, for the EPA cleanup,
the firm quoted a price of 4 cents per pound to the zone contractor and subse-
quently increased the price to A.5 cents per pound about halfway through ths
site cleanup. The disposal firm claimed the increase was a rate increase
effective for all customers. However, the firm accepted waste from another
Superfund site at the 4 cent rate after the 4.5 cent rate supposedly went into
effect. The OSC believes the disposal firm's increase represents an overcharge.
The zone contractors do not always obtain preferred customer rates for disposal.
One zone contractor used the same disposal facility on two delivery orders.
This facility had negotiated annual contracts with preferred customers at
a rate of $100 per ton for PCB contaminated solids, while other customers
were charged rates varying from $120 to $180 per ton. At one site the zone
contractor obtained the $100 per ton rate for 141.77 tons disposed, while it
paid $180 a ton for disposal of 344.3 tons from another site. Agency officials
told us that the disposal firm established a new rate of $180 a ton for all
customers which was effective before the second disposal. However, a review
of invoices after the supposed affective date of the $180 rate disclosed that
charges to customers varied from $140 to $130 per ton.
Under the ERCS contracts, disposal contracting is done separately for each
delivery order and the zone .contractors do not know their disposal needs for
future delivery orders. Therefore, preferred customer annual contracts are
not obtained under tha current ERCS structure.
The zone contractors also do not always accurately identify the material to be
disposed. In one instance, a zone contractor labeled material to be disposed
as PCB liquids regulated under the Toxic Substances Control Act (TSCA),
although most of the material, which had very few traces of PCBs, was actually
regulated under the Resource Conservation and Recovery Act (RCRA). Because of
the highly toxic nature of PCBs and the two available disposal facilities, the
cost of disposal of PCBs is higher than for most hazardous materials regulated
under RCRA. The inaccurate identification of the material disposed may have
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resulted in excess disposal costs. This example again illustrates the control
problems created by assigning overall responsibility for all aspects of a
cleanup to a single zone contractor. EPA would be more likely to promptly
learn of identification inaccuracies if the on-site cleanup, transportation,
and disposal contractors were each separately accountable to EPA.
Agency Comments
The Agency stated that "By deferring the contracting for these numerous
individual transportation and disposal requirements until after the ERCS prime
contracts are in place, the Agency has increased its cost effectiveness and
enhanced competition." The Agency indicated that transportation and disposal
contractor selection may be determined primarily by factors other than cost.
The Agency agreed that the market for transportation services is highly compe-
titive. However, the Agency indicated that some firms "over book their limited
number of trucks by quoting low prices and then accepting other higher paying
jobs if and when they arise." The Agency stated that selection factors include
"the number of trucks a company has available at the time, its reputation for
safety, its proximity to the site, its license restrictions, and its relation-
ship (good or bad) with the chosen disposal facility." The Agency also stated
that trucks could not haul their naximun gross loads in the example we cited
because of load densities and state weight limitations on bridges and highways.
The Agency stated that "cost is not necessarily the determining factor in
selecting a disposal facility." Facility compliance with regulatory require-
ments, the nature of the waste, and the distance and route to be travelled are
the predominant factors.
The Agency stated:
The waste disposal industry has developed a reputation for selectively
doing business on its own terms and conditions. They decide whose waste
they will accept, when it may be delivered, whose trucks are acceptable,
and most important the price they have decided to charge.
When the disposal facility knows the location of the cleanup site (we are
required to report the origin of the waste) and the next closest approved
disposal facility, it is easy to calculate the difference in the transpor-
tation costs between the two and if inclined increase the price quote so
as to enhance its' profits and still be the lower (transportation plus
disposal) cost overall. Presently there is no recourse, regulatory or
otherwise, than to pay the increased price or incur the excessive trans-
portation costs to the other disposal facility.
The Agency noted "additional improvements" in the ERCS contracts. These
allow the OSC to approve using the nearest contractor, including the ERCS''
contractor, for transportation of less than $5,000 or, with the approval of the
contracting officer, of less than $25,000.
The Agency indicated that the use of an exemplary performance incentive in
the zone contracts does not act as a disincentive to full and timely disclosure
of performance problems to EPA because of "the daily on-site presence of the
OSC, who is charged with the continuous monitoring of performance of all site
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activity." The Agency noted that the OSC is assisted by the Technical
Assistance Team (TAT) and that nunerous other Agency personnel have review and
monitoring responsibilities. "As a direct result of the past ERCS incentive
plan, the new reconpetes for these requirements are going to have a large
portion of the cleanup costs on a cost-plus-award-fee basis and will include
a periodic evaluation of the future ERCS contractors' performance."
