100R80101
AUDIT GUIDE
FOR
CONSTRUCTION
GRANT PROGRAM
ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
Revised May 1980
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This document is not a replacement for or supplement to EPA regulations, guidelines, or
official EPA policy statements. It is a guide used by the Environmental Protection
Agency and its auditors to assist in conducting interim and final construction grant
audits. As such, this guidance is subject to be modified as EPA regulations, guidelines,
and policies change.
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TABLE OF CONTENTS
Page
Chapter 1: Introduction 1-1
1.1 Purpose of Audit Guide 1-1
1.2 Program Background 1-1
1.3 Authority for Audit 1-2
1.4 Audit Standards 1-2
1.5 Audit Objectives 1-2
1.6 Matters Requiring Immediate Attention 1-3
1.6.1 Suspected Fraud, Irregularity,
or Collusion 1-3
1.6.2 Insufficient Data or
Inadequate Systems 1-3
1.7 Quality Control 1-3
Chapter 2: Definition of Program Terms 2-1
Chapter 3: Preliminary Procedures 3-1
3.1 Developing the Audit Approach 3-1
3.2 Types of Audits 3-1
3.2.1 Interim Audits 3-1
3.2.2 Final Audits 3-3
3.3 Developing the Plan 3-3
3.4 Major Activity Areas for Audit Focus 3-7
3.4.1 Accounting Practices 3-7
3.4.2 Procurement Practices 3-9
3.4.3 Project Management Practices 3-12
3.4.4 Property Management 3-14
Chapter 4: Field Audit Procedures 4-1
4.1 Approach to Audit of Costs 4-1
4.1.1 Factors for Determining
Allowability 4-1
4.1.2 Set-Aside Costs 4-4
4.1.3 Review of Costs 4-4
4.2 General Audit Steps 4-5
4.2.1 Initial Field Audit
Procedures 4-5
4.2.2 Verification of Claim 4-6
4.2.3 Verification of Eligibility 4-6
4.2.4 Credits, Rebates, and
Refunds 4-6
4.2.5 Unpaid Bills 4-7
4.3 Audit of Specific Costs 4-7
4.3.1 Audit of the Force Account 4-7
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Page
4.3.2 Audit of Engineering
Services 4-8
4.3.3 Audit of Construction
Costs 4-19
4.3.4 Other Costs 4-28
4.4 Other Audit Matters 4-28
4.4.1 Flood insurance 4-29
4.4.2'Property Control 4-29
4.4.3 National Pollutant Discharge
Elimination System 4-30
4.4.4 User Charge System (UCS) 4-30
4.4.5 Industrial Cost Recovery (ICR) System 4-31
4.4.6 Operation and Maintenance
(O&M) Manual 4-31
4.4.7 Sewer Use Ordinance 4-32
4.4.8 Operation of Facility 4-32
4.4.9 Value Engineering 4-33
4.4.10 Start up Services 4-34
4.4.11 Federal Facilities v 4-35
4.4.12 Municipal Pretreatment Program s 4-35
Chapter 5: Exit Conferences 5-1
5.1 Audits with No Findings 5-1
5.2 Audits with Significant
Findings 5-1
5.3 Documentation 5-1
Chapter 6: The Audit Report 6-1
6.1 Introduction 6-1
6.2 Content and Format of Audit
Report 6-1
6.2.1 Scope Paragraph 6-1
6.2.2 Opinion 6-1
6.2.3 Comments on Compliance,
Performance, and
Internal Controls 6-1
6.3 Presenting the Findings 6-1
6.4 Example Audit Report No. 1 6-3
6.5 Example Audit Report No. 2 6-14
Appendix A: Survey of Grantee's
Accounting, Procurement, and
Property Management Systems A-l
Appendix B: Bond Calculation Guidance B-l
Appendix C: Supplemental Audit
Procedures for Relocation Costs C-l
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Appendix D: Criteria for Eligibility and
AHowability of Selected Items of Costs D-l
Appendix E: Consulting Engineer
Subagreements—Records Subject
to Audit E-l
Appendix F: Consulting Engineer
Subagreements—Allowable Methods of
Compensation F-1
Appendix G: Consulting Engineer
Subagreements Subject to 40 CFR
35.937-5, -6, and -7 G-l
Appendix H: Interpolation of Fee
Percentage H-l
Appendix I: Application of Paragraph B.5
of Appendix D to 40 CFR 35, Subpart E 1-1
Appendix J: EPA Division Audit Offices
and Cognizant Geographic Areas J-l
Appendix K: References K-l
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CHAPTER 1: INTRODUCTION
1.1 PURPOSE OF AUDIT GUIDE
This guide has been prepared to assist the Environmental Protection Agency (EPA) and its
auditors in conducting interim and final audits of the construction grant program. The audit
steps in this guide are intended to provide general insight into the nature and scope of audit
contemplated. This guide is not intended to be a complete manual of procedures, nor is it
intended to supplant the auditor's judgment of the work required to meet the audit objectives
outlined in this audit guide. The audit procedures contained in this guide may not cover all
circumstances or conditions encountered in auditing a particular grant, and, similarly, not all of
the audit procedures will apply to each grant audited. The auditor must use his professional
judgment to tailor the procedures to meet conditions at the audit site so that the audit objectives
set forth in the guide may be achieved.
1.2 PROGRAM BACKGROUND
The first Federal legislation concerning water pollution was the Rivers and Harbors Act of
1899. The Act provided that those convicted of polluting navigable waters or their tributaries
would be guilty of a misdemeanor and, upon conviction, would be fined between $500 and
$2,500 and imprisoned for not less than 30 days nor more than one year. Forty-nine years later,
the 1948 Federal Water Pollution Control Act was enacted. It provided grants for the planning
and design, and loans for construction of waste-water treatment plants. The Federal Water
Pollution Control Act of 1956 provided the basis for the current construction grant program.
This Act was amended in 1961, 1965, 1966, 1970, 1972, 1973, 1977,1978, and 1979. The Act, as
amended, provides for Federal grants to municipalities, intermunicipal agencies, states, and
interstate agencies for planning, designing, and constructing waste treatment facilities.
The Department of Health, Education, and Welfare (now Health and Human Services)
administered the program until 1966. The Federal Water Pollution Control Act of 1966
transferred this responsibility to the Department of the Interior. The construction grant
program was transferred to the Environmental Protection Agency in 1970 (Reorganization
Plan No. 3).
After June 30, 1967, Federal participation in grants for the cost of constructing a
wastetreatment facility could be increased from 33 percent to 40 percent if the State agreed to
pay not less than 30 percent of the estimated reasonable cost of all State construction projects
receiving Federal grants. The percentage limitation could be further increased to 50 percent if
(1) the State agreed to pay not less than 25 percent of estimated reasonable cost of all projects
for which Federal grants were made and (2) enforceable water quality standards had been
established for the waters into which the project's effluent discharged. An additional Federal
participation of as much as ten percent of the approved grant was permitted if the funded
project was in conformity with a metropolitan plan for that particular area. Thus, it was
possible for a Federal grant to be awarded for an amount equal to 55 percent of the total
estimated reasonable project cost.
Title II of the Federal Water Pollution Control Act Amendments of 1972 authorized a
Federal grant of 75 percent of the cost of constructing a treatment works. The 1977
amendments authorized additional Federal grants of:
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• 85 percent of Step 2 (design) and Step 3 (construction) costs of projects initiated after
October 1, 1978, which incorporated innovative or alternative technologies; and
• 100 percent of the modification or replacement costs if the innovative or alternative
project fails.
In addition, Section 206(a) through (e) of PL 92-500 (codified in Subpart D of 40 CFR 35
and amended by PL 93-207) provided for reimbursement of public sewage treatment projects
on which construction was initiated after June 30, 1956.
1.3 AUTHORITY FOR AUDIT
The authorized representatives of the Administrator of EPA and the Comptroller General of
the United States have authority to audit the grantees' books, documents, records, and papers
(PL 92-500). This audit authority is extended to the subcontractors' books, documents,
records, and papers which are pertinent to the project (40 CFR 35.935-7). EPA auditors and
auditors under contract to EPA are the Administrator's representatives.
The EPA Office of Inspector General is responsible for audits of EPA grants. The Divisional
Assistant Inspector General for Audits (see Appendix J to this guide) may elect to have an
individual audit conducted by his staff, another Federal agency, state or local government
auditors, or an independent public accountant. When the Divisional Assistant Inspector
General for Audits (DAIGA) elects to have the audit performed by an independent public
accountant, the DAIGA must notify the grantee or contractor as to the firm performing the
audit. The selected firm must contact the grantee or contractor to arrange for the start of the
audit.
1.4 AUDIT STANDARDS
Audits of EPA construction grants will be made in accordance with this guide and the
"Standards for Audit of Governmental Organizations, Programs, Activities, and Functions"
issued by the Comptroller General in August 1972. The independent public accountant will not
be required to express an opinion as to the efficiency and economy of operations or with respect
to program evaluations. He will, however, be required to perform certain audit tests related to
these aspects and to report the results of his examination.
In performing audits of EPA grants/contracts, the auditor is expected to adhere to generally
accepted auditing standards. In addition, the auditor should utilize applicable portions of the
American Institute of Certified Public Accountants' (AICPA) Industry Audit Guides. Of
particular importance is the guide "Audits of State and Local Governmental Units."
1.5 AUDIT OBJECTIVES
The objectives of the audits of grants and contracts are to:
a. Determine whether the management controls exercised by the grantee through its
management system, accounting system, procurement system, and property control system are
adequate to provide assurance that costs claimed/incurred are reasonable, allowable, and
allocable to the sponsored project under the grant terms and conditions, Federal Management
Circulars (FMCs), and applicable EPA regulations.
b. Identify any noncompliance with applicable grant provisions or EPA rules and
regulations and, based upon the review, provide recommendations for improvement.
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c. Determine whether the costs claimed under the EPA grant are reasonable, allowable,
and allocable to the sponsored project.
1.6 MATTERS REQUIRING IMMEDIATE ATTENTION
1.6.1 Suspected Fraud, Irregularity, or Collusion
Audits performed in accordance with this guide are not for the purpose of detecting fraud,
although audits may minimize fraud loss, discourage irregularities, and identify conditions of
gross mismanagement. If, during the examination, instances of possible fraud, gross
mismanagement, or other similar irregularities are noted, the auditor should:
a. Document the situation;
b. Immediately notify the D AIG A of the situation encountered; and
c. Proceed only in accordance with instructions provided.
1.6.2 Insufficient Data or Inadequate Systems
The auditor is expected to use professional judgment in arriving at conclusions concerning
the sufficiency of available supporting data. If additional guidance is needed as to the
acceptability of certain data, the auditor should contact the DAIGA or his designated
representative. Where insufficient data or inadequate systems preclude reaching opinions
concerning the reasonableness, allocability, and allowability of costs within a reasonable period
of time, the auditor must, as a minimum:
a. Document tests and observations to support the auditor's opinion regarding
insufficient data or inadequate systems.
b. Notify the DAIGA and cease work until instructions are received.
1.7 QUALITY CONTROL
EPA retains the right to review audit workpapers to evaluate the overall quality of the audit
performed. In this regard, EPA may require that copies of the audit workpapers be forwarded
along with the completed audit report to the responsible DAIGA or his designated
representative. The audit workpapers will be returned to the auditor upon completion of the
EPA evaluation. Based on this review, the auditor may have to return to the job site to perform
whatever additional work is required. In this regard, the auditor should retain the workpapers
applicable to the audit of any EPA grant or contract for three years after completion of the
assignment and submission of the required audit report.
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CHAPTER 2: DEFINITION OF PROGRAM TERMS
In conducting a construction grant audit, it is extremely important that the auditor
understand certain program terms. Program terms are defined in 40 CFR 35.805 and 35.905 of
EPA's Final Construction Grant Regulations. In addition, the following definitions are
presented to further assist the auditor.
Cutoff Date—A cutoff date is established by the EPA Regional Office. The grantee is normally
notified of the cutoff date by letter. After the cutoff date, the cost of work performed, equipment
or materials delivered or installed, or services rendered will not be allowable for Federal
participation. If no other cutoff date is established, the cutoff date will be the date of the final
inspection performed by either the state agency or EPA, whichever the Region deems the true
final inspection.
Federal Share—The amount of the Federal grant not to exceed the smaller of the amount of
the approved grant or the actual allowable audited costs multiplied by the percentage of Federal
participation on which the grant was computed.
Force Account—The grantee's use of its own employees, material, and equipment for
construction, construction-related activities, or facility repair or improvement.
Grantee—An applicant who has received a grant. A grantee may be a municipality,
intermunicipal agency, state, interstate agency, District of Columbia, Puerto Rico, Virgin
Islands, Guam, American Samoa, or Trust Territory of the Pacific Islands.
Industrial Cost Recovery—Grantee and/or Federal government recovery of construction costs
from (1) industrial users of a treatment works and (2) commercial users of an individual system.
This recovery is based on the proportionate treatment of waste from such users over a period of
30 years or the life of the facility. Fifty percent of the recovered funds, together with any interest
earned, is to be refunded annually to the U.S. Treasury. Forty percent of the recovered amount
is to be retained by the grantee and used only for EPA-approved construction. The remaining
ten percent may be used as the grantee wishes.
Operation and Maintenance—The operation and maintenance of a treatment works during its
service life, following completion of the Step 3 phase.
Project File—The EPA file which contains each grant agreement or amendment (such as Step
1, Step 2, or Step 3) and supporting documents, correspondence with the grantee, copies of
inspection reports, and the grantee's payment requests.
Value Engineering (VE)—A specialized cost control technique based on a systematic and
creative approach which identifies and focuses on unnecessarily high cost in a project in order to
arrive at a cost saving without sacrificing the reliability or efficiency of the project. Value
engineering is required for all Step 2 grant applications having a projected total Step 3 grant-
eligible construction cost of $10 million or more, excluding the cost of interceptors and collector
sewers, for all construction grant projects certified by the state on or after October 26, 1976.
(See Section 4.4.9 of this guide.)
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CHAPTER 3: PRELIMINARY PROCEDURES
3.1 DEVELOPING THE AUDIT APPROACH
The scope of each construction project is initially denned by a prospective applicant, with
final determination made by the Regional Administrator when grant assistance is awarded
(35.930-4).
Grants are generally obligated in three separate stages of project development (see Figure
3.1):
a. Step 1—facility plans and related elements;
b. Step 2—preparation of construction drawings and specifications; and
c. Step 3—fabrication and building of a treatment works.
A "project" may consist of an entire step, a segment (defined in 35.905-24), or a combination of
steps (35.909). Construction grant projects funded under PL 84-660 consist of a combination of
Steps 1, 2, and 3. An average sized project may require approximately six years to plan and
construct. Very large regional projects may require 12 to 15 years.
3.2 TYPES OF AUDITS
Two types of field audits will be discussed in this guide: interim audits and final audits.
(Preawards and defective pricing audits are integral parts of EPA Audits' workload. They are
not covered by this guide, but will be the subjects of separate guidance.)
The overall objectives of interim and final audits are to ensure that the grantee is in
compliance with grant requirements and to identify any areas in the management of the
construction grant program which need improvement.
The auditor is expected to have the skills necessary to perform the reviews required to meet
the objectives of this guide. If the auditor encounters situations requiring skills of an
engineering technical nature, he should contact the Divisional Assistant Inspector General for
Audits, who will review the situation and arrange for technical assistance.
3.2.1 Interim Audits
The primary purpose of the interim audit is to (1) review grantee operations during
construction to detect weaknesses in internal controls or in the controls over contractors
responsible for design and construction and (2) offer recommendations for improvements.
Interim audits will be performed during the earlier part of a construction project, often shortly
after the construction contractor has submitted a construction payment request. Accordingly,
interim audits will be primarily directed toward:
a. Internal accounting controls,
b. Procurement systems,
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Figure 3.1
CONSTRUCTION PROJECT MILESTONES—OVERVIEW
STEP 1
Facility Plans and Related Elements
Municipality submits application
State and EPA review application
EPA offers a grant and municipality accepts it
Grantee submits a facility plan which the state and EPA review and approve
Environmental assessment is prepared
Grantee holds a public hearing
State sets priorities for Step 2
STEP 2
Preparation of Construction Drawings, Plans, and
Specifications
Municipality submits application
State and EPA review application
EPA offers a grant and the municipality accepts it
Grantee performs a value engineering analysis (if required)
Grantee submits plans and specifications for approval by state and EPA
Grantee submits implementation schedules for a sewer use ordinance, a user
charge system, and an industrial cost recovery system for approval by
state and EPA
STEP 3
Fabrication, Building, and Certification of Treatment
WoTkg
Municipality submits application
State and EPA review application
EPA offers a grant and the municipality accepts it
Grantee advertises and selects low, qualified construction bidder
State and EPA review and approve selected bidder
Construction starts
State and/or EPA perform interim inspections and an audit
Grantee submits operation and maintenance manual to state and EPA for
approval
Grantee submits sewer use ordinance to state and EPA for approval
Grantee submits user charge and industrial cost recovery systems to state
and EPA for approval
Grantee certifies project is complete
EPA performs final inspection, makes final payment, and performs final
audit
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c. Design and construction controls, and
d. Costs incurred.
3.2.2 Final Audits
The primary purpose of the final audit is to review grantee records after completion of the
project to assure that costs claimed are reasonable, allocable, and allowable and that the grantee
has met the grant objectives. Final audits will also be concerned with controls in effect at the
time of grant performance, to provide assurance that the grant was administered efficiently and
resulted in an acceptable final product.
3.3 DEVELOPING THE PLAN
The EPA Office of Inspector General will utilize the criteria presented in Figure 3.2, other
relevant reports, construction grant and audit information, and sampling techniques to select
projects for audit.
Once the grantee has been selected, the Office of Inspector General will review the project
files and, after consultation with the Regional Office, assemble an audit planning package which
will be used to:
a. Determine whether a field audit will be performed;
b. Determine the scope of audit; and
c. Provide a basis for preparing the audit services order.
Descriptive data needed for completing the audit estimates will be provided (Figure 3.3) to
the prospective auditor for use in developing an audit plan. Other data relevant to actual project
costs and contract information (Figure 3.4) should be obtained from the project file by the
auditor selected to perform the audit.
When an auditor under contract to EPA is to perform the audit, the Divisional Assistant
Inspector General for Audits will coordinate the entrance conference date with him and
confirm the date by letter to the grantee.
There are substantial regulatory requirements with which the grantee must comply under
the PL 92-500 construction grants program. These requirements are primarily set forth in Parts
30 and 35 of EPA regulations published in Title 40 CFR, but other parts are applicable when
referenced (e.g., Part 4, Implementation of the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970). The auditor must also review the grant documents
in order to identify the terms and conditions unique to the audit being performed.
In reviewing the project, the DAIGA will determine if there are areas requiring special
attention. The DAIGA will identify areas which require detailed audit coverage as well as areas
requiring little or no coverage. In addition, the DAIGA may decide to expand the audit to cover
certain aspects of efficiency, economy, or program effectiveness. Whenever the scope of audit is
expanded, the DAIGA will provide the necessary additional audit guidance.
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Figure 3.2
FACTORS TO BE CONSIDERED IN SELECTING PROJECTS
FOR AUDIT
• Size of grants/projects
• Existence of unit-price contracts
• Type of construction contracts and subcontracts
• Type and materiality of engineering contracts and subcontracts
• Number and significance of change orders
• Experience with prior grantee/project audits
• Indication of deficiencies
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Figure 3.3
INFORMATION TO BE PROVIDED TO PROSPECTIVE AUDITORS
FOR USE IN DETERMINING SCOPE, SCHEDULE, RESOURCES,
PLANS, AND ESTIMATES OF AUDIT REPORTS
• Grant number
• Grantee name, address, and phone number
• Eligible project cost
• Grant amount
• Number and dollar value of change orders
• Number, amount, and type of construction contracts
• Number, amount, and type of engineering agreements
• Extent offeree account work (as available)
• Cutoff date
• Notification if construction is located in a flood hazard area requiring the grantee to
purchase flood insurance
• National Pollutant Discharge Elimination System (NPDES) permit
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Figure 3.4
INFORMATION TO BE OBTAINED FROM THE PROJECT FILE
BY THE AUDITOR PERFORMING THE AUDIT
* • Final project inspection date
• Any additional engineering or construction contracts
• Copies of related subcontracts (as available)
* • Final inspection reports and cutoff dates
(final audits)
• Copies of EPA-approved change orders
• Bid tabulations, contractor proposals
• Expenditure work sheet calculations
• Payments made by EPA
• Approval of sewer use ordinance, user charge system, industrial
cost recovery system, and operation and maintenance manual
• Approvals to advertise and award contracts
• Other pertinent correspondence (e.g., management
problem areas)
• Grants information and control data sheets
• Inspection reports, correspondence, and memorandums
* • Final Project Progress Report and Payment Request
(PPR & PR) or Outlay Report and Request for
Reimbursement for Construction Program
• Form FWPCA-7 or Form 5700-32, Application, with
supporting documentation
• Form FWPCA-7c, State Priority Certification and
Project Approval
• Form FWPCA-8a or Form 5700-20 (Offer and
Acceptance)
* Normally not available from Regional Office project
files for an interim audit.
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After the auditor has been selected and he has studied the project file furnished by EPA, he
must:
a. Note any special grant conditions which may be significant to the audit; and
b. Familiarize himself with the regulations applicable to the grant/project as indicated
in grant award documents.
3.4 MAJOR ACTIVITY AREAS FOR AUDIT FOCUS
The general scope of audits will be established by the EPA Divisional Assistant Inspector
General for Audits during the definition and audit planning stages. The major activity areas to
be addressed during an audit include the grantee's:
a. Accounting practices,
b. Procurement practices, and
c. Project management practices.
Both interim and final audits will include the audit of costs incurred associated with these
activities.
3.4.1 Accounting Practices
A primary requirement for the competent management of any project is a good accounting
system. The major areas which should be of primary concern to the auditor during his survey
(see Appendix A of this guide) are discussed below. For additional information on the criteria of
an adequate/acceptable accounting system, see the EPA publication, "Accounting Guide for
Construction Grants" (October 1977).
a. Accounting records
In order to have an accounting system, there must be records of all financial transactions.
This system should document all receipt and disbursement transactions, including explanations
and identifying codes (e.g., invoice number) on a chronological basis. It should also group them
by type of account (e.g., expense, asset) and by individual account (e.g., Board of Supervisors
payroll, communications expense).
Accounts should be set up in such a way as to identify each cost with a cost center and cost
objective in the form of a task or subtask. A cost center may be an organizational unit, a
function, or even an item of expense. Its purpose is to collect costs on a functional basis. Thus,
accounts might be divided into more than one cost center (e.g., payroll expense might be
distributed into several departments) and cost centers may have more than one account (e.g.,
the accounting department's costs might include payroll expense, supplies, and other accounts).
An important project management objective of accounting records is the derivation of
information regarding actual versus budgeted costs by project task and by performing
organization. A separate cost center or series of subaccounts should be established to identify
and accumulate the costs applicable to the EPA construction grant.
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All entries in the chronological and account groupings should be cross-referenced. Further,
the groupings should be cross-referenced to the supporting documents. (See 40 CFR 30.800 and
30.805.)
b. Supporting documents
Every entry in the accounting records should be supported by appropriate documentation.
This could be a document from outside the grantee's office, as in the case of an invoice, or it
could be an internally generated document, as in the case of payroll. In many cases, several
documents will support a single transaction. For instance, a purchase of materials should have a
purchase request, purchase order, and receiving report in addition to an invoice. It might also
involve requests for proposal, contracts, advisory board resolutions, progress reports, and
progress payments. The key is that the files of supporting documents should contain all
information necessary to explain every transaction completely and should be cross-referenced
in such a way that transactions can be traced from any document dealing with the transaction
back to the initiation of that transaction and forward to the entry or entries concerned with that
transaction.
c. Traceability
Traceability is composed of two elements. The first is mechanical in nature. All entries
should be traceable to supporting documents. This requires a good filing system based on
reference codes for each entry and document. In a small system, codes may not need to be as
detailed, due to the lower volume of transactions, but in almost all systems referencing based
solely on a date or name will eventually prove cumbersome, inefficient, and probably
inadequate. Sequential numerical codes are usually best, not only for ease of referencing but also
for internal control.
The second element of traceability is the logic behind the transaction. One should be able to
determine not only what was done but why it was done. It is here that written procedures
become important. Some companies and governmental units survive without them; however,
they constantly experience exceptions to the unwritten rules and loose internal control because
of employee turnover and changes in circumstances. A grantee should have or should prepare
complete procedures for handling grant funds.
d. Segregation of costs
Accounting systems under Federal grants must provide for segregation of costs. In order to
permit grantees and EPA to determine in which costs the government will participate, the
accounting system must differentiate between:
(1) Eligible and ineligible costs
Each construction grant project is normally evaluated by EPA Regional Office personnel to
determine which portions of the project are eligible for Federal participation under Federal
statutes. All costs applicable to eligible portions of the project are considered eligible costs.
Costs applicable to the ineligible portion, conversely, are considered ineligible and cannot be
claimed for Federal participation.
(2) Allowable and unallowable costs
All costs related to construction grants must be allowable under applicable Federal
regulations and the terms of the grant if EPA is to participate. Grantee costs must also be
considered allowable under FMC 74-4 and EPA regulations in 40 CFR 35.940. Each cost
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should be scrutinized in view of these requirements. Unallowable costs should then be
segregated, thus preventing their inclusion in the grantee's claim for Federal participation.
(3) Direct and indirect costs
A further distinction must be made between direct and indirect costs. Direct costs are those
which can be directly identified to a particular grant. For example, accounting or procurement
costs are commonly not identified with individual grant projects. Grantee indirect costs are not
allowable as charges to a grant program unless an indirect cost proposal identifying indirect
costs and showing the proposed allocation is prepared, audited, and accepted by the Federal
government. (See 40 CFR 30.715-2 and 40 CFR 35.940-4.)
e. Internal control
Internal control is the means by which the accounting, procurement, and other management
systems are regulated. It serves to assure management that proper procedures are being
followed with respect to receipts and disbursements.
Each grantee should have controls which act to check the functioning of the system
automatically and which ensure that all major transactions have checks and balances on the
individuals involved. Contractors hired by the grantee should be supervised not only with
respect to their work but also with respect to their accounting for the costs of work under
reimbursable contracts. This supervision should also be provided for as a part of the grantee's
internal control system. For example, costs of contractor efforts by task should be recorded and
should have an audit trail which the grantee could examine in detail if the contract were
significant in amount.
f. Accounting reports
Accounting reports are an integral part of an accounting system and are often the least
planned aspect of the system. This applies more to internal reports than to external reports
because the form of many external reports is prescribed. Grantees should realize that the data
which must be reported to outside sources is not always the same as that which is required for
internal management. Like internal control, report content will vary from grantee to grantee.
The keys here are simplicity, comparability, and advance planning.
g. Summary
The constant question must be: has the grantee given sufficient thought to planning the
accounting system? It should be based on analysis of needs and resources, rather than on a
standard system copied from a book. The thing to look for is an understanding of those needs
and an analysis of how the accounting system will fulfill them.
3.4.2 Procurement Practices
a. Construction contracts
EPA regulations (40 CFR 35.938-3) require that each construction contract greater than
$10,000 (see 40 CFR 35.936-19 for those under $10,000) shall be either a firm-fixed-price (or
lump sum) contract, a unit price contract, or a combination of the two, awarded by means of
formal advertising to the lowest reponsive, responsible bidder. Exceptions include negotiated
change orders (see 40 CFR 35.938-5) and other construction contracts negotiated for reasons
given in 40 CFR 35.936-18.
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(1) Firm fixed price (FFP)
The FFP contract generally provides that the contractor will be paid a lump sum agreed to in
advance for the construction of the facility reflected in detailed plans and specifications. It is not
subject to adjustment by reason of contract cost experience and, when appropriately applied,
places maximum risk upon the contractor. The grantee and the Federal government are assured
of a reasonable price through the receipt of competitive bids under the formal advertised
procurement process. For changes in scope of work, noncompetitive change orders to formally
advertised procurements must be negotiated.
(2) Unit price
The unit price contract generally provides that the contractor will be paid a fixed sum for
each unit of work performed under the approved plans and specifications. This type of contract
is commonly used where the work represents a repetition of things, such as the laying of sewer
lines, or where the quantity of work may vary substantially. Unit prices are not subject to
adjustment by reason of cost experience. As in FFP contracts, the reasonableness of the total
contract price is assured through the receipt of competitive bids under the formal advertised
procurement process. Where there are significant differences in unit quantities awarded and
unit quantities constructed, the reasonableness of unit prices must be established through
negotiation.
b. Engineering contracts (Figure 3.5)
Engineering and consulting services under grants are generally obtained through a
negotiated procurement. This type of procurement should involve screening a number of firms
for technical competence. Under a negotiated procurement, there are a number of types of
contracts: firm fixed price, cost plus fixed fee (or cost reimbursable), time and material (or labor
hour), or combinations of the above. The Federal Procurement Regulations (FPR), Section
1-3.4, discuss in detail these forms of contracting, when they are considered applicable, and
their limitations. The following summary of each is provided.
(1) Firm fixed price
The FFP contract generally provides for a firm price agreed to in advance for the services to
be procured. It is not subject to adjustment by reason of the contract cost experience and, when
appropriately applied, places maximum risk upon the contractor. Since the contracting firm
assumes full responsibility for profit or loss, it has maximum incentive for effective cost control
and contract performance. The FFP contract is suitable for use in procurements only when
definite performance requirements are available and when fair and reasonable prices can be
established at the outset. Prior to award, a negotiation process which includes either price or
cost analysis should take place between the firm and the grantee to arrive at a reasonable
estimate of cost plus a negotiated profit. The grantee is expected to document this negotiation.
(2) Cost plus fixed fee (CPFF)
The CPFF contract provides for the payment of actual cost plus a fixed fee to the contractor.
The fixed fee once negotiated does not vary with actual cost. Therefore, the CPFF contract
provides the contractor only minimum incentive for effective management control of costs.
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Figure 3.5
Engineering Contract Characteristics
AREAS OF
CONSIDERATION
Cost and fee profit
pattern
Effect of overrun or
underrun
Basis of payment
risks
COST-PLUS-FIXED-FEE
CONTRACT
• Cost is estimated
• Fee is fixed
• No fee in cost
• Fee unchanged
• Government assumes risk of overrun
and benefits of underrun
• Cost reimbursed as incurred, plus
prorated fee
• Best effort only is required to meet
cost
• Government maintains a high level of in-
volvement in contractor's operations
• Contractor normally does not contest
extracontractual direction, requests,
and interpretations
FIRM-FIXED-PRICE
CONTRACT
• Cost is not specified
• Profit is not specified
• A total price is established
• All costs over price are borne by
contractor
• Cost underrun increases profit
• Progress payment vanes
P
• Specified schedules and technical
performance requirements must be met
• Contractor must deny extracontractual effort
• Changes to the contract and claims
must be managed astutely
• A proven cost, schedule, planning system,
and control system are essential
• Can expect an increase in disputes
with government
TIME AND MATERIALS
CONTRACT
• Cost is not specified
• Profit is not specified
• Fixed hourly labor rates are negotiated
• All costs over price of each hour's
work are borne by contractor
• Cost underrun increases profit
• Payment based upon actual
hours worked
f d bel
• Specified schedules and technical
performance requirements must be met
• Changes to the contract and claims
must be managed astutely
• A proven cost, schedule, planning
system, and control system are essential
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The CPFF contract provides that the contractor receive its actual allowable labor, other
direct costs, and indirect costs, plus a fixed-fee profit. The CPFF contract is written to provide
for a total estimated cost (contract ceiling). The firm's costs are subject to an audit during or
after completion of performance to determine that its claims included only allowable costs in
accordance with applicable regulations.
(3) Time and materials
This type of contract provides for the procurement of services on the basis of direct labor
hours at specified fixed hourly rates (which include direct labor, overhead, and profit). This type
of contract does not provide the contractor with any positive incentive to control cost. It is
essential that time and materials contracts be used only where provision is made for adequate
controls, including appropriate surveillance during performance. Because this type of contract
does not encourage effective cost control and requires almost constant surveillance, it should be
used only after determination that no other type of contract will suitably serve. This type of
contract shall establish a ceiling price which the contractor should not exceed.
The time and materials contract has been used frequently by engineering and consulting
firms in the past. While it is an acceptable form of contracting, certain controls that have not
existed in the past are essential. The grantee is responsible for obtaining cost data from the
consulting engineer for evaluation and negotiation in establishing hourly rates. This should be
documented to show that a determination of reasonableness was made. In addition, the grantee
is responsible for maintaining surveillance over the hours charged by the contractor. The
contract must set a reasonable ceiling on the total cost of these services. A final audit will be
made to assure that the contractor has appropriate documentation to support the time charged
to the project.
In summary, any of the above forms of engineering contracts can be acceptable. However,
the grantee is responsible for demonstrating that:
(1) The method selected is appropriate for the services to be performed (see FPR
1-3.4);
(2) The necessary evaluation of the reasonableness of the proposed costs was made;
and
(3) Controls were maintained during performance.
In reviewing systems for procurements awarded under EPA's "Subagreement Regulations
for Construction Grants," the auditor should be guided by the requirements of 40 CFR 35.936,
40 CFR 35.937, and 40 CFR 35.938.
3.4.3 Project Management Practices
The grantee's ultimate ability to control costs and construction schedules is strongly
influenced by the project management approach applied. In addition to establishing a clear
understanding of contractual relationships, the grantee, the engineering firm, and the
construction contractor must maintain a complete communication system with effective
controls over costs and schedules and with a rapid decision-making and feedback capability.
The basic principles of such a system of management controls are shown in Figure 3.6. Large
projects may include a construction management contract to provide these controls.
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Figure 3.6
Project Management Activities
Basic Principles of the Grantee-Engineer-Construction Contractor System
• Proper definition of project scope; estimated cost; schedules; and responsibilities of the
grantee, the engineer, and the construction contractor
• Prompt revision of scope, estimated costs, and schedules after changes
• Control of design costs and procurement of engineering services and construction
• Control of schedule, costs, and changes during construction by monitoring:
— work schedules, material schedules, and startup;
— material quantities purchased and used
Planning and Design Phases Cost and Schedule Control Activities
• Inclusion of value engineering in Step 2 when estimated eligible Step 3 construction costs are
$10 million or more (exclusive of interceptor and collector sewers)
• Regular planning and design meetings attended by proper management membership
• Regular reports on planning and design progress as related to prior schedules
• Specifications, reviews, and approvals for major equipment, much the same as for drawings
Controls Applied During Construction
• A program for viewing overall time schedule and cost variances from budgets and schedules
• Inspections and reports of installed quantities of materials, with comparison between
planned and actual construction
• Control of field progress by periodic site reviews or continuing on-site inspection/monitoring
• A change-order budget system which shows dollars, workhours, and quantities of materials
or equipment
• A change-order approval system with (1) adequate formalized evaluations of the impact of
pending changes and (2) change notification procedures for fully implementing approved
changes
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a. Planning and design phases cost and schedule control
The control of costs and construction schedules during planning and design is of great
importance. Common activities and management control activities are shown in Figure 3.6.
b. Construction phase cost and schedule control
Emphasis during the construction phase is focused on the management and monitoring of
project cost and schedule data for construction labor, material installations, and performance of
subcontractors providing equipment and services. The grantee must ensure that adequate
inspections at the project locations are provided and that construction and equipment conform
with the approved plans and specifications. Controls exercised during this phase are shown in
Figure 3.6.