Auditor Evaluation
We understand the reasons for the transportation and disposal subcontracting
provision of the ERCS contracts. However, our audit demonstrated that in
practice the provision has not served to keep costs down or to allow full
competition. We understand that technical needs must be met, but did not find
evidence that they were met in the most cost effective manner.
We also understand that some hauling firms may not be suitable in particular
circumstances. Competitive bids should be sought from firms with adequate
capacity and technical capability. Special arrangements between disposal
firms and transportation firms serve to diminish competition and should be
viewed in that light. Upon further review, we did not find that the ability
to haul maximum gross loads was limited in the case we cited by load densities
and state weight limitations. The fact that truck manifests and bills of lading
showed that truck loads of contaminated soil being hauled from the EPA cleanup
site varied in weight more than 60 percent indicated that trucks were not always
fully loaded. Thus, we believe a number of the loads could apparently have
been consolidated. Further, State Highway officials advised us that under
state road and bridge standards properly loaded trucks could carry substantially
more than the weight limitations cited in the Agency response.
We recognized in the report the severe limitations on available disposal
facilities. Our finding focused on obtaining the lowest possible price at a
selected disposal facility. We found indications that some disposal firms may
offer preferential rates to preferred customers.
The "additional improvements" cited by the Agency only allow sole source
procurement for small transportation subcontracts. They do not enhance
competition or resolve the deficiencies noted in the finding.
We note that the OSC may be responsible for multiple sites at the same time
and is not always able to be on-site. Our audit clearly demonstrated that the
review and monitoring activities of Agency personnel and the TAT have been
inadequate to prevent the problems we noted. The planned changes to a cost-
plus-award-fee basis and periodic performance evaluations could produce
improvements.
Recommendations
1. We recommend that EPA award one master cost-plus-award-fee contract for the
procurement of ERCS transportation services in all zones. The contractor
would not have to necessarily be a transportation company, but should be
knowledgeable about the hazardous waste transportation market.
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Agency Comments
The report's recommendation that EPA award and administer a separate
contract for the procurement and management all of the transportation
services at cleanup sites is not feasible nor is it in the best interest
of the Agency due to the following:
0 The time, place, destination, and nature of the waste to be trans-
ported cannot be specified in advance of the need in order to award
one contract.
0 The Superfund Off-Site Disposal policy has the net effect of requiring
the Agency to make disposal decisions on a site-specific basis.
0 The OSC is responsible under the National Contingency Plan for direct-
ing all on-site work. Therefore, the OSC is responsible for the
selection of the disposal facility which impacts on the transportation
service required.
0 Permit requirements for hauling hazardous wastes vary substantially
from state to state and even county to county thus individual regional
management contracts would be necessary.
0 Any additional contracts would be an extra layer of contracting which
would duplicate what the existing cleanup contractors now routinely
perform for their commercial customers.
The present method of subcontracting for the transportation services under
the ERCS delivery orders is effective and needs only to have more detailed
documentation supporting the rationale as well as the cost benefits asso-
ciated with selecting other than the lowest bid. A periodic compliance
review is scheduled to be implemented. (See response to Finding No. 6).
Where possible, the Agency will consider awarding separate contracts for
transportation and disposal on a site-specific basis, such as that which
is being done at the Shaffer site in West Virginia.
Auditor Evaluation
The first three points the Agency raised are true but do not demonstrate
that our recommendation is infeasible. The many factors involved seem to
indicate the desirability of a procurement for a specialized service
that could take full account of all factors while seeking full price
competition.
Permit requirements do vary. However, they are known and the selected
contractor would be responsible for maintaining a detailed knowledge of
them.
Our recommendation would involve an extra layer of contracting, but the
advantages of our recommended approach, as outlined in our finding,
outweiah this disadvantaae.
outweigh this disadvantage,
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We have demonstrated that the present method of transportation subcontract-
ing has not effectively served to minimize costs. Better documentation
and periodic compliance reviews would be improvements. However, we believe
our recommendation would provide a more effective alternative. We support
trie use of competitively procured site-specific transportation and disposal
contracts where appropriate.
We recommend that EPA determine how EPA can obtain preferred rates from
disposal facilities. The method found most feasible should be implemented
to obtain preferred rates for Superfund work by EPA, the U.S., Army Corps
of Engineers and the States, including their contractors. EPA should also
consider whetner it is feasible to incorporate into these arrangements
other publicly funded hazardous waste disposal, such as EPA laboratory
waste and waste from State-funded response actions.