3.4.4 Property Management
EPA regulations (40 CFR 30.810) require that the grantee's management of nonexpendable
personal property include the elements listed in Figure 3.7.
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Figure 3.7
ELEMENTS OF A PERSONAL PROPERTY MANAGEMENT SYSTEM
• Accurately maintained property records which include:
— Description of the property
— Serial and model numbers
— Source, including grant number
— Identification of titleholder
— Acquisition date and cost
— Location, use, and condition of the property
— Ultimate disposition data
— Unit acquisition cost
• A physical inventory at least once every two years
• A control system to safeguard the property
• Proper sales procedures for unneeded property
• Identification of property owned by the Federal government
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CHAPTER 4: FIELD AUDIT PROCEDURES
In performing the audit, the auditor must use professional judgment on a case-by-case basis
in determining the specific audit procedures to be applied. Not all of the audit procedures
outlined in this guide will apply to each audit.
The auditor must consider the materiality of costs incurred by the grantee as related to
administrative labor and materials, engineering services, and construction. In addition, the
management controls applied by the grantee to the overall program must be reviewed.
Chapter 3 of this manual outlines project management systems and their relationships to the
audit, including the need to focus on the specifics of the procurement, accounting, and project
management activities. This chapter sets forth the field audit procedures to be used in
conjunction with this guidance.
4.1 APPROACH TO AUDIT OF COSTS
In conducting audits of EPA construction grants, the auditor will be attempting to reach a
conclusion as to the acceptability of costs. In an interim audit, the auditor will express an
opinion on costs incurred through the grantee's most current accounting period even thoi%n
these costs may not have been claimed on a reimbursement voucher to EPA. In a final audit, the
auditor will express an opinion on the costs reported on the final report of expenditures or
updated form. Thus, in a final audit where the grantee has actually incurred costs in excess of
the amounts claimed or reported, the auditor may not increase the amount of the grantee's
claim. Nor should the auditor allow the grantee to oifset unclaimed costs with questioned costs,
even if the net amount would not increase the grantee's claim. He should, however, disclose
through footnotes the extent of unclaimed or unreported costs which would normally be
considered allowabl
4.1.1 Factors for Determining Alienability
To be allowable under a grant program, costs must meet the following general criteria:
a. Be necessary and reasonable for proper and efficient administration of the grant
program, be allocable thereto and, except as specifically provided herein, not be a general
expense required to carry out overall responsibilities of state or local governments;
b. Be authorized or not prohibited under state or local laws or regulations;
c. Conform to any limitations or exclusions set forth in the grant document, Federal
laws, or other governing limitations as to types or amount of cost items;
d. Be consistent with policies, regulations, and procedures that apply uniformly to both
Federally assisted and other activities of the unit of government of which the grantee is a part;
e. Be accorded consistent treatment through application of generally accepted
accounting principles appropriate to the circumstances;
f. Not be allocable to or included as a cost of any other Federally financed program in
either the current or a prior period; and
g. Be net of all applicable credits.
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Costs questioned normally fall under one or more of the following categories (see Figure 4.1):
Ineligible costs: Costs which are specifically prohibited by (1) Federal statutes or regulations,
(2) the terms of the grant, (3) other cost principles cited in the grant, or (4) applicable EPA
regulations or guidelines.
Unreasonable costs: In determining the reasonableness of a given cost, consideration shall be
given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for the
conduct of the grantee's (contractor's) business or the performance of the contract;
b. The restraints or requirements imposed by such factors as generally accepted sound
business practices, arm's length bargaining, Federal and state laws and regulations, and
grant/contract terms and specifications;
c. The action that a prudent businessman would take in the circumstances, considering
his responsibilities to the owners of the business, his employees, his customers, the government,
and the public at large; and
d. Significant deviations from the established practices of the grantee/contractor which
may unjustifiably increase the grant/contract costs.
In conducting his examination, the auditor should be cognizant of the costs incurred which
indicate to him that they may be excessively high or even unwarranted. In determining whether
to question any costs as being unreasonable, the auditor should rely on his own judgment; he is
not expected to make judgments on technical matters outside of his area of expertise.
Unallocable costs: In reviewing the allocabtlity of costs, the auditor will be guided by the
following criteria:
a. A cost is allocable to a particular grant/contract to the extent of benefits received.
b. Any cost allocable to a particular project or function may not be shifted to a Federal
grant/contract to overcome fund deficiencies, to avoid restrictions imposed by law or
grant/contract agreements, or for other reasons.
c. Where an allocation of common costs will ultimately result in charges to a
grant/contract, an indirect cost rate proposal must be prepared to justify the equitability of the
charge.
Undocumented costs: Costs for which detailed documentation is not available to show that the
costs claimed were incurred under the EPA grant/contract.
Unapproved costs: Costs for which grant/contract provisions or applicable cost principles
require awarding agency approval, but for which the auditor finds no evidence of such approval.
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Figure 4.1
Categories and Examples of Questioned Costs
Ineligible Costs
• Interest on bonds or other financing costs
• Fines and penalties resulting from violation of Federal, state, and local laws
• Personal injury compensation or damages as a direct result of construction on the project
Unreasonable Costs
• Purchase of expensive equipment needed only for a short period when a lease would have been
more economical
• Costs for which appropriate evidence is not available under a negotiated contract that the
grantee or contractor employed those controls necessary to assure that the price was reasonable
Improperly Allocated Costs
• Costs already matched to another Federal program
• Inequitable allocation of indirect costs to the contract/grant
• Costs allocated in total to the grant, which also benefited other grantee/contractor programs
Improper Documentation of Costs
• Lack of time and attendance records, invoices, etc.
• Lack of written contracts with consultants
• Lack of proper authorization to incur costs or to disburse funds
• Non-Federal contributions recorded but not documented
Costs Not Approved by EPA
• Purchase of capital equipment
• Costs incurred before or after grant/contract period, except Step 1 and 2 grants prior to July
1,1975 (40 CFR 35.925-18)
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4.1.2 Set-Aside Costs
During the course of an audit, the auditor should attempt to reach a definite conclusion as to
whether each item of incurred/claimed cost is allowable. There may be instances in which the
allowability of cost cannot be determined without the assistance of an EPA engineer or other
program official. In these instances, the auditor should set these costs aside in the audit report
pending the Region's approval/disapproval of actual allowability. Examples of set-aside costs
are (1) change orders offeree account work not approved by EPA and (2) costs for which an
assist audit has been requested but not received as of the audit report date.
The auditor must perform all audit tests on set aside costs to determine that the costs would
otherwise be allowable pending resolution of the issue resulting in the cost being set aside.
4.1.3 Review of Costs
Under the terms of the grant, EPA's participation in a project is for a limited period. Thus,
EPA may only participate in those costs properly chargeable to that period, with the exception
of certain pregrant costs which will be allowable (40 CFR 35.925-18). In reviewing costs, the
auditor will be examining total project costs. For many projects, EPA is only participating in a
portion of the project. Thus, it will be necessary for the auditor to review the grantee's
segregation of costs as to the eligible and ineligible portions of the project.
When portions of the project are considered ineligible, the ineligible portions should be
clearly identified by EPA in the review of plans and specifications. Bid documents commonly
distinguish between eligible and ineligible portions of a construction contract. Where the
contractor's monthly pay estimates are prepared on the same basis as the bid documents,
distinction between eligible and ineligible construction costs is simplified. Further guidance
concerning the eligibility of specific items is included in Appendix D of this guide.
EPA may only participate in the acceptable portion of eligible costs. The auditor will review
each cost to determine whether it is acceptable as a charge to the EPA project. During the audit,
the auditor will be testing the systems utilized by the grantee in managing the grant. Where
items of costs are shown to be unallowable (unreasonable, unallocable, undocumented,
unapproved, or ineligible), the costs should be questioned. Where the audit tests have not
disclosed any material deficiency with respect to items of cost, the cost should be accepted.
Once the auditor has evaluated eligible construction costs, he will classify the costs as
accepted, questioned, or set aside.
The auditor must review costs other than construction costs claimed to determine whether
or not they are acceptable. He then should allocate other acceptable costs over the eligible and
ineligible portions of the project on the following basis:
Total Eligible Construction Other Other Eligible
Costs Accepted x Acceptable = Accepted
Total Construction Costs Costs Costs
For final audits, this formula should only be applied in situations where:
a. Other acceptable costs incurred are associated with both eligible and ineligible
construction, and
b. Accounting records accumulating and segregating these costs are not available.
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Examples of items exempt from this formula are (1) bond costs (on PL 84-660 projects),
because the bond formula takes into consideration total eligible project costs (see Appendix B of
this guide for an illustration of bond formula); and (2) special studies not related to construction
which are totally eligible. The auditor should use the above criteria to determine whether the
formula should be applied to a particular cost category.
For interim audits where the eligibility ratio is applicable, the following qualifying language
should be incorporated in the report:
The approved grant application estimates eligible construction costs which, when taken over
total construction costs, result in an eligibility factor of percent. To arrive at the total
eligible project costs, a ratio based on actual costs will be applied to all other acceptable costs
at the time of the final audit.
Total eligible project costs will be computed as follows:
Total Eligible Construction + Other Eligible = Total Eligible
Costs Accepted Accepted Costs Accepted Costs
The percentage of project costs in which EPA is participating, through the grant agreement,
will then be applied to total eligible project costs accepted. This will show the Federal share
earned. The designation of a cost as questionable by the auditor does not necessarily mean that
the cost will be disallowed. The determination as to the acceptability of costs will be made by
the EPA Regional Administrator.
•
4.2 GENERAL AUDIT STEPS
4.2.1 Initial Field Audit Procedures
In starting the audit, the auditor should:
a. Conduct an entrance conference with the official-in-charge upon arriving at the audit
site. The purpose of the entrance conference is to (1) inform the grantee of the purpose of the
audit, the general plan of audit approach, and the records to be used during the audit; and (2)
answer the grantee's questions regarding the audit. During the conference, the auditor should
also arrange for private, adequate working space.
The auditor should document the entrance conference in his workpapers. He should include
the names and positions of those attending the conference and details of the matters discussed.
b. Obtain background information on the grantee organization. This may be in the
form of charters, bylaws, incorporation documents, or public relations documents which
identify the nature of the organization's operations and key employees. In addition, the auditor
should obtain copies of the organization's financial reports as well as access to any audit reports
issued by the organization's internal or external auditors.
c. Identify any additional EPA or other Federal grants or contracts awarded to the
grantee. In this regard, the auditor will obtain the grant/contract number, the amount of the
agreement, the status of the grant/contract, and the Federal agency involved. The auditor
should promptly communicate this to the Divisional Assistant Inspector General for Audits so
that he may decide whether the scope of the audit will be expanded to cover these agreements.
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d. Familiarize himself with the grantee's accounting, personnel, procurement, and
property management systems as they relate to grant expenditures. The auditor should initially
obtain information regarding established policies and procedures governing these activities. In
this regard, each audit should be initiated with a survey of the project utilizing, as a minimum,
the survey questionnaire contained in Appendix A of this guide. The purpose of this survey is to
identify significant weaknesses in the systems, as they apply to the EPA grant, and to establish
the scope of the audit. The survey should include documentation and testing of the records to
validate the information obtained and to support decisions affecting the scope of audit.
Appendix A should be included as documentation in the workpapers for all interim audits and
any final audits where the grantee has other active EPA grants.
4.2.2 Verification of Claim
The auditor should reconcile the control account (that is, total cost incurred) with the
latest/final request for reimbursement/cash outlay report and reconcile each expense item in
total to the project cost and/or disbursement ledger. The auditor should:
a. Determine the mathematical accuracy of the report and the ledger.
b. Determine whether the grantee prepared the report based on its own accounting
records or whether the report was prepared by EPA or the grantee's consultant. If it was
prepared by others, determine what records were used.
c. Analyze supporting data (e.g., contractor's and/or other certification for cumulative
billing amounts submitted for the cash outlay reimbursement report).
d. Determine the total cash payments to the grantee under the construction grant.
e. Determine the total disbursement by the grantee to date and compare with Federal
payments. Any under- or over-payment should be documented.
4.2.3 Verification of Eligibility
Identify from the EPA project file any portions of work under each construction contract or
engineering subagreement which have been designated ineligible for Federal participation.
Review the grantee's disbursement ledger to determine if project costs are segregated by
means of a special project account which (1) identifies eligible and ineligible costs, (2) identifies
allowable and unallowable costs, and (3) contains separate accounts for each item of expense
(FMC 74-4); that is:
a. Construction, by contract;
b. Engineering services; and
c. Legal and administrative services.
4.2.4 Credits, Rebates, and Refunds
Throughout the audit, the auditor should be alert for evidence of credits, rebates, or refunds.
Such items should be credited properly to the construction account. As part of the audit:
a. Examine contractor billings, noting whether certain items are marked or indicated
for deletion;
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b. Examine cash receipt records, noting funds received from contractors and/or other
sources (i.e., state sales tax refunded to grantees or subcontractors); and
c. Determine that funds received for copies of the plans and specifications (unrefunded
deposits) are credited to the grant costs.
4.2.5 Unpaid Bills
If the grantee has any unpaid bills relating to the specific grant under audit, the following
audit steps should be taken:
a. Determine the reasons for the unpaid bills.
b. Determine whether there are sufficient funds available to pay bills in a timely
manner.
c. Assure that costs related to long-standing unpaid bills or retainages have not been
included on the request for reimbursement or cash outlay report to EPA. If they have, such
costs should be set out in the audit report unless they represent normal accounts payable.
4.3 AUDIT OF SPECIFIC COSTS
4.3.1 Audit of the Force Account
The actual construction work is normally performed by construction contractors under
contracts awarded through competitive bidding. Construction-related activities such as
preliminary planning, designing, preparation of plans and specifications, and resident
inspection services are normally performed by consulting engineers under subagreements.
However, in some instances the work is performed by employees of the grantee. This is known
as "force account" work. If force account costs are claimed, such costs should consist of project
work performed by employee labor of the grantee or materials, equipment, and supplies
purchased by the grantee. (Direct travel costs may be allowed.)
Determine that:
a. Force account work (construction/engineering/administration) was specifically
approved by EPA as provided in EPA regulations 40 CFR 30.645, 40 CFR 35.935-2, and 40
CFR 35.936-14.
b. Construction work handled through the force account was not for repair,
maintenance, or operation of existing facilities.
c. Completed construction was appropriately approved by the grantee's engineer.
d. Purchases of material or supplies were based on competitive bids as required by state
or local procedures or Federal regulations. (This step may be included under the Review of
Procurement Controls.)
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The auditor should include in his workpapers a schedule showing force account labor costs,
and on a selective basis he should:
a. Trace hours charged to time records;
b. Verify payroll computations;
c. Verify payments made from the payroll to the construction account; and
d. Verify fringe benefit costs.
All indirect costs claimed by the grantee must be supported by an approved indirect cost
proposal. If the auditor encounters a situation where indirect costs are not supported by an
approved proposal, he should contact the Divisional Assistant Inspector General for Audits for
further instructions. The auditor should also be alert for situations where:
a. Persons are working in a capacity other than that for which they are getting paid
(e.g., engineer working as a draftsman).
b. Costs are claimed for hours worked on the project but not paid for by the grantee,
i.e., overtime hours not paid for. These costs are not an actual cost to the grantee and therefore
are not allowable.
c. Labor hours are charged on a departmental average hourly rate. This practice should
not be accepted unless there is supporting documentation to prove that it represents actual cost.
d. Overtime hours are being charged solely to an EPA project when the employee works
on other jobs during the same period.
The auditor should include in his workpapers a schedule of force account material, supply,
and equipment costs. On a selective basis, he should:
a. Verify types and quantities of items used to issue slips or similar documentation.
b. Determine that the amounts charged were reasonable and computed in accordance
with the grantee's normal costing policy.
c. Determine that costs claimed do not include nonexpendable construction equipment
(i.e., exceed minimal cost and life expectancy) even though such equipment may have been
purchased specifically for the project.
d. Determine that any write-offs of expendable items do not exceed the amounts
allowable under the cost principles contained in FMC 74—4.
e. Determine whether the grantee followed EPA guidance in disposing of or adjusting
costs for unused materials which remained after completion of construction.
If use allowance or rental rates were used in arriving at costs charged to the project,
determine whether these factors are in line with FMC 74—4. Review and test the method used to
accumulate hours of equipment usage. Test payments made for use of equipment to invoices
and cancelled checks and/or to fund transfer documents.
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4.3.2 Audit of Engineering Services
In reviewing procurements of engineering services, the auditor should be aware that EPA
regulations governing these procurements changed with the issuance of Program Guidance
Memorandum (PG) 53 and with the issuance of EPA's "Subagreement Regulations for
Construction Grants" (40 CFR 35.935, 35.936, and 35.937, dated December 17, 1975).
Appendix F to this guide (Consulting Engineer Subagreements—Allowable Methods of
Compensation) addresses the acceptability of the type of engineering contract during the
transition period of the December 17, 1975, regulations. Accordingly, the audit criteria change
depending upon whether the engineering contract was awarded prior to or after the effective
date of the above regulations.
a. Contracting procedures
It is the responsibility of the grantee in contracting for engineering services to take
reasonable measures to ensure that services are obtained from qualified firms at a reasonable
price.
Grantees could prior to July 1, 1975, use their own procurement regulations which reflect
applicable state and local laws, rules, and regulations, provided that these rules and regulations
adhere to minimum standards as set forth in Attachment O to FMC 74—7. Effective July 1,
1975, grantees were prohibited from awarding multiplier and percentage-of- construction-cost
types of contracts by PG 53 and, later, by Appendix D to EPA's "Subagreement Regulations
for Construction Grants." The effective date of those regulations (dated December 17, 1975) is
March 1, 1976. Starting on that date, grantee procurements of consulting engineering services
must be in accordance with 40 CFR 35.936 and 35.937.'
For procurements awarded under 40 CFR 35.936 and 40 CFR 35.937, the auditor should
review the grantee's procurement procedures for consulting engineering services and determine
that these procedures include, where applicable, requirements for:
(1) Public notice (40 CFR 35.937-2);
(2) Evaluation of qualifications (40 CFR 35.937-3);
(3) Solicitation and evaluation of proposals (40 CFR 35.937-4);
(4) Negotiation (40 CFR 35.937-5);
(5) Cost and price considerations (40 CFR 35.937-6
and 40 CFR 35.937-7); and
(6) Required solicitation and Subagreement provisions
(40 CFR 35.937-9).
Note that 40 CFR 35.937(a) provides that the provisions of 35.937-2 (Public Notices),
35.937-3 (Evaluation of Qualifications), and 35.937-4 (Solicitation and Evaluation of
Proposals) are not required, but may be followed where the population of the grantee
municipality is 25,000 or less according to the most recent U.S. census. When $10,000 or less of
services (e.g., for consultant or consultant subcontract services) is required, the provisions of
35.936-19 (Small Purchases) shall apply.
For procurements awarded prior to the effective date of 40 CFR 35.936 and 40 CFR 35.937,
the auditor should determine that the grantee has documentation to show that:
Requirements for engineering subagreements under grants awarded during the transition
period (July 1,1975, through February 29, 1976) are explained in Appendix F.
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(1) Procurements were conducted so as not to prohibit maximum open and free
competition.
(2) Contracts were made only with responsible contractors who possess the
potential ability to perform successfully under the terms and conditions of a proposed
procurement. Consideration should have been given to such matters as contractor integrity,
record of past performance, and financial and technical resources.
(3) The contract clearly defines the scope of services to be provided under each
reimbursement method included in the contract. The contractual language should be specific
enough to identify the services provided under each phase of the contract.
Agreements between grantees and engineering firms covering engineering services take a
number of forms. Usually, a single agreement covers all phases of engineering. Traditionally,
these agreements were entered into well in advance of the award of a construction grant and
represented a continuing relationship for engineering services. The reimbursement provisions
contained in such agreements varied from a single fee covering all services to separate fees for
each phase of work or combination thereof. Historically, the reimbursement for engineering
services included: (a) firm-fixed-price (lump sum) contracts, (b) time and materials (labor hour)
contracts, (c) percentage-of-construction-cost (fee curve) contracts, and (d) actual labor cost
plus a stipulated multiplier for overhead and profit (cost plus a percentage of cost).
However, for agreements awarded after June 30, 1975, the cost-plus-percentage-of-cost
(including salary multiplier where profit is included in the multiplier) and the percentage-of-
construction-cost types of contracts are not acceptable. (See Appendix D to EPA's
"Subagreement Regulations for Construction Grants," published December 17, 1975.)
In some cases a negotiated subagreement may have been executed prior to July 1, 1975, to
cover work under more than one step of a grant. Guidance for these situations is given in
Appendix D as referenced above.
Note that Appendix E has been added to this guide to provide an outline of the types of
records subject to audit under various situations, and Appendix F has been added to provide an
analysis of types of engineering contracts allowable during the transition period.
b. Contracts for engineering services awarded prior to July 1, 1975
EPA does not consider that the fee curve or multiplier method of compensation ensures a
reasonable price in the absence of an effective negotiation based on current cost data. However,
EPA does not take exception to these forms of contracting prior to July 1, 1975, as they were in
accordance with industry practices which EPA regulations did not prohibit. The auditor's
report should disclose instances where the fee curve or multiplier forms of contracting were
used. The auditor will not be responsible for determining the reasonableness of fees awarded
under the fee curve or the multiplier. However, the auditor will be responsible for evaluating the
application of the fee curve for reasonableness and consistency. The fee curve will be evaluated
in accordance with historical and advisory guidelines in general use or guidelines acceptable
locally such as the American Society of Civil Engineers (ASCE) Manual No. 45. Other data
relied upon or utilized by the contracting parties in negotiation of the agreement will also be
evaluated for reasonableness and consistency.
In cases where engineering services are compensated under a multiplier, fee curve, or FFP
contract awarded prior to July 1, 1975, the following audit steps and paragraphs, as
appropriate, should be included in the schedule and referenced to technical service costs
incurred, claimed, accepted, and questioned.
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If multiplier and/or fee curve was used, then the following paragraph should be included in
the report:
We noted that compensation for engineering services was based upon
the method of contracting. The use of the and
profit resulting solely therefrom have been accepted because, at the time the contractual
arrangement was made, this method of contracting was not prohibited and was in
accordance with accepted industry practices. The method of
contracting is now prohibited by Appendix D to Subpart E of 40 CFR 35, dated December
17,1975.
If a multiplier contract was used, the auditor should:
(1) Determine whether the amounts billed were based on the terms of the
agreement.
(2) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of the salary rates and hours billed. If not, the auditor should
arrange through the grantee to perform an audit of the engineer's records. In instances where
access to records is denied, all engineering fees billed under this method of contracting should
be questioned.
If a fee curve contract was used, the auditor should:
(1) Determine whether the fee billed agrees with the contract terms as to the rate
used and the method of application.
(2) Ascertain whether the fee provided in the contract is consistent with the ASCE
or state society guidelines in effect at the time of the award. If not, why?
(3) Ascertain whether the fee percentage is determined in accordance with the
engineering agreement and whether the use of separate contracts is justified (e.g., interceptor
versus treatment plant). If separate contracts are not justified, the additional compensation
should be questioned.
If an FFP contract was used in the absence of an effective price negotiation, then the
following paragraph should be included in the report:
We noted that compensation for engineering services was based upon a firm-fixed-price
method of contracting without the use of current cost data in the negotiation process. The
use of a firm-fixed-price contract not negotiated on the basis of current cost data and the
resulting profit have been accepted in this case because, at the time the contractual
arrangement was made, a negotiation based on current cost data was not a requirement of
the industry or EPA. EPA regulation 40 CFR 35, Subpart E, Appendix D, dated December
17, 1975, requires that all negotiated contracts be based on current cost and pricing data.
If an FFP contract was used, the auditor should:
(1) Determine that the amount billed is in accordance with the terms of the
agreement and that the work was accepted by the grantee.
(2) Evaluate the reasonableness of the fixed price. In this regard, the auditor should
compare the services provided, the price charged to the services, and the price obtained by using
the fee curve as outlined in the ASCE manual.
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c. Contracts for engineering services awarded after February 29, 1976 (under EPA's
"Subagreement Regulations for Construction Grants," 40 CFR 35.936 and 40 CFR 35.937)
Determine whether the grantee performed a negotiation to establish the reasonableness of
compensation. As a minimum, this should include a cost review to determine the composition
of each element of cost and the profit proposed by the consulting engineer.
Unless available documentation shows that the grantee's negotiation resulted in a reasonable
price, the auditor will review the reasonableness and validity of cost data submitted. Where
review of the engineer's records shows that cost data was incorrect, unreasonable, or
unallowable under applicable cost principles (FPR 1-15.2, FPR 1-15.4), the excessive costs
should be questioned. In addition, the fee curve and multiplier contracts where profit is
included in the multiplier are generally considered ineligible if awarded after June 30, 1975.
The right of access to records in auditing charges for engineering services under agreements
awarded prior to the effective date of EPA's "Subagreement Regulations for Construction
Grants" is governed by the terms of the engineering agreement and Appendix D to the
Subagreement regulations. This guidance generally prescribes the right of audit access to the
engineer's records. In instances where indications of fraud, gross abuse, or corrupt practices are
noted, the auditor has the right of access to all records. Refusal by a consulting engineer to
allow access to his records as provided by Appendix D will render costs incurred under such
contracts ineligible. Accordingly, all such costs will be questioned pending access to records.
See Appendix E to this guide, Consulting Engineer Subagreements—Records Subject to Audit.
d. Verification of engineering costs
Before auditing the engineering firm's records, the auditor should determine from the
Divisional Assistant Inspector General for Audits whether another Federal agency has audit
cognizance of the firm. If another agency has cognizance, the DAIGA will provide further
instructions. If no other agency has audit cognizance, the auditor should complete the
applicable sections of this guide.
(1) Determine amount of charges for engineering services. (This should be detailed
by services billed under the various methods of reimbursement, e.g., FFP or CPFF.)
(2) Based on a review of the records, determine that claims for services provided are
applicable to the eligible portion of the construction.
(3) Determine whether technical service costs were incurred prior to the EPA
approval of the grant award or after the date of completion of construction. If work was
initiated before October 31, 1974, prior EPA approval was not required. However, for grants
awarded after this date the provisions of 40 CFR 35.925-18 apply.
(4) When evaluating the engineering services charged on a reimbursable basis,
determine that:
(a) Salaries of partners doing less than "partner's" work (e.g., drafting) are billed
at a rate commensurate with the duties performed.
(b) Services included as a basic service under an FFP or fee curve contract are
not also billed on a reimbursable basis.
(c) An offsite overhead rate was used when appropriate.
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(d) Executive salaries are reasonable. The criteria developed by the Office of
Audits should be utilized for this purpose.
(5) Determine the adequacy of the engineering firm's accounting system to account
for the type of contract awarded.
(6) Determine that the costs of engineering services claimed by the grantee do not
include charges related to ineligible services such as site acquisition, bond preparation,
easement, rights-of-way, or claims against the government. The engineer's invoice should be in
sufficient detail to clearly define the nature of the work performed.
(7) Verify the mathematical accuracy of the billing for engineering services and test
grantee payments for engineering services to vouchers and cancelled checks.
e. Engineering services compensated under the fee curve
Question all costs billed under this method of compensation for agreements entered into after
June 30,1975.
For subagreements awarded prior to July 1, 1975:
(1) Determine whether the amount billed agrees with the contract terms as to the
rate used and the method of application.
(2) Ascertain whether the compensation provided in the contract is consistent with
the ASCE or state society guidelines in effect at the time of the award, except as provided for in
steps three and four below.
(3) Determine whether the compensation (fee) percentage is based upon the total of
all construction contracts under a specific project (e.g., treatment plant, interceptor sewers). If a
separate fee percentage was used for each contract, the resulting additional cost should be
questioned. In determining the allowability of costs based on a separate fee percentage for each
contract, consider the appropriate ASCE or state society guidelines in eifect at the time the
engineering agreement was negotiated. (See Appendix I of this guide, Application of Paragraph
B.5 of Appendix D to 40 CFR 35, Subpart E.)
(4). Paragraph B.5 of Appendix D to 40 CFR 35, Subpart E, provides that allowable
costs for a percentage-of-construction-cost type of contract be based on an amount not to
exceed (1) the total construction contract awards and change orders approved by the grantee or
paid in full prior to December 17, 1975, or (2) the low bid for construction, which specifically
excludes the cost of construction contract change orders and cost overruns from the
computation basis. The method of computing the allowable engineering costs related to
construction contracts awarded or paid after December 17, 1975, depends on the time between
completion of plans/specifications and bid opening.
(a) Less than one year: If less than one year elapses between substantial
completion and bid opening, paragraph B.5.a of Appendix D limits allowable cost to the
amount obtained by applying the applicable fee curve percentage to the low bid for
construction.
(b) More than one year: When one year or more elapses between substantial
completion of design and bid opening, paragraph B.S.b of Appendix D limits allowable costs to
the lowest of:
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• The applicable fee curve percentage applied to the total of the consulting
engineer's construction cost estimate provided at substantial completion of plans and
specifications plus an escalation of up to five percent of the estimate.
• The applicable fee curve percentage applied to the consulting engineer's
construction cost estimate provided at substantial completion of plans and specifications. A
consulting engineer's compensation escalation of up to $50,000 is added to the resultant
amount.
• The applicable fee curve percentage applied to the low bid for construction.
(5) It is EPA policy to recognize those costs incurred by the consulting engineer
that are not in the scope of the contract at the time of the construction contract award. For
example, a change (ordered by the grantee/owner) which requires specific design and
specification preparation by the consulting engineer in the scope of the construction contract
probably should be recognized as requiring a change in the consulting engineer's contract for
which reasonable additional compensation is allowable. Conversely, additional consulting
engineering fees will not be considered eligible if these fees are the result of a change order to the
construction contract to correct a design deficiency which is attributed to the consulting
engineer.
Of course, these two examples are the extremes in the premises, and between these two poles
may arise situations requiring a subjective judgment on the part of the EPA project officer as to
the validity of the consulting engineer's request for added compensation. Additional
compensation for such design work should be based on actual cost records available for audit.
In the absence of cost records, the auditor should determine whether the change order was of
a type which generated an increase in design effort and, therefore, an increase in design cost.
Certain change orders do not require additional design effort; for example, an increase solely in
construction quantities does not increase design cost. However, a change ordered by the
grantee/owner for a modification in the scope of the construction contract does require
additional design effort. If these additional design costs are not supported by actual cost
records, the costs should be set aside with the recommendation that the Regional Administrator
determine the eligibilty of these costs.
Also, in the period between the original substantial completion (a subjective judgment on the
part of the project engineer) and the bidding of the project, EPA regulations may have been
issued which would require some changes in the plans and specifications for which the
consulting engineer could request, and EPA could pay, additional compensation under
Paragraph B.S.c of 40 CFR 35, Subpart E, Appendix D.
f. Engineering services reimbursed under firm-fixed-price contracts
(1) Determine that the amount billed is in accordance with the terms of the
agreement and Appendix D to EPA's "Subagreement Regulations for Construction Grants"
(Part B of Appendix D to Subpart E of 40 CFR 35) and that the work was accepted by the
grantee.
(2) For FFP contracts awarded before March 1, 1976, the auditor should evaluate
the reasonableness of the fixed price. In this regard, the auditor should compare the services
provided and price charged with the services and price obtained by using the fee curve as
outlined in the ASCE manual. Amounts in excess of the comparable fee curve percentage
should be questioned.
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(3) For FFP agreements in excess of $ 100,000 awarded after February 29,1976, the
auditor should analyze the information documenting the grantee's review of the composition of
costs and perform audit steps four through eight below. (See 40 CFR 35.937-6.)
(4) Determine what review was performed by the grantee to determine the
reasonableness and validity of the amounts proposed (both quantity and dollar estimates).
Where the grantee has not perfomed a review of subagreement costs or the review is
considered inadequate, the auditor should furnish the Divisional Assistant Inspector General
for Audits with a list of all applicable subagreements. (A review of proposed subagreement costs
is considered adequate if: (a) the grantee's in-house engineering staff develops an independent,
detailed cost estimate which, when compared to the proposed consulting engineering cost
estimate, demonstrates the reasonableness of the proposed amount; (b) the grantee performs a
verification of the proposed costs and quantitites to the data used by the engineering firm in
developing the proposal; or (c) sufficient cost and pricing data for work similar to this project is
available to provide a basis for comparison.) The DAIGA will decide whether an audit of the
subagreement is necessary and will advise the auditor reviewing the grant.
If another agency will perform the audit, the DAIGA will initiate the request for audit and
provide a copy of the request to the auditor performing the review of the grant. The auditor does
not have to wait for the results of audit requests from another Federal agency; he should
prepare the audit report and set aside the requested portions. The audit report should explain
that the subagreement is being audited by another audit agency and that the results will be
transmitted as soon as received.
If the DAIGA has determined that no other Federal audit agency is cognizant and that the
subagreement should be audited, the auditor should make arrangements to perform an audit of
the documentation maintained by the engineering firm. In instances where access to records
necessary for the audit is denied, all engineering fees billed under this method of compensation
should be questioned pending access to records.
(5) The auditor should compare the fixed price negotiated under the contract and
the engineer's actual incurred costs. When actual costs were substantially less than estimated
costs included in the proposal used as a basis for negotiation, a comparison of estimated and
actual incurred quantities (labor hours/material quantities, etc.) should be made. (EPA
regulation 40 CFR 35.937-6(c)(6) requires that the engineer account for costs in the same
manner in which he proposes costs.)
(6) In instances where the actual quantities (labor hours) were significantly less than
estimated quantities, the auditor should obtain an explanation for the differences from the
consulting engineer. Where the reduction in quantities was due to new and improved work
methods or efficiencies in performance, the auditor should accept the lump sum price. In other
instances, the auditor should review the data used for estimating the quantities included in the
consulting engineer's proposal. In instances where the data used as a basis for negotiation was
not complete, current, or accurate, the auditor should question amounts claimed in excess of
costs computed using complete, current, and accurate data.
(7) In instances where actual costs were significantly less than estimated costs and
where actual quantities did not vary significantly from estimated quantities, the auditor should
review the engineer's cost proposal used as a basis for negotiation.
(8) In reviewing the engineer's cost proposal, the auditor should as a minimum
determine that costs proposed were allowable under FPR 1-15.2 and 1-15.4.
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In instances where amounts proposed do not represent current (at the time of negotiation),
valid cost or pricing data, the auditor should question any amounts claimed in excess of those
computed using current, complete, and accurate cost data.
The auditor should determine that:
(a) Salary rates proposed represented current salary data, factored for the length
of the contract.
(b) Fringe benefits represented cost history based on actual fringe benefit cost
incurred by the engineering firm.
(c) Costs of material and supplies were based on current cost information.
(d) Costs of subcontracts were based on properly documented previous
experience of similar work or bids from the prospective subcontractors.
(e) Travel costs were based on amounts regularly paid under the engineer's
standard procedures.
(f) Other direct costs were based on accurate, valid costing data.
(g) Indirect costs were proposed based on rates computed in accordance with
FPR 1-15.2 and 1-15.4.
g. Engineering services reimbursed under the multiplier form of contracting
(1) Question all costs billed under this method of compensation for agreements
entered into after June 30, 1975, unless the agreement complies with 40 CFR 35.937-l(d) of
the EPA "Subagreement Regulations for Construction Grants."
However, for agreements awarded under the new regulations, if under either a CPFF or
firm-fixed-price contract the grantee desires to utilize a multiplier for interim billing purposes,
all of the following must apply:
(a) The multiplier and the portions of the multiplier allocable to overhead and
allocable to profit have been specifically negotiated;
(b) The portion of the multiplier allocable to overhead includes only allowable
items of cost under the cost principles of FPR 1-15.2 and 1-15.4;
(c) The portions of the muliplier allocable to profit and allocable to overhead
have been separately identified in the contract; and
(d) The firm-fixed-price contract includes a guaranteed maximum price for
completion of the specifically defined scope of work; the CPFF contract includes a fixed dollar
profit which may not be increased except in case of a contract amendment which increases the
scope of work.
Thus, the multiplier is not an acceptable form of contracting in itself, but^under a CPFF or
FFP contract it may be used for interim billing purposes. Cost claimed under a multiplier
arrangement not meeting the above criteria should be questioned.
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(2) For agreements entered into prior to the effective date of the new subagreement
regulations:
(a) Determine whether the amounts billed were based on the terms of the
agreement.
(b) Determine whether the grantee has performed an audit of the engineering
firm's records to establish the propriety of the salary cost billed.
(c) In establishing the acceptability of salary cost used as a base to which the
multiplier is applied, use actual salaries and wages paid. In addition, make sure that the
multiplier is applied to the labor of only bona fide employees of the engineering firm.
(d) Regardless of contract terms, the actual costs of fringe benefits must be
supported by the accounting records when they are claimed as a direct charge. If the charges are
not supported or if the actual cost is less than the amount claimed, the total or the difference is
unallowable for Federal participation. Where the fringe benefits are claimed as a direct charge
and also included in the multiplier, the duplicate direct charge is unallowable for Federal
participation.
(e) Regardless of contract terms, question charges made to the grant where
there was no cost incurred. Labor charges and related costs for straight time or overtime hours
which are billed but for which cost has not been incurred will be unallowable for Federal
participation.
(f) Regardless of contract terms, the actual cost of service charges must be
supported by accounting records. Service charges are defined as any supplemental charges
added to other direct cost (nonsalary) which are claimed on an actual cost basis. If the service
charges are not supported or if the actual cost is less than the amount claimed, the total or the
difference is unallowable for Federal participation. This is in accordance with the ASCE
manual, which states that the service charge is for expenses to be reimbursed by the client. (See
PG 64, dated February 5, 1976.)
In reviewing direct costs claimed by the engineer, the auditor should determine whether
service charges are claimed on an actual cost basis or a percentage added to a direct cost item
(for example, service charge of X% added to the cost of supplies purchased or outside services).
When such claims are identified, the auditor should:
• Determine the engineer's actual cost of the services as supported by the
accounting records.
• Determine that costs included in the service charge are consistently
applied and are not duplicated in other accounts (e.g., overhead).
• Compare the service charge applied to the actual cost of the service and
question any overrecovery of actual cost.
h. Engineering services reimbursed under a time and materials form of contracting
(1) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of labor hours billed.
(2) For time and materials contracts over $100,000 awarded after June 30, 1975,
perform Step 4 under FFP contracts. (See page 4-15.)
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(3) Determine the adequacy of the firm's accounting system to identify and
accumulate project labor hours.
(4) Verify the accuracy of the labor hours claimed to the accounting records.
(5) Determine that the categories of labor billed are in accordance with the contract
terms and that employees are charged in the correct classification.
(6) In reviewing costs claimed under a time and materials contract awarded under
40 CFR 35.937, the auditor should compare the rates claimed to the engineer's proposal, which
details the labor rates, overhead rate, and profit factor used as a basis for negotiation. The
auditor should determine that:
(a) The labor rates used as a basis for negotiation were based on complete,
current, and accurate cost data at the time of negotiation. The cost data used should include
actual average labor rates for categories of employees or for specific employees anticipated to
perform the work.
(b) The overhead rates used as a basis for negotiation were prepared in
accordance with FPR 1-15.2 and 1-15.4 and were based on complete, current, and accurate
cost data.
(7) In instances where the total rate negotiated under 40 CFR 35.937 was not based
on complete, current, and accurate cost data or was not prepared in accordance with FPR
1-15.2 and 1-15.4, the auditor should compute an acceptable rate, using current, complete, and
accurate cost data, and question amounts resulting from the use of an unacceptable rate. The
auditor should determine that:
(a) Salary rates proposed represented current salary data, factored for the length
of the contract.
(b) Fringe benefits represented cost history and were based on actual fringe
benefit costs incurred by the engineering firm.
(c) Indirect costs were proposed based on rates computed in accordance with
FPR 1-15.2 and 1-15.4.
i. Engineering services reimbursed under a cost-plus-a-fixed-fee contract
(1) Determine whether the grantee has performed an audit of the engineering firm's
records to establish the propriety of costs billed.
(2) Where the grantee has not performed reviews of subagreement costs or the
reviews were inadequate, the auditor should furnish the Divisional Assistant Inspector General
for Audits with a list of all applicable subagreements. The DAIGA will decide whether an audit
is needed and, if one is needed, who will perform the audit. If no audit of the subagreement is
considered necessary, the DAIGA will so advise the auditor reviewing the grant. In such cases,
the costs claimed under the subagreement will be considered allowable if costs were claimed in
accordance with subagreement provisions.
If another agency will perform the audit, the DAIGA will initiate the request for audit and
provide a copy of the request to the auditor performing the review of the grant. The auditor does
not have to wait for the results of audit requested from another Federal agency; he should
prepare the audit report and set aside the requested portions. The audit report should explain
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that the subagreement is being audited by another audit agency and that the results will be
transmitted as soon as received.
If the DAIGA has determined that no other Federal audit agency is cognizant and that the
subagreement should be audited, the auditor should make arrangements to perform an audit of
the documentation maintained by the engineering firm.
(3) Determine whether other direct costs claimed are reasonable, applicable, and
allowable under the terms of the contract and the Federal cost principles contained in FPR
1-15.2 and 1-15.4.
(4) Review the firm's overhead rate to determine that it is reasonable, equitable, and
in accordance with the principles set forth in FPR 1-15.2 and 1-15.4 and the "EPA Audit
Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals."
(5) More complete guidance as to the audit of CPFF contracts is contained in the
"Audit Guide for EPA Contracts." The overhead rates considered allowable by the auditor
should be used in determining allowable indirect costs under the subagreement.
4.3.3 Audit of Construction Costs
Plant construction and equipment costs represent a major portion of the construction grant
program. The grantee will normally have established a procedure or engaged the design
engineer to ensure that construction is in accordance with the specifications, plans, schedules,
and construction contract. For grants awarded under PL 92-500, the basic procurement system
requirements and procedures utilized to award the construction contract must be in accordance
with the applicable grant regulations (40 CFR 35.936 and 40 CFR 35.938, dated December 17,
1975). Specific criteria for procurement systems are outlined in section 3.4.2 of this guide.
In reviewing procurements of construction contracts, the auditor should be aware that EPA
procurement regulations—especially those concerning required contract provisions,
negotiation of change orders, progress payments, and subcontracts under construction
contracts—changed greatly on March 1, 1976. The audit criteria change depending on whether
the construction contract was awarded before or after that date.
a. Audit guidance for basic construction contracts and change orders
(1) The auditor will review the grantee procurement records for each construction
contract awarded in excess of $10,000 to determine whether:
(a) Construction contracts awarded under the grant are firm fixed price or unit
price or combinations of two (40 CFR 35.938-3).
(b) Adequate public notice (40 CFR 35.938-4(a)) was given.
(c) Adequate time (40 CFR 35.938-4(b)) was given for preparing bids.
(d) Bidding documents included (40 CFR 35.938-4(c)):
• A complete statement of the work to be performed, including necessary
drawings and specifications and the required completion schedule;
• The terms and conditions of the contract to be awarded;
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• A clear explanation of the method of bidding and the method of evaluating
bid prices; and
• Responsibility requirements or criteria which will be used in evaluating
bidders.
(e) The grantee provided for sealed bids and for safeguarding bids received until
public opening (40 CFR 35.938-*(d)).
(f) Contracts were awarded to the lowest responsive, responsible bidder. If not,
determine what rationale exists for awarding to other than the lowest bidder (40 CFR
35.938-4(h)).
(g) Approvals were obtained from EPA prior to contract award.
(h) Awarded contracts contain a provision for access to
contractor/subcontractor records, reports, drawings, and accounts for the purpose of
inspection, review, copying, and audit by EPA representatives (40 CFR 35.935-7).
(i) At least two brand names followed by the words "or equal" are used in the
specifications (PL 92-500 and 40 CFR 35.936-13(a)(l)). The use of only one brand name is
considered restrictive.
(j) Awarded contracts contain a "Buy American" provision or the Regional
Administrator waived such a provision. (See PL 95-217 and 40 CFR 35.936-13(d).)
(k) Items considered ineligible to EPA were ineligible in the contracts.
(1) Special circumstances or provisions pertaining to the contract require
review; e.g., implementation of the provisions of the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970 when acquiring real property for the project.
(Appendix C of this guide provides supplemental procedures for auditing relocation costs.)
(2) Review and test the grantee's procedures for accumulating cost of change
orders.
(3) Determine if change orders to the contract(s) pertain to eligible construction
and have been reviewed, checked for duplication of base contract items, and approved by EPA.
If approvals from EPA have not been received, such costs are not acceptable.
(4) Determine whether documentation is maintained that demonstrates the
purpose, cause, necessity for the change order(s), and reasonableness of the change order price.
In this regard, determine whether costs and quantities estimated were supported and evaluated.
Be alert for instances where support for a change order indicates that work was for a purpose
other than that described on the change order,
(5) Determine that change orders for quantity increases or decreases were approved
by the grantee as soon as it could be readily determined that a change was necessary and/or an
overrun/underrun would occur.
(6) Determine that credits for deletions have been included in the change order.
Credit for deletions from FFP contracts should be based on the market price at the time of
deletion. Credit for deletions from unit price contracts should be based on the bid price of the
item.
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(7) Determine that prior EPA'approval was obtained for changes over $100,000
and changes in the scope of the project.
(8) Determine whether the grantee or consulting engineer performed an evaluation
to establish the reasonableness of the change order price (40 CFR 35.938-5). Note that EPA
regulation 40 CFR 35.938-5 does not technically apply to change orders under grants awarded
prior to March 1, 1976. However, the requirement to assure the reasonableness of change order
costs has always existed in EPA regulations. Although 40 CFR 35.938-5 is not applicable, the
principles prescribed by this regulation are just good business practices; thus, procedures
comparable to those required by this regulation should be followed in negotiating change order
prices. Therefore, in auditing change orders under grants awarded prior to March 1, 1976, the
auditor should follow the same basic audit procedures used for auditing change orders under
grants awarded after March 1, 1976. It is important to be aware, however, that in writing
deficiencies related to these change orders, the auditor should not cite 40 CFR 35.938-5 as a
specific requirement.
(a) Original Bid Item. For variances in quantities of items included in the
original bid package, it is acceptable to use the original bid price. However, if the variance is
significant (15 percent) and the dollars are material, the grantee should be required to
demonstrate it has evaluated the reasonableness of using the original bid price.
(b) New Items. Since the reasonableness of the price of new bid items was not
established in the basic award, the grantee should take adequate measures to assure that new
items are reasonably priced. Prices for new items should be established on the basis of an
independent estimate developed from current cost and pricing data or a detailed analysis of the
data used to develop the contractor's price. The responsibility for establishing the
reasonableness of change order prices is frequently delegated to the consulting engineering
firms. In these instances, the audit should include a review of the engineer's records, which
should contain estimates of workhours to be expended, quantities of material, hours of
equipment usage, and cost and pricing data.
(9) Change orders under grants awarded after the effective date of EPA's
"Subagreement Regulations for Construction Grants" (40 CFR 35.936 and 35.938) must be
negotiated on the basis of current cost and pricing data furnished by the contractor to the
grantee. For FFP or unit price change orders awarded, the auditor should analyze the
information documenting the grantee's cost review of the composition of costs and perform the
following audit steps:
(a) Determine what reviews were performed by the grantee or its consulting
engineer to ascertain the reasonableness and validity of the amounts proposed (both quantity
and dollar estimates).
(b) Where the grantee has not performed a review of change order costs or the
reviews are considered inadequate, furnish the Divisional Assistant Inspector General for
Audits with a list of all change orders under the specific contract being reviewed. (A review of
proposed change order cost is considered adequate if (1) the grantee or its consulting engineer
develops an independent detailed cost estimate which when compared to the contractor's
proposed change order cost demonstrates the reasonableness of the amount proposed or (2) the
grantee performs a verification of the proposed costs and quantities to the data used by the
contractor in developing the proposal.) The DAIGA will decide whether an audit of the
contractor's records is needed. If no audit of the subcontracts is considered necessary, the
DAIGA will so advise the auditor reviewing the grant. In such cases, the costs claimed under
the change order will be considered allowable if costs were claimed in accordance with FPR
1-15.2 and FPR 1-15.4. If the DAIGA has determined that an audit of the contractor's records
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is necessary, the auditor should make arrangements to audit the documentation maintained by
the contractor.
(c) Initially, compare the amounts paid under the contract and the contractor's
actual incurred costs. Where actual costs were substantially less than estimated costs, compare
estimated and actual incurred quantities (labor hours/material quantities, etc).
(d) In instances where the actual quantities (material and workhours) were
significantly less than estimated quantities, obtain an explanation of the differences from the
contractor. Where the reduction in quantities was due to new and improved work methods or
other efficiencies, the auditor should accept the amount negotiated for the change order. In
other instances, the auditor should review the data used for estimating the quantities included
in the contractor's proposal. In instances where the data used as a basis for negotiation was not
complete, current, and accurate, the auditor should question amounts claimed in excess of costs
computed using complete, current, and accurate data.
(e) In instances where actual costs were significantly less than estimated costs
and where actual quantities did not vary significantly from estimated quantities, review the
contractor's cost proposal used as a basis for negotiation.
(f) In instances where amounts proposed do not represent current (at the time of
negotiation), valid cost or pricing data, question any amounts claimed in excess of those
computed using current cost data. The auditor should also ascertain the rationale for
differences disclosed above. (See 40 CFR 35.938-5.)
(g) In reviewing the contractor's cost proposal, as a minimum determine that:
• Salary rates proposed represented current salary data factored for the
length of the contract.
• Fringe benefits represented cost history based on actual fringe benefit cost
incurred by the engineering firm.
• Costs of material and supplies were based on current cost information.
• Costs of subcontracts were based on properly documented previous
experience of similar work or bids from the prospective subcontractors.
• Other direct costs were based on accurate, valid costing data.
• Indirect costs were proposed based on rates computed in accordance with
FPR 1-15.2 and 1-15.4. (See 40 CFR 35.938-5(d)(4).)
(10) Determine that all credit (decrease) change orders have been considered in
interim or final payments to contractors.
(11) Determine whether the work was completed and accepted by the grantee or its
designated representative.
(12) Determine whether the engineer accepted the change order work as complete
and in accordance with the change order specifications.
(13) If the auditor is unable to assure himself that the reasonableness of the change
order was evaluated by the grantee or the engineer, he should question the cost and make a
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recommendation that the Region determine whether to participate in the cost of the change
order.
(14) Determine whether the contractor completed construction within the time
constraints provided in the contract. In instances where construction was not completed within
the time frame established by the contract, including amendments, determine whether or not
the grantee recovered liquidated damages as spectified in the construction contract. Any
additional cost—construction, engineering, legal, or administrative—generated because of a
contractor's lack of performance should be covered by the liquidated damages clause. Thus, any
such increase in cost is unallowable for Federal participation even if the grantee elects not to
exercise its right to recover liquidated damages.
(15) Determine, when applicable, that the procedures followed by a construction
contractor in formulating and implementing a construction incentive change proposal (CICP)
conform to Program Requirements Memorandum (PRM) 79-5, dated December 28, 1979.
b. Verification of construction pay estimates
It is the grantee's responsibility to establish adequate controls to ensure that construction
contractors are paid only for construction work performed and materials and equipment
furnished.
Audit tests of construction pay estimates depend, to a large degree, on the type of
construction contract awarded, i.e., FFP, unit price, or a combination of FFP and unit price
items.
(1) Firm-fixed-price contracts
In practice, the responsibility for initially approving interim pay estimates is normally
delegated by the grantee to the consulting engineer as an element of services during the
construction phase. However, it is the grantee's responsibility to determine that the consulting
engineer exercises procedures and controls adequate to ensure that contractors are paid only for
.acceptable construction performed through the cutoff date of the pay estimate. Accordingly,
the auditor should determine whether the grantee has performed a review or analysis to make
such a determination.
(2) Unit price contracts
Under unit price contracts, the contractor is normally reimbursed monthly on the basis of
actual quantities furnished under each bid item. The total cost of this type of contract is flexible
to the extent that quantities are estimated and final payment will be based on actual quantities
used. The responsibility for verifying unit quantities claimed is normally a part of the services
provided by the consulting engineer.
The auditor should perform adequate tests to determine whether the grantee or the
consulting engineer (acting as the grantee's representative) exercised the necessary controls to
ensure that payments were made only for quantities received. Claims for quantities which
cannot be supported in the grantee's or consulting engineer's records should be questioned.
c. Audit guidance for construction pay estimates
(1) Firm-fixed-price contracts
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Under FFP contracts, the contractor is normally reimbursed monthly on the basis of
percentage of completion of work plus project inventories stored. In performing final audits, the
auditor should:
(a) Examine vouchers, invoices, and disbursement records to determine that
costs claimed have been paid in accordance with the original contract award and approved
change orders.
(b) Determine that the work required under the contract has been completed by
the contractor and accepted by the grantee based on a final inspection by the grantee.
In performing interim audits, the auditor should:
(a) Examine vouchers, warrants, and/or cancelled checks to determine that costs
booked have been paid in accordance with approved progress pay estimates.
(b) Ensure that costs claimed are based on the total value of work in place
(completed work) reduced by any amounts withheld by the grantee as a retainage (usually a
percent of costs claimed that is withheld to guarantee satisfactory completion of work).
(c) Determine whether the grantee or the consulting engineer initially approved
pay estimates.
(d) Review the procedures actually used by the consulting engineer to determine
that the procedures limit interim payments to work completed and accepted and inventories
stored (40 CFR 35.938-6). This should include appropriate tests of specific items included in
the pay estimate to source documents which indicate the resident inspector's acceptance. The
source documents will include inspector's diaries, daily inspection reports, and other
correspondence.
(2) Unit price contracts
(a) Examine vouchers, invoices, and disbursement records to determine that
costs claimed have been paid. Costs claimed should be based on the total value of work in place
(completed work) reduced by any amounts withheld by the grantee as retainage (usually a
percent of costs claimed withheld to guarantee satisfactory completion of work).
(b) Review the procedures used for the verification of quantities claimed under
unit price contracts. The pay estimate should be prepared by the contractor and approved by
the grantee or its representative. In no instance should the contractor's pay estimate be
prepared by the grantee or its representative (the engineer).
(c) Verify quantities billed to the original contract and approved change orders.
(d) Describe briefly in the working papers the procedures in effect and the type
of records maintained for recording units of work completed, e.g., pipe placement, piles driven,
concrete placed, rock excavation, sheeting). Are the procedures used and the records kept in
accordance with the firm's written procedures?
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(e) On a selective basis, determine that quantities claimed are properly
supported by documentation maintained by the contractor and/or determined by the resident
engineer. The documentation may include:
• Daily inspection reports or inspector's diaries;
• Calculations from excavation notes and shop drawings;
• Receipts for materials delivered to the site;
• Pile driving records; and
• As-built drawings. (The auditor may use these to accept quantities of pipe
and manholes if he determines, by reviewing source documentation such as field reports, that
the as-builts accurately represent in-place construction.)
(f) Determine that all entries are dated. This applies to summary records, books
of secondary entry, and source documents.
(g) Determine that all records documenting quantities are maintained on a
current basis. Diaries and inspection reports should be maintained daily, summary sheets
weekly or monthly.
(h) Review and determine the mathematical accuracy of calculations of
excavation and backfill, sheeting, concrete, asphalt, rock excavation, and other items for which
quantities are determined through mathematical computations.
(i) Estimates for quantities of rock excavation, excavation below grade, and
backfill are often treated as contingencies because actual soil conditions may vary significantly
from those established in preliminary test borings. Determine that records show that these
items were actually used.
(j) Source documents such as the inspector's diary and/or daily inspection
reports sometimes indicate unacceptable construction. Determine whether the inspector has a
method for summarizing construction deficiencies that is useful in obtaining corrections.
Determine that all construction recorded as unacceptable has been corrected or is in the process
of being corrected.
(3) Retainages
The provisions of PRM 75-22, 40 CFR 35.938-7, and 40 CFR 35.945 provide guidance
concerning the treatment of retainages. The grantee has the option of withholding a portion of
each progress payment or accepting a financial instrument in lieu of the cash retainage.
(a) Under the provisions of 40 CFR 35.938-7, a grantee may elect to accept
negotiable securities without recourse, conditions, or restrictions; a release of retainage bond; or
an irrevocable letter of credit provided by the contractor. Whenever a grantee elects to permit
its contractors to provide such assets in lieu of retainages, the grantee must maintain a system of
internal controls and procedures to safeguard the interest of all involved parties. At minimum
these controls should ensure safe storage and adequate accountability.
• Safe storage
— The assets are kept in a safe place, such as a custodianship at a bank.
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— Access to these assets is limited to designated, appropriately bonded
grantee officials. At least two or more such officials shall be present at any time of access.
• Adequate accountability
— Official accounting records of the grantee clearly record the receipt and
release of assets. The assets should be identified to the project and contract for which they serve
as retainages.
— The receipt or release of assets is only authorized and carried out by
designated grantee officials.
— A verification was made to assure the clear ownership and value of the
assets.
— Accountability for the assets is maintained separately from any person
responsible for receiving or having physical custody of or access to the assets. Periodically (at
least annually) there should be unannounced, independent verification of the assets actually on
hand as related to the assets provided in lieu of retainages as recorded on the grantee's
accounting records.
Where contract provisions give the contractor the option of providing securities or other
assets in lieu of retainages and a contractor elects to exercise that option, the grantee becomes
obligated to pay the full amount due the contractor. Assuming that adequate controls are
maintained over the assets provided in lieu of retainages, EPA should accept, in the outlay
report, the full amount paid to the contractor.
Where the grantee has accepted such assets, the auditor shall assess the adequacy of controls
over those assets. Where deficiencies are identified, the auditor shall develop appropriate
findings and recommendations and include them in the audit report. Where the deficiencies are
considered especially significant, the auditors should consider questioning the portion of project
costs represented by assets held in lieu of retainages.
(b) Under the provisions of 40 CFR 35.938-7, a grantee may retain a portion of
the amount due a construction contractor. Up to 10 percent may be withheld when work is less
than 50 percent complete. The withholding can be reduced to five percent when more than 50
percent of the work is satisfactorily completed. When the work is substantially completed,
retainages can be further reduced.
A grantee may not claim retainages in its outlay report. In addition, a grantee who delays the
disbursement of grant funds to a contractor or engineer will be required to credit to the United
States all interest earned on those funds (40 CFR 35.938-7(c)).
The auditor should ensure that:
• Retainages are not included as expenditures in outlay reports
submitted to EPA.
• Where engineer or contractor retainages are claimed as expenditures in
a grantee's outlay report, costs are questioned to the extent of the retainages plus interest
attributable to the cash retainages.
• The claimed retainages are reinstated as acceptable costs when the
grantee becomes obligated to actually pay the retained amount.
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• The interest reflects the amount actually earned by the grantee if the
cash retainages are invested at higher than the prime rate. However, in no event shall the
interest be calculated at a rate less than the prime rate for the term improperly claimed.
d. Quality control
It is the grantee's responsibility to ensure that construction is performed in accordance with
the design plans and specifications. This responsibility is normally assigned to an engineering
firm which, under contract with the grantee, provides resident inspection services. These
services generally include furnishing a professional engineer to be in overall charge of the
project construction inspection, a qualified project representative, and a resident inspector. The
inspection of work and materials should normally be continuous whenever work is being
performed on the project and throughout the duration of construction.
The grantee or its engineering firm should exercise controls to provide assurance that
construction was performed in accordance with the approved design plans and specifications.
The auditor should review records documenting this system of controls.
The auditor should exercise reasonable judgment in pursuing audit deficiencies and
indications of construction deficiencies. This guide does not require that audits include
engineering evaluations of grantee or auditee operations. Should conditions be encountered
which require such evaluations, the auditor should contact the Divisional Assistant Inspector
General for Audits, who will review the situation and arrange for appropriate technical
assistance.
e. Guidance for auditing quality control procedures
In auditing controls exercised by the grantee over quality of construction, the auditor should
place maximum reliance on inspections performed by state or EPA inspectors. In this regard,
he should review inspection reports showing the results of such inspections. Where such
inspections are documented to show that each of the areas set forth below was properly
controlled by the grantee and its engineer, further audit work may not be required. If, however,
the grantee did not properly manage the areas below, the auditor should review them. Where
inspection documentation indicates management problems, the auditor should follow up to
determine that corrective action was taken. The auditor should proceed as follows:
(1) Where the grantee has delegated the responsibility for professional services during
construction and/or resident inspection, determine how the grantee stays apprised of
construction progress and problems encountered during the construction. The grantee's
procedures should include review and evaluation of daily inspection reports and engineers'
work progress reports, and observation of the work performed by the resident engineer and
resident inspectors.
(2) Determine the grantee's or consulting engineer's minimum qualification
requirements for resident inspectors.
(3) Review personnel records and determine the resident inspector's actual
qualifications. Do these qualifications meet the minimum requirements (step 2 above)?
(4) Determine whether the grantee or consulting engineering firm has written
procedures, in the form of a "construction manual" or otherwise, which prescribe the duties
and responsibilities of the resident inspectors in performing day-to-day activities. Were these
procedures followed?
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(5) Determine whether there are written procedures requiring that certain types of
daily records be kept by the inspector (e.g., diaries, daily inspection reports). Were daily
inspection reports maintained? Do such records appear to be complete in accordance with
procedures?
(6) Review work progress reports and other correspondence maintained by the
grantee and note any major construction problems identified. Determine that noted
construction deficiencies were corrected. The auditor should also determine that a punch list of
minor construction deficiencies was maintained so that corrective actions may be taken during
project cleanup.
(7) Review the contract specifications and determine what tests (e.g., concrete density
tests, soil compaction, line and grade tests) are required, who should perform the tests, and
what limits or tolerances have been established.
(8) Determine, on a selective basis from the engineer's records, whether tests were
performed as required and whether test results were within the specified limits or tolerances.
(9) Should the audit disclose construction deficiencies of a serious nature which have
not been corrected, attempt to identify the cost associated with that portion of construction.
These costs will not be considered acceptable for EPA participation until the construction
deficiencies are corrected.
4.3.4 Other Costs
In reviewing other costs, the auditor should determine whether the costs are allowable and
applicable to the EPA grant. Guidance concerning the allowability of specific cost items can be
found in FMC 74-4, 40 CFR 35.940, FPR 1-15.2, FPR 1-15.4, and Appendix D to this guide.
The auditor should determine that:
a. The types of expenditures involved were contemplated in the original budget and the
expenditures were adequately documented;
b. In instances where the contractor has established separate pools for such costs as
computer services, reproduction, and communications, the methods used to calculate and
distribute such costs are equitable;
c. Amounts claimed are properly supported as other direct costs, and similar costs are
not recovered through indirect costing methods;
d. The contractor credits to the government the applicable portion of any income,
rebate, allowance, or other credits relating to any allowable costs received by or accruing to the
contractor;
e. When applicable, necessary approvals have been obtained from the EPA project
officer; and
f. Such costs are allowable under applicable cost principles.
The auditor should be alert for additional engineering costs or any other added costs due to
contract default. These costs are not eligible, as the grantee is compensated for these costs by the
contractor's bonding company.
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4.4 OTHER AUDIT MATTERS
4.4.1 Flood insurance
Effective July 1, 1975 (or one year after a community's notification of identification as a
flood-prone community, whichever is later), for activities where the total cost is $10,000 or
more per structure, EPA is prohibited by law from making any grant for acquisition or
construction purposes in a flood hazard area unless the community in which the project is
located is participating in the flood insurance program and flood insurance is purchased by the
grantee. If the audit planning package furnished by the Divisional Assistant Inspector General
for Audits identified construction in a flood hazard area, the auditor should determine that the
grantee has flood insurance.
4.4.2 Property control
a. Real Property
(1) 40 CFR 35.940-3 provides for the eligibility of land acquired after:
(a) October 17, 1972, that will be an integral part of the treatment process, or that
will be used for ultimate disposal of residues resulting from the treatment process;
(b) December 26, 1977, that will be used for storage of treated wastewater in land
treatment systems prior to land applications;
(c) December 26,1977, that will be used for the purpose of composting or
temporary storage of compost residues resulting from wastewater treatment provided that EPA
has approved a program for use of the compost.
(2) If land is acquired for residual waste management, the auditor should determine
whether the grantee has:
(a) Obtained EPA's prior approval before the acquisition of the land by purchase
rather than lease or easement.
(b) Followed the procedures for an independent appraisal and acquisition of land
as outlined in 40 CFR 4 (Implementation of the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970). See Appendix C of this audit guide for additional
audit steps.
(c) Previously certified to the Regional Administrator that it would abide by and
subsequently complied with 40 CFR 30.810 and specifically 30.810-4 (the grantee shall obtain
fee simple title to the land acquired with EPA assistance, with no encumbrances other than the
one protecting the Federal interest) and 30.810-5 (guidelines on the use and disposition of the
property).
(d) Performed an analysis to determine whether land acquisition by lease or
easement would be more cost effective than a fee simple title (see PRM No. 77-5).
Note: Acquisition of land for storage purposes must be by purchase rather than by lease or
easement (PRM No. 78-4).
In addition to performing the above steps, the auditor should document in the workpapers
and bring to the attention of his supervisor (or project officer) any examples of land acquisition
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which will generate significant revenues for the grantee. Such revenue could be generated by
leasing the land, growing crops, etc. The purpose of highlighting such examples is to address the
appropriateness of the land acquisition policies to EPA management.
b. Personal property
The auditor should review the grantee's property management system using the criteria set
forth in 40 CFR 30.810. In evaluating this system, the auditor should:
(1) Determine whether the grantee maintains property records to account for
equipment purchased for use in the EPA grant program.
(2) Review the property records maintained and consider whether they contain
the necessary information, identified in Figure 3.7.
(3) Ascertain whether the grantee takes a physical inventory of grant equipment
and reconciles the results with property records at least once every two years to verify the
existence, current utilization, and continued need for the property.
(4) Determine whether:
(a) Differences between the property record balances and physical balances
are investigated and fully documented.
(b) Property records are adjusted as a result of the inventory.
(c) The grantee takes action to dispose of an item of equipment if it is no
longer needed.
(d) Periodic inspections and routine maintenance are performed on
equipment.
(5) Select from the property records a sample of equipment items purchased for
the EPA grant and physically inventory the equipment to see whether the system is adequate in
terms of (3) above.
4.4.3 National Pollutant Discharge Elimination System
The auditor should review the NPDES permit (furnished by the grantee or in the audit
planning package) to determine effluent limitations and other requirements as established in the
permit. He should determine from grantee records and discussions whether the permit
requirements are being met.
a. Does the grantee have procedures for performance reporting under the NPDES
permit requirements and/or state and local requirements? Have they been implemented?
b. Are required sampling, analytical, and reporting systems in operation?
c. Do reports indicate that standards are complied with? Note exceptions.
4.4.4 User Charge System (UCS)
For Step 3 grants awarded after March 1, 1973, the auditor should determine whether the
grantee has developed a UCS. With the Regional Administrator's approval, a grantee may
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utilize an ad valorem tax system in lieu of a UCS based on actual use. The auditor need not
concern himself with the requirements (40 CFR 35.929) for developing a UCS. However, based
on the status of UCS development, the Regional Administrator may limit award and payment
of grant funds (40 CFR 35.935-13). The auditor should determine that the following conditions
were met:
a. Under grants awarded between March 1,1973, and April 24, 1978, the Regional
Administrator may not pay: more than 50 percent of the grant amount unless the grantee has
submitted adequate evidence of timely development of its UCS; or more than 80 percent of the
grant amount unless he has approved the UCS.
b. Under grants awarded between April 25, 1978, and July 1, 1979, the Regional
Administrator may stop payments on the grant, terminate or annul the grant, and not award
new Step 3 grants to the grantee after June 30, 1979, if the UCS has not been approved by July 1,
1979.
c. Under Step 3 grants awarded after June 30, 1979, the Regional Administrator
must approve the UCS before offering the grant.
4.4.5 Industrial Cost Recovery (ICR) System
Although collection under the ICR system has been suspended until further notice, the
grantee is required to develop a system for Step 2 and 3 grants awarded after March 1, 1973.
The audit report should be qualified to the extent that the system was not audited. The auditor
should determine that:
a. The grantee has indicated to the Regional Administrator that it has industrial
users. If it advised the Regional Administrator that it does not have industrial users, the auditor
should be alert for information to the contrary during the audit. The remaining steps can be
eliminated.
b. The grantee has obtained letters from "significant" industrial users agreeing to
pay under the ICR system. (See 40 CFR 35.925-11(C).) The regulations allow the Regional
Administrator to limit award and payment of Step 3 grant funds if the grantee fails to fulfill the
ICR requirements. Therefore, the auditor should determine that:
(1) For Step 3 grants awarded between March 1, 1973, and April 24, 1978, the
Regional Administrator did not pay more than 50 percent of the grant amount unless the
grantee submitted adequate evidence of timely development of its ICR system or more than 80
percent unless he approved the system.
(2) For Step 3 grants awarded between April 25, 1978, and June 30, 1979, the
Regional Administrator stopped payments on the grant and did not award any new Step 3
grants to the same grantee after June 30, 1979, if the ICR system (except for the ordinance and
rates) was not approved by July 1,1979.
(3) For Step 3 grants awarded after June 30, 1979, the grantee obtained the
Regional Administrator's approval of the ICR system (except for the ordinance and rates)
before the Step 3 grant award.
(4) The Regional Administrator approved the ICR system, including the rates,
before final payment was made on the Step 3 grant.
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4.4.6 Operation and Maintenance (O&M) Manual
No more than 50 percent of the Step 3 grant amount may be paid until the grantee submits a
draft operation and maintenance manual, and no more than 90 percent may be paid until the
manual is approved by the Regional Administrator (40 CFR 35.935-12).
4.4.7 Sewer Use Ordinance
No more than 80 percent of the Step 3 grant amount may be paid until the sewer use
ordinance(s) has been submitted by the grantee and approved by the Regional Administrator
(40 CFR 35.935-16).
4.4.8 Operation of Facility
An important step of the field work will be a tour of the wastewater treatment plant. The
objective of this portion of the audit is to discuss operation of the plant with operating
personnel. The auditor will be alert for indications that the facility is not managed and
maintained in accordance with grant objectives.
During this phase of the audit, the auditor should:
a. Determine whether the grantee has established a permanent record file which
includes:
(1) The operation and maintenance manual;
(2) A complete set of as-built drawings;
(3) Plans, specifications, drawings, and manufacturers' specifications for
operation and maintenance of each unit.
b. Determine whether the grantee has employed the number of qualified treatment
plant operators indicated in its operation and maintenance manual.
(1) Has the grantee established institutional arrangements for personnel training
and development leading to certification?
(2) Do key supervisory personnel meet the state's minimum certification
requirements?
(3) Obtain and review copies of Federal, state, and/or local agency inspection
reports. Identify any major deficiencies reported and determine the status of corrective action
being taken.
(4) Review the engineer's daily inspection reports, punch lists, and deficiency lists
to ascertain construction deficiencies which required correction. Determine whether the
deficiencies were corrected. Request technical assistance as required.
c. Determine that the plant has a laboratory capability and that it is being utilized.
Review effluent testing procedures for consistency with requirements in the"O&M manual.
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d. Discuss the overall operation of the plant with several levels of operating
personnel, including the plant superintendent:
(1) Are there problems which impair the plant's ability to properly treat sewage?
If so, review the plant's:
(a) Equipment;
(b) Process design; and
(c) Facility design.
Obtain operating personnel's suggestions for remedial measures.
(2) Do any overflows occur, or is it necessary to bypass any units? Frequency and
cause?
(3) What are the frequency and nature of contacts by regulatory agency personnel
(local, state, or Federal)?
permits?
(4) Has an adequately funded preventive maintenance system been established?
(5) Is the plant successful in meeting effluent limitations under its discharge
(6) Are any items of equipment or sections of the plant not in use? Why? Costs of
unnecessary or inoperable equipment should be questioned or set aside.
4.4.9 Value Engineering
VE is required for all Step 2 grants on or after October 26, 1976, having a projected Step 3
grant-eligible construction cost of $10 million (see page 2-1).
a. As a minimum, the value engineering proposal should include, as required by 40
CFR 35.926 and PRM 75-36, a description of the:
(1) Scope of VE analysis;
(2) VE team and qualifications;
(3) Level of VE effort;
(4) VE cost estimate; and
(5) VE schedule in relation to project schedule.
b. VE Summary Reports—Upon completion of the VE analysis, a preliminary
report summarizing the VE findings and a final report describing implementation of VE
recommendations must be submitted to the project officer on a time schedule approved by him.
c. Grant Eligibility—The grant eligibility of the VE fee is limited to the actual VE
analysis of the project. The applicant may incorporate training as part of the proposed VE
workshop. However, the intention must be so stated in the proposal, and all costs associated
with such training must be computed separately. For example, the cost for a VE instructor,
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additional time and room space, etc., must be itemized and separately identified for training.
These additional costs for training are not grant eligible (PRM 75-36, Section VII, Paragraph
2).
d. The audit approach should include:
(1) Discussion with the project officer of the adequacy of the VE proposal
regarding the requirements listed above.
(2) Review of the Step 2 grant application to determine that the application
includes the minimum required information set forth above.
e. Audit steps should include, but are not limited to:
(1) Verification that the required VE team qualifications have been met.
(2) Determination that a firm independent of the design firm is conducting the VE
review. If not, determine that the VE team members had not been involved in any part of the
proposed project design except for VE analysis. The audit report should comment that the VE
analysis was performed in-house.
(3) Review of the preliminary and final VE reports.
(4) Determination that the VE recommendations were implemented to the
maximum extent feasible.
f. For further information and guidance, see:
(1) "Federal Register," Vol. 41, No. 186 (September 23, 1976), pages
41690-41691.
(2) "Value Engineering Workbook for Construction Grant Projects," US
Government Printing Office, MDC-29, and US Environmental Protection Agency, EPA-
430/9-76-008 (July 1976).
(3) "Value Engineering in the EPA Construction Grants Program," PRM No.
75-36 (January 20, 1976).
4.4.10 Start up Services
Certain startup services are eligible, in accordance with a December 1976 amendment to the
"Handbook of Procedures, Construction Grants Program for Municipal Wastewater
Treatment Works" (Chapter VIII); PRM 77-2, dated November 29, 1976; and 40 CFR
35.940-l(p), effective October 1, 1978. When startup services are claimed, the auditor should
determine whether:
a. The Step 2 grant application included a commitment to prepare startup service
provisions.
b. The Step 3 grant application included clearly defined startup service provisions.
c. The regional project engineer reviewed and approved the startup service
proposed.
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d. The startup services were performed within a 12-month period.
e. The startup level of effort was within the 90-workday average or 300-workday
maximum for complex facilities.
f. The startup services were performed by the design engineer or others identified by
the design engineer.
g. A review was made of all engineering contracts in order to ensure there was no
duplication of effort.
h. Only eligible services were claimed, such as:
(1) on-site pre- and post-startup personnel training;
(2) fine tuning of treatment processes to optimize performance;
(3) on-site training in laboratory procedures needed for satisfactory process
controls;
(4) implementation of maintenance and records management systems; and
(5) revision of the O&M manual based on actual operating experience during the
startup period.
Ineligible services include:
(1) costs normally associated with the operation and maintenance of the treatment
plant;
(2) all off-site training;
(3) wet and dry equipment and facility testing; and
(4) any entry-level or update training.
4.4.11 Federal Facilities
Whenever a planned treatment works will jointly serve both a community and a Federal
facility, the Step 2 and 3 project costs must exclude the proportional costs allocable to the
treatment of wastes from major facilities of the Federal Government (40 CFR 35.925-16 and
PRM 75-35). A major facility contributes either 250,000 gallons per day or five percent of the
total design flow. When a project services a Federal facility, the auditor should:
a. Ensure that payments by EPA and the Federal facility do not exceed the total
actual costs of constructing the portion of the treatment works that serves the Federal facility;
and
b. Determine whether the Regional Administrator has approved the capital outlay
and user charge calculations included in the contract between the grantee and the major
Federal facility.
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4.4.12 Municipal Pretreatment Program
Under Step 3 grants awarded after December 31, 1980, the Regional Administrator may not
pay more than 90 percent of the grant amount unless the grantee's pretreatment program (40
CFR 35.907) has been approved. Under Step 3 grants awarded between October 1, 1978, and
December 31, 1980, the grantee need only show significant progress on the program (40 CFR
35.935-19). Development of a municipal pretreatment program is an eligible project cost (40
CFR35.940-l(r)).
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CHAPTER 5: EXIT CONFERENCES
Throughout the course of the audit, the auditor is expected to discuss deficiencies disclosed
during audit, their effect, and possible corrective actions, with responsible officials of the
audited party. The primary purpose of these disussions is to ensure that audited parties have an
opportunity to provide additional data with respect to the problem areas identified during audit.
5.1 AUDITS WITH NO FINDINGS
For audits with no findings or audits without significant findings, the auditor should notify
the Divisional Assistant Inspector General for Audits and then hold a preliminary exit
conference with the audited party at the site. When the audited party is a subcontractor, a
separate or joint exit conference may be held with the grantee and the subcontractor. If the
audited parties desire to provide written comments with respect to matters raised in the audit,
they should be furnished a copy of the draft report and afforded the opportunity to provide
written comments. It is not necessary to return to the job site for a formal exit conference.
5.2 AUDITS WITH SIGNIFICANT FINDINGS
For audits with significant findings, the auditor should initially discuss the findings with the
Divisional Assistant Inspector General for Audits by telephone. The auditor should then hold a
preliminary exit conference with the audited party to discuss the factual information disclosed
during the audit. He should emphasize that the audit results and findings are tentative at that
point, and that they will be included in a draft report forwarded to the audited party for written
comment.
The auditor should prepare his draft audit report, highlighting the costs considered
unallowable and other deficiencies disclosed during the audit. The DAIGA should be promptly
furnished a preliminary copy of the draft report. If, after reviewing the draft report, the
DAIGA agrees that the deficiencies are significant, he will meet with the responsible EPA
program officials to brief them on the situation. In addition, he shall require that the grantee
and other audited parties (such as those performing under subagreements) be furnished a copy
of the draft audit findings and conclusions to enable review and written comment prior to the
formal exit conference.
After he receives written comments from the audited parties, the auditor will conduct an exit
conference with each of the responsible parties involved (i.e., the grantee and other parties
having subagreements whose operations and/or costs were audited).
5.3 DOCUMENTATION
The auditor's workpapers shall contain the name of the auditor who conducted the exit
conference, the names and positions of those in attendance, details of the matters discussed, and
a summary of the reactions of the audited parties.
A synopsis of the audited parties' comments will be included in the section of the audit report
entitled "Comments on Compliance, Performance, and Internal Controls." When written
comments are of reasonable length, they will be included as an attachment to the report. The
auditor may also include any rebuttal considered appropriate in light of the audited parties'
comments.
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CHAPTER 6: THE AUDIT REPORT
6.1 INTRODUCTION
Audits of EPA construction grants may result in findings and recommendations concerning
costs questioned or deficiencies in the administration of the grant. For effective administration
of the construction grant program, audit reports must contain all findings, observations,
conclusions, and recommendations resulting from the audit.
6.2 CONTENT AND FORMAT OF AUDIT REPORT
The audit report will be prepared in accordance with the following instructions and in the
formats shown in the Example Audit Reports (with exhibits and schedules) on pages 6-3
through 6-24.
6.2.1 Scope Paragraph
a. The scope paragraph will identify the grant audited and the period audited. For final
audits, the period audited will normally be from the date of grant offer to date of final inspection
or the designated cutoff date. For interim audits, the period audited will normally be from the
date of grant offer to the date audited costs were incurred or claimed.
b. The scope paragraph will also include a statement that the examination was made in
accordance with the EPA "Audit Guide for Construction Grant Program" and the GAO
"Standards for Audit of Governmental Organizations, Programs, Activities, and Functions." If
conditions were encountered which preclude the inclusion of such a statement, an appropriate
statement will be prepared explaining the nature of conditions which required the deviation.
6.2.2 Opinion
The report will contain an opinion as to the costs incurred/claimed and costs eligible under
the EPA grant. Based on the review of the reasonableness, allowability, and allocability of costs
claimed in conjunction with grant terms and conditions and applicable Federal regulations, the
auditor will classify costs as "accepted," "questioned," or "set aside" in a separate schedule
referenced in the report.
6.2.3 Comments on Compliance, Performance, and Internal Controls
The report will include a separate section relating to the compliance, performance, and
internal control reviews made during the examination. The report should include a discussion
of any deficiencies identified during the course of the audit. In addition, the interim report must
contain comments as to the adequacy of the accounting system and procurement system. A
final audit report must contain those comments only if the grantee has other active EPA grants.
6.3 PRESENTING THE FINDINGS
Audit findings, whether they relate to costs questioned or grant administration procedures,
will be presented in sufficient written detail to ensure that report recipients may readily:
a. Understand the finding;
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b. Understand the basis for the finding; and
c. Grasp the significance of findings not directly related to the costs questioned.
The discussion of an audit finding should conclude with management improvement
recommendations, if applicable.
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6.4 EXAMPLE AUDIT REPORT NO. 1
Divisional Assistant Inspector General for Audits
Office of Inspector General
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs incurred/claimed* and EPA-eligible costs (Exhibit
A) for the City of Anywhere, U.S.A., under EPA Grant No. XXXX for the period (month, day,
year) to (month, day, year). Our examination was made in accordance with generally accepted
auditing standards and the "Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions." The audit included tests of the accounting records and other
auditing procedures we considered necessary in the circumstances. The Environmental
Protection Agency's "Audit Guide for Construction Grant Program," revised May 1980, was
also used as a guide in our examination.
As part of our examination, we determined the allowability of costs incurred/claimed under
the project in accordance with the provisions of the grant and applicable Federal regulations.
Schedule A-l sets forth the costs which we questioned in this regard and includes an
explanation of the reasons such costs were questioned.
In our opinion, subject to the effects on Exhibit A of EPA's ultimate resolution of ?
questionable expenditures referred to in the preceding paragraph, Exhibit A fairly presents the
financial information in accordance with generally accepted accounting principles and financial
provisions of the grant.
In addition, in connection with our examination of the statement of costs incurred/claimed
and eligible EPA costs, we have reviewed the grantee's (1) system of internal control (based on
criteria established by EPA and set forth in the aforementioned EPA audit guide) and (2)
compliance with previsions of the grant and applicable Federal regulations. Our report thereon
appears as Exhibit B. ,
This report is intended for use in connection with the grant to which it refers and should not
be used for any other purpose.
DATE SIGNATURE
*The audit report will normally address costs claimed. However, on interim audits there
may be instances where the grantee's claim is not current. In these instances, the audit report
will address costs incurred.
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EXAMPLE AUDIT EXHIBIT A
REPORT NO. 1
City of Anywhere, U.S.A,
Secondary Sewage Treatment Plant
Statement of Grantee's Costs Incurred/Claimed and EPA-Eligible Costs
for the Period (Month, Day, Year) to (Month, Day, Year)
Total Costs Costs Claimed
Description * Incurred as EPA-Eligible
Construction Costs $2,780,000 $731,715
Project Inspection
Fees 133,537 26,707
Total Costs $2,913,537 $758,422
Grant No. XXXX was awarded to the City of Anywhere, U.S.A., under Public Law 84-660.
The grant was awarded on (month, day, year) and provides for 5 5-percent Federal participation
in the construction of a secondary sewage treatment plant and interceptor sewers, with a
maximum Federal share of $1,100,000. At the time of completion of the audit field work
(month, year), construction was approximately 40-percent complete on two contracts. The
third construction contract under the grant had been recently awarded, but construction had
not started at (month, year).
See Schedule A-l for a statement of costs accepted and questioned during the audit.
The cost categories listed on the Outlay Report and Request for Reimbursement for
Construction Programs (SF 271) should conform to the Description column.
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EXAMPLE AUDIT
REPORT NO. 1
SCHEDULE A-l
City of Anywhere, U.S.A
Secondary Sewage Treatment Plant
Statement of Cost Incurred, Accepted, and Questioned
for the Period (Month, Day, Year) to (Month, Day, Year)
Description
Construction Cost
Project Inspection Fees
Total Costs
Determination of amount
due grantee or EPA
based on audit
Federal share (55%) of
accepted eligible cost
EPA-Eligible Costs
Claimed Accepted Questioned
$551,348
$731,715
26,707
$758,422
9,787
$561,135
$180,367
16,920
$197,287
Notes
T
2
$417,132
$308,624*
$108,508
Less EPA payments made
through (month, day, year)
Balance due Grantee
300,000
$ 8,624
"This amount should not be construed as being the final determination of the Federal share
of accepted eligible costs. The amount may vary depending upon the resolution by EPA of
questioned costs totaling $ 197,287.
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Notes to Schedule A-l
Note 1 Construction Contracts
a. The grantee contracted for the erection of 198,422 feet of wooden fence around the
construction site of the treatment plant at a cost of $1.50 a linear foot, for a total price of
$297,633. The contractor submitted invoices totaling $325,000 for the 198,422 feet of fence
installed. The consulting engineer approved and the grantee paid the overpayment
requested. The overpayment was $27,367. $ 27,367
b. The grantee awarded a $550,000 construction contract for repair, maintenance, and
construction of the collection system. Upon reviewing the scope of the contract, the EPA
project engineer stated that it should not have been deemed eligible for Federal participation
because it relates to the collection system, not to necessary interceptors. Therefore, we question
the entire contract because PL 84-660 excludes collection systems from Federal
participation. The total cost incurred to date is $ 150,000. 150,000
c. The grantee contracted for a protective wooden fence to be completed by September 15,
1974. The fence was not completed until September 18, 1974. This delay required another
contractor under the grant to defer the start of excavation to September 20, 1974. The
contractor incurred $3,000 in equipment rental costs during the three-day delay. Chapter VII of
the Handbook of Procedures states that increased costs resulting from lack of performance by
the construction contractor are unallowable for participation, even if the grantee elects not to
exercise its right to recover liquidated damages. The cost incurred during the three-day overrun
is $3,000. 3,000
Total Costs Questioned $180,367
Grantee's Comments
The grantee agrees with the above questioned costs.
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Note 2 Project Inspection Fees
A summary of audit recommendations follows:
Description Costs
Claimed Accepted
Subagreement Costs*
Personnel $32,000 $10,000
Fringe Benefits 6,000 1,886
Overhead 32,000 10,000
Travel 2,537 2,537
Subcontracts 23,000 - 0 -
Total Costs $95,537 $24,423
Fee 8,000 8,000
Total Subagreement Costs
plus Fixed Fee $103,537 $32,423
Force Account Costs 30,000 16,5JO
Total Project Inspection
Fees $133,537 $48,933
Eligible Costs $ 26,707 $ 9,787
Questioned Reference
$22,000
4,114
22,000
- 0 -
23,000
$71,114
- 0 -
$71,114
13,490
$84,604
$16,920
*In this example audit report, engineering fees were considered to be compensated under a cost-plus-fixed-fee
contract; thus, an audit of actual cost was performed. In cases where engineering services are compensated under a
multiplier, fee curve, or FFP contract awarded prior to July 1, 1975, the procedures outlined in section 4.3.2.b of this
guide should be included in this schedule and referenced to technical service costs incurred/claimed, accepted, and
questioned.
a. Engineering firm's records do not accurately record project cost—$22,000: The
consulting engineer was unable to support charges totaling $22,000 for project supervision and
inspection. The project was charged for the full time of the project engineer and one-half time
for another engineer whose identity we could not determine. The engineering firm's payroll
records did not identify the projects to which the inspectors were assigned, and the firm was
unable to provide the weekly time sheets which, a representative of the firm stated, contain
project identification. We are questioning all charges except the salary of the project engineer.
b. The amount questioned represents the application of the firm's fringe benefit rate of
18.7 percent to personnel costs questioned in Note 2a above (18.7 percent x $22,000 = $4,114).
c. The amount questioned represents the application of the firm's overhead rate of 100
percent to personnel costs questioned in Note 2a above (100% x $22,000 = $22,000).
d. Approval of engineer subcontracts—$23,000: The consulting engineer, without the
knowledge or approval of the grantee or EPA, awarded a fixed-price subcontract for the design
of the settlement basins. EPA regulations require prior approval of subcontracts and a
determination that such subcontracts are reasonably priced. Further, the consulting
engineering firm could not demonstrate that the subcontract was awarded at a reasonable price.
Consequently, we have questioned this subcontract of $20,000 plus a f 5-percent management
fee of $3,000, or $23,000.
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e. The grantee incurred personnel costs of'$30,000 for force account work, of which
$6,000 was claimed as EPA-eligible costs. Since the grantee's records did not identify eligible
costs, the grantee used the percentage of eligibility identified in the grant application (20% of
$30,000 = $6,000). An in-depth analysis of the force account costs revealed that $13,490 was
related to another project. The remaining $ 16,510 is accepted as eligible costs.
f. The approved grant application estimates eligible construction costs which, when
taken over total construction costs, result in an eligibility factor of 20 percent. To arrive at the
total eligible project cost, a ratio based on actual costs will be applied to all other acceptable
costs at the time of the final audit.*
Engineering Firm's Comments
(a thru c) The engineering firm's representative agreed that records were not available to
support all salary charges, but contended that the staff had performed sufficient work to earn
the cost claimed.
d. The engineering firm's representative stated that they were not aware of these
requirements. Based upon the performance of the subcontractor, they considered this to be a
reasonable price.
Grantee's Comments
The grantee concurred with the facts in Note e.
*See page 4-5 of this guide.
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EXAMPLE AUDIT REPORT NO.l EXHIBIT B
CITY OF ANYWHERE, U.S.A
SECONDARY SEWAGE TREATMENT PLANT
CONSTRUCTION GRANT XXXX
COMMENTS ON COMPLIANCE, PERFORMANCE, AND INTERNAL CONTROLS
As a part of our examination, we reviewed and tested the grantee's system of internal
accounting controls to the extent we considered necessary to evaluate the system as required by
generally accepted auditing standards. This evaluation established a basis for reliance on the
grantee's accounting control system in determining the nature, timing, and extent of other
auditing procedures necessary for expressing an opinion on the financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance that the (1) assets are safeguarded against loss from unauthorized use or disposition
and (2) financial records are reliable for preparing financial statements and maintaining
accountability for assets. The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the benefits derived and also
recognizes that the evaluation of these factors necessarily requires estimates and judgments by
management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most control
procedures, errors can result from misunderstanding of instructions, mistakes of judgment,
carelessness, or other personal factors. Control procedures whose effectiveness depends upon
segregation of duties can be circumvented by collusion. Similarly, control procedures can be
circumvented intentionally by management, either with respect to the execution and recording
of transactions or with respect to the estimates and judgments required in the preparation of
financial statements. Further, projection of any evaluation of internal accounting control to
future periods is subject to the risks that the procedures may become inadequate because of
changes in conditions and that the degree of compliance with the procedures may deteriorate.
The EPA "Audit Guide for Construction Grant Program," revised May 1980, requires a
review and evaluation of the adequacy of the accounting system and internal controls of the
grantee to (1) safeguard its assets; (2) check the accuracy and reliability of the accounting data;
(3) promote operating efficiency; and (4) encourage compliance with prescribed management
policies and such additional fiscal, accounting, and administrative requirements as EPA may
establish. We understand that EPA considers procedures conforming to the criteria in its audit
guide to be adequate for EPA purposes. Procedures that are not in conformity with the audit
guide indicate some inadequacy for EPA purposes. Based on this understanding and on our
study, we believe that the City's procedures were adequate (inadequate) for EPA purposes
except for (because of) the conditions described below, which we believe are material
weaknesses in relation to the grant to which this report refers. In addition to such weaknesses,
other conditions which we believe are not in conformity with the criteria referred to above are
described on the following pages.
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GRANTEE'S ACCOUNTING SYSTEM (Interim Report)*
The grantee's general accounting system is considered adequate to record and accumulate
financial information. However, the grantee's cost accounting system is not considered
adequate to identify and accumulate costs under the subject grant. The grantee maintains a
general accounting system controlled by a general ledger and supported by various accounting
journals. However, the grantee does not maintain cost or project accounting records to identify
EPA-eligible project costs. The general ledger consists of one construction account which
includes the costs of all construction projects undertaken by the City. As a result, we could not
determine the amount of EPA-eligible expenditures incurred.
EPA general grant conditions provide "the grantee shall maintain books, records,
documents, and other evidence and accounting procedures and practices sufficient to reflect (1)
the amount, receipt, and disposition by the grantee of all assistance received for the project,
including both Federal assistance and any matching share or cost sharing, and (2) the total cost
of the project, including all direct and indirect costs of whatever nature incurred for the
performance of the project for which the EPA grant has been awarded...."
During the course of our audit, the accounting system deficiency was discussed with the City
Controller, who made arrangements for a public accounting firm to identify and accumulate,
from the City's records, costs incurred under the grant project. At the completion of our audit,
project costs incurred by the City from inception of the grant through June 30, 1975, had been
identified and summarized. However, costs incurred since July 1, 1975, have not been analyzed,
and a system to provide for the identification and accumulation of future grant expenditures has
not been implemented.
Recommendation
We recommend that EPA require the City to take immediate action to implement
accounting procedures adequate to reflect EPA-eligible and allowable project costs.
Grantee's Comments
The grantee concurred and indicated that necessary corrective action would be taken.
GRANTEE'S PROCUREMENT SYSTEM
The grantee's procurement system for construction and engineering services was generally
adequate except for procedures relating to pricing change orders.
The grantee has not established effective procedures for controlling the change orders to
assure that: (1) a review of the reasonableness of change order costs is made, (2) responsibility is
assigned for final acceptance of the change order work prior to approving payment on the
change orders, and (3) responsibilities of City officials authorized to sign and approve the
change orders are defined. The grantee, on the recommendation of the consulting engineer,
approved three contract change orders, valued at $100,000, under contract number XXXX.
The change orders extended the construction period for nine months and provided for extensive
substitution of equipment.
*For final audits, statements regarding the accounting systems are necessary only if the
grantee has other active EPA grants.
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Our review of the consulting engineer's records disclosed that the engineer had not
performed a cost analysis or taken other measures to assure the reasonableness of the change
order price. In addition, neither the grantee nor the consulting engineer had approved the
change order work prior to payment for the change order. We also noted that the changes have
not been submitted to EPA for approval. We do not take a position concerning the merits of the
changes, but we believe that changes altering the scope of the project are subject to prior
approval before they are binding on EPA.
Recommendation
We recommend that the grantee be required to establish eifective procedures for controlling
change orders which will, as a minimum, provide for reasonable costs, acceptable work, and
properly defined responsibilities for City officials approving the change orders. In addition,
prior EPA approval should be obtained whenever the change orders alter the scope of the
project and/or when cost changes exceed $ 100,000.
Grantee's Comments
The grantee and the engineering firm concurred with the auditor's findings and
recommendations.
CORRECTION OF CONSTRUCTION PROBLEMS
Our review disclosed that construction deficiencies noted in the inspection reports were not
adequately controlled to assure correction. The current inspection system does not provide a
mechanism for assuring that deficiencies identified in the inspection process are corrected. For
example, we identified 25 construction deficiencies (from inspectors' diaries and daily
inspection reports) which had not been corrected at the time of completion of the audit field
work. These deficiencies were recorded over a six-month period ending in June 1974. As of June
1975, when we discussed these deficiencies with the resident inspector and project engineer, no
action had been taken to correct the deficiencies. The project engineer indicated that some of the
deficiencies represented major structural defects.
Recommendation
We recommend that EPA take appropriate action to ensure that the grantee requires its
consulting engineering firm to adequately control and document followup action on all
construction problems included in the inspection reports or other records. The grantee should
ensure it is fully informed of the status of construction and operational problems identified by
the consulting engineering firm. We also recommend that EPA perform an inspection to
determine the seriousness of the construction deficiencies and the appropriateness of proposed
corrective action.
Engineering Firm's Comments
Representatives of the engineering firm indicated that they would take prompt action to
follow up on deficiencies and get the contractors to take necessary corrective action.
Grantee's Comments
The grantee stated that it would take the necessary action to get deficiencies corrected.
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CONFLICTING CONTRACT TERMS
The grantee has relied on the consulting engineer to determine whether the contractors have
performed the work in accordance with the plans and specifications approved by EPA. The
contract between the grantee and consulting engineering firm is not clearly defined as to the
firm's responsibility for inspecting the work of construction contractors and its authority to
interpret the plans and specifications. However, the contracts between the grantee and three of
its contractors contain specific language that states the consulting engineer is the grantee's
representative on all matters concerning interpretation of plans and specifications, inspections,
and obtaining rework of work not meeting those plans and specifications. Thus, the grantee
appears to rely on the consulting engineer to obtain satisfactory completion of the project when
in fact the contract does not provide that assurance.
Recommendation
We recommend that the grantee be required to amend its consulting engineering contract to
specifically state the engineer's authority and responsibility.
Engineering Firm's Comments
Representatives of the engineering firm stated that they see no problem with the present
wording of the contracts.
Grantee's Comments
The grantee concurred with the audit finding and stated that the consulting engineering
contract would be appropriately amended.
ENGINEERING FIRM'S ACCOUNTING SYSTEM
The engineering firm's accounting system is not considered adequate to identify and
accumulate costs under the subject contract. Adequate documentation is not maintained to
support all costs charged to the project. Payroll records did not identify the projects to which
inspectors were assigned. As a result, we questioned $22,000 of personnel costs charged to the
project. (See Schedule A-l, Note 2 (a).)
Recommendation
We recommend that the engineering firm be required to maintain records which properly
document salary charged. This should include, as a minimum, weekly time sheets which are
signed by the employee and his supervisor and which identify all projects on which the
employee is working. In addition, appropriate reconciliations should be made between labor
distribution and payroll records.
Engineering Firm's Comments
The engineering firm stated that immediate action was being taken to correct deficiencies in
its accounting system.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
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ENGINEERING FIRM'S PROCUREMENT SYSTEM
The engineering firm's procurement system is considered generally adequate to protect the
interests of the grantee and EPA with the following exception: the engineering firm awarded a
subcontract for a portion of the work under its contract with the grantee. However, in awarding
such a contract, the engineer did not perform an adequate cost or price analysis to ensure a
reasonable price for the subcontracted work.
Recommendation
We recommend that future subcontract procurements by the engineering firm under cost-
plus-fixed-fee contracts be subjected to a cost or price analysis to assure reasonable prices.
Engineering Firm's Comments
The engineering firm's representatives were not aware of this requirement, but will consider
it in subcontracting for future work.
Grantee's Comments
The grantee concurred with the audit finding and recommendation.
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6.5 EXAMPLE AUDIT REPORT NO.2
Divisional Assistant Inspector General for Audits
Office of Inspector General
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs incurred/claimed* and EPA-eligible costs (Exhibit
A) for the City of Anywhere, U.S.A., under EPA Grant No. XXXX for the period (month, day,
year) to (month, day, year). Our examination was made in accordance with generally accepted
auditing standards and the "Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions." The audit included tests of the accounting records and other
auditing procedures we considered necessary in the circumstances. The Environmental
Protection Agency's "Audit Guide for Construction Grant Program," revised May 1980, was
also used as a guide for our examination.
As part of our examination, we determined the allowability of costs incurred/claimed under
the project in accordance with the provisions of the grant and applicable Federal regulations.
Schedule A-l sets forth the costs which we questioned in this regard and includes an
explanation of the reason such costs were questioned.
In our opinion, subject to the effects on Exhibit A of EPA's ultimate resolution of the
questionable expenditures referred to in the preceding paragraph, Exhibit A fairly presents the
financial information in accordance with generally accepted accounting priniples and financial
provisions of the grant.
In addition, in connection with our examination of the statement of costs incurred/ claimed
and eligible EPA costs, we have reviewed the grantee's (1) system of internal control (based on
criteria established by EPA and set forth in the aforementioned EPA audit guide) and (2)
compliance with provisions of the grant and applicable Federal regulations. Our report thereon
appears as Exhibit B.
This report is intended for use in connection with the grant to which it refers and should not
be used for any other purpose.
DATE SIGNATURE
The audit report will normally address costs claimed. However, on interim audits there
may be instances where the grantee's claim is not current. In these instances, the audit report
will address costs incurred.
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EXAMPLE AUDIT
REPORT NO. 2
EXHIBIT A
City of Anywhere, U.S.A.
Statement of Costs Incurred/Claimed and EPA-Eligible Costs
for the Period (Month, Day, Year) to (Month, Day, Year)
Description* Total Costs Costs Claimed
Incurred as EPA-Eligible
Administration $87,000 $ 65,000
Preliminary Expense 200,000 70,000
Land, Structures, Rights-of-Way 127,530
Architectural Engineering Basic Fees 700,000 600,000
Other Architectural Engineering Fees 95,000 87,000
Project Inspection Fees 115,000 103,000
Construction and Project
Improvement Cost 4,150,000 3,760,000
Total Claimed $5,474,530 $4,685,000
Grant No. XXXX was awarded to the City of Anywhere, U.S.A., under Public Law 92-500.
The grant was awarded on (month, day, year) and provides for 75-percent Federal participation
in the construction of a secondary sewage treatment plant and interceptor sewers, with a
maximum Federal share of $13.5 million. At the time of completion of the audit field work
(month, year), construction was approximately 30-percent complete on ten contracts.
See Schedule A-l for a statement of costs accepted and questioned during the audit.
The cost categories listed on the Outlay Report and Request for Reimbursement for
Construction Programs (SF 271) should conform to the Description column.
6-15
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EXAMPLE AUDIT
REPORT NO. 2
SCHEDULE A-l
City of Anywhere, U.S.A.
Statement of Costs Claimed, Accepted, Set Aside, and Questioned
for the Period (Month, Day, Year) to (Month, Day, Year)
Description
Administration
Preliminary Expense
Architectural Engineering
Basic Fees
Other
Project Inspection Fees
Construction
Total Costs
Determination of amount
due grantee or EPA
based on audit
Federal Share (75% of
accepted eligible costs)
Claimed
$65,000
70,000
600,000
87,000
103,000
3,760,000
$4,685,000
EPA-Eligible Costs
Accepted
$47,258
70,000
570,400
76,492
31,743
3,711,700
$4,507,593
Set Aside
$63,363
40,067
$103,430
Questioned
$17,742
29,600
10,508
7,894
8,233
JS73J77
Notes
$3,513,750 $3,380,695'
$77,572
$55,483
Less EPA payments
made through
(month, day, year)
Balance due EPA
3,750,000
$369,305
"This amount should not be construed as being the final determination of the Federal share
of accepted eligible costs. The amount may vary depending upon the resolution by EPA of
questioned and suspended costs of $177,407.
6-16
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Notes to Schedule A-l
Notel
Of the total costs claimed by the grantee under the Administration cost category, we have
questioned $17,742 for the following reasons:
(a) The grantee claimed costs incurred by a city employee whose salary was totally
reimbursed with Federal funds under the Public Service Program. $ 1,242
(b) The sale of plans and specifications to prospective bidders cost $100 per copy. Each
bidder then received a refund of 100 percent of the cost of one copy, but additional copies taken
by the same bidder were only refunded at 50 percent of the original cost. The results of our test
performed on one contract indicated that where 18 bids were received, the grantee's gross
receipts totaled $23,500; $10,050 was returned to bidders, and $13,450 was credited to general
revenue. This $13,450 should have been used to reduce the reimbursable costs for the
preparation of the plans and specifications. 13,450
(c) The grantee claimed costs for printing and legal fees related to the sale of bonds. Costs
associated with the approval, preparation, issuance, and sale of bonds are not eligible for grant
participation in accordance with EPA's "Construction Grants Handbook of Procedures,"
Chapter VII (formerly Program Guidance Memorandum No. 64). 3,050
Total Costs Questioned $17J42
Grantee's Comments
The grantee concurred with the above findings and has indicated that it will compute the
amount of miscellaneous revenue for each contract and offset this revenue to the cost of the
project.
Note 2
We noted that compensation for engineering services was based upon the fee curve and
multiplier methods of contracting. The use of the fee curve and multiplier and profit resulting
solely therefrom have been accepted because, at the time the contractual arrangement was
made, these methods of contracting were not prohibited and were in accordance with accepted
industry practice. The fee curve and multiplier methods of contracting are now prohibited by 40
CFR 35, Subpart E, Appendix D, dated December 17, 1975.
In addition, the grantee's claim of $600,000 for the design services was computed by
applying the fee suggested by curve A of the American Society of Civil Engineers to the total
actual construction costs, including change orders and overruns on estimated quantities in the
plans and specifications for completed contracts 1 through 4. However, paragraph B.S.a of
Appendix D to 40 CFR 35 limits EPA participation to the amount based upon the low bid for
construction. Accordingly, we computed the accepted amount based upon curve A and the low
bids of $13,100,000 for both the eligible and ineligible portions of the construction contract.
This resulted in a fee of 5.9 percent. Application of the accepted rate to the low bid for eligible
construction work of $11,790,000 resulted in a fee of $695,610. This fee was reduced by the
applicable portion ($125,210) of the $139,122 credit for preliminary work and construction
phase, for an accepted cost of $570,400.
6-17
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Grantee's Comments
The grantee concurred with the above finding.
Engineer's Comments
The engineer agreed with the above finding and calculations.
Note 3
We have questioned $10,508 of other architectural engineering fees as not being eligible for
EPA participation per Chapter VII of the EPA "Construction Grants Handbook of
Procedures" (formerly Program