Agency Comments
While the report's recommendation to award separate preferred rate
contracts has many of the same shortcomings as those previously mentioned
against separate transportation contracts, any preferred customer rate
agreements obtainable would assist the ERCS contractors in subcontracting
for these services. Some critical concessions in the liability areas
would probably be requested by the disposal facilities for any preferred
rates granted. The Agency stated that they will initiate a study of the
feasibility of entering into such agreements with any willing disposal
facility.
Auditor Evaluation
The feasibility study which the Agency indicates it will initiate would be
the first step to implementing our recommendation.
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FINDING NO. 6 - EPA SHOULD IMPROVE CONTRACT MONITORING
Contracting officers did not monitor the ERCS contracts on a regular basis.
As a result, the ERCS contractors did not (1) always comply with the terms of
the contract, (2) provide services in a cost effective manner, and (3) comply
with Federal laws. Specifically, the ERCS contractors (primes and subs)
did not comply with (1) the Minimum Personnel Qualifications required by the
contract,-(2) the Purchasing and Subcontracting Agreement of the ERCS contracts,
and (3) Federal labor laws.
Title 48 CFR 1.602-2 states that contracting officers are responsible for
(1) ensuring performance of all necessary actions for effective contracting,
(2) ensuring compliance with the terms of the contract, and (3) safeguarding
the interests of the United States in its contractual relationships.
In addition 41 CFR 1-3.903-2 states that:
(a) When the prime contract is not to be placed on a firm fixed-price basis,
review of subcontracts prior to placement may be desirable since the
ultimate cost to the Government will depend in part on subcontract
prices and performance. Contract provisions requiring advance notifica-
tion to the contracting officer of proposed subcontracts for materials,
components and other purchases may be appropriate both for information
as to sources and prices and to provide an opportunity for review and
for approval or objection by the contracting officer prior to award of
the subcontracts.
(b)(3) In those instances where a contractor's purchasing system . . .
has been deemed adequate, review of subcontracts generally may
not be necessary. However, contracting officers shall conduct
periodic reviews of the application of the system to insure
* conformance therewith.
The need to conduct contract monitoring was reinforced by a program official
who said that on-scene coordinators in the field frequently did not understand
the ERCS contract terms and were not always able to get satisfactory explana-
tions in a timely manner from the Procurement and Contract Management Division.
Proper contract monitoring of the ERCS contractors and subcontractors would
have detected the following deficiencies.
Minimum Personnel Qualifications
Minimum personnel qualifications for the contractors' professional and cleanup
personnel are included in the ERCS contracts. One company included in our
review used personnel who did not meet the minimum requiranents. We reviewed
the qualifications of 74 employees on three delivery orders and found that 8
employees did not meet the minimum qualifications.
These employees worked as cleanup technician II, chemist II and foreman III.
Each of these positions required minimum experience levels, which the eight
employees did not meet. For example, we found employees with less than 1 year
of experience who were classified at the technician II level which requires
2 to 6 years of specialized experience.
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Purchasing And Subcontracting Agreement
The ERCS contracts state that: "Competition shall be obtained to the maximum
practicable extent." Furthermore, one ERCS contractor's own procurement poli-
cies, which were incorporated as part of the contract, stated that it would
utilize an in-house centralized purchasing function to obtain the best price
for goods and services. The subcontracts we reviewed for this contractor,
however, showed that the contractor failed to adhere to these policies.
For four delivery orders issued to the contractor, we reviewed the 12 largest
subcontracts. The subcontracts had dollar values which ranged from $9,707
to $528,137. Three of these subcontracts were procured competitively in
accordance with the contract. The remaining nine subcontracts (1) had no
documentation to demonstrate competitive procurement; (2) had only one bid;
or (3) were awarded to a firm other than the lowest bidder with no explanation.
As discussed in Finding No. 5, we found instances where improper procurement
actions by an ERCS contractor may have led to EPA being overcharged.
Federal Labor Laws
The ERCS contracts specify that overtime should be paid in accordance with the
requirements of the "Contract Work Hours and Safety Standard Act" and the
"Fair Labor Standards Act" (FLSA).
The ERCS contracts require that "laborers, mechanics, guards, and watchmen be
compensated at a rate of one and one-half times their basic rate of pay for
all hours worked in excess of eight (8) hours per day or forty (40) hours per
week, whichever yields the greater number of overtime hours."
The FLSA applies to supervisory, professional and clerical personnel. These
individuals are designated as exempt or non-exempt from FLSA regulations.
Non-exempt employees are to be paid no less than one and one-half their regular
rates of pay for all hours worked in excess of forty hours per seven-day work
week.
In reviewing the pay rates of two ERCS contractors and their subcontractors,
we found that these Federal labor laws were not always complied with. One
contractor did not pay overtime to any of its employees. The remaining
contractor paid overtime up to $18.00 per hour. One employee, who should have
been paid $21.45 an hour for overtime, was adversely affected by this policy.
However, as shown in Finding No. 4, EPA was charged increased rates for over-
time hours worked.
The ERCS contracts are also subject to the Service Contract Act which includes
a requirement for a Department of Labor wage determination. We found that the
minimum wage rates specified in the wage determination were not always paid to
the employees of the ERCS contractors and subcontractors. A review of the wage
rates of 192 employees of two contractors and their subcontractors revealed
that 149 were paid less than the rates specified in the wage determination.
We found instances where welders and equipment operators, who should have been
paid a minimum of $9.62 per hour under the wage determination, were paid as
little as $5.50 per hour by an ERCS contractor.
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In summary, the contracting officers have managed the ERCS contracts by
exception. Questions and problems are addressed, but contractor compliance
is not reviewed on an ongoing basis. As a result, goods and services were
not procured in an effective or cost efficient manner. Contractors violated
Federal labor laws and assigned employees to work who were not qualified to
perform under the terms of the contract.
Recommendations
We recommend that EPA improve contract monitoring by actively reviewing the
contractors' compliance with the contract on a routine basis. Given the
extensive programmatic and contractual coordination involved in the management
and administration of the ERCS contracts, we recommend that EPA establish a
monitoring board which includes program and contracts personnel from both
headquarters and the regions. This board would provide all users of the ERCS
contracts with uniform interpretations of the contracts and promote consistent
contract administration.
Agency Comments
With the implementation of the Agency's contract management improvement program
and the hiring of more contracts management personnel, officials said they have
made significant improvements in monitoring ERCS. Award fee provisions in
planned zone and regional ERCS contracts would encourage better oversight by
EPA and the contractors. Contract specialists would also institute a review
system to ensure that the contracts are properly monitored. Officials plan
the following additional steps to resolve problems rioted in the report. They
believe these actions will implement the recommendation that EPA improve
contract monitoring. Officials did not believe that the recommended
"monitoring board" was necessary.
Contract Monitoring
Agency officials said they have assisted OSCs by issuing contract manuals
and providing training. They plan the following actions in FY 1987 to
further improve guidance to OSCs.
0 Visits to every region to provide OSC training on the ERCS.
0 A program by procurement officials and the headquarters program
office which will involve reviewing contractor performance, obser-
ving/ assisting the OSC, and evaluating contract billing and payment
procedures.
Minimum Personnel Qualifications
As a result of the audit and program review, procurement and program
personnel will institute quarterly program management reviews of zone and
regional ERCS contracts. OSC training will emphasize to OSCs to be alert
for contract employees who may not meet qualification requirements.
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Purchasing and Subcontracting Agreement
Officials recognized the need for general improvements and will:
0 conduct purchasing system reviews of the new zone ERCS contracts
within a short time after award;
0 review purchasing systems of regional ERCS contracts as part of
program management reviews;
0 give OSCs additional instructions on proper subcontracting procedures,
Federal Labor Laws
Officials said they have notified the U.S. Department of Labor of past
violations. In addition, officials will review new ERCS contracts to
determine if employees are paid according to the contract and the law.
To help identify labor law violations, officials will request audit
assistance.
Auditor Evaluation
The Agency's proposed actions should improve contract monitoring. However,
officials have not explained why a monitoring board is not necessary. We
believe that including regional and headquarters program and procurement
officials on a monitoring board would fostar uniform contract interpretations
and administration, which would not be ensured by the steps currently proposed.
The Regional involvement and uniform interpretations are important aspects of
our recommendation. We believe the proposed activities ^ould be more effective
if overseen by a monitoring board.
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APPENDIX 1
DISTRIBUTION
Action Officials
Assistant Administrator for Administration and Resources Management
Assistant Administrator for Solid Waste and Emergency Response
Information Copies
Administrator
Deputy Administrator
Special Assistant to the Administrator
Comptroller
Agency Follow-up Official: Attn: Resources Systems Staff
Director, Office of Congressional Liaison
Director, Office of Public Affairs
Regional Administrators
U S. Environmental Protection Agency,
Region V, Library
230 South Dearborn Street „<•"
Chicago, Illinois 60604 '
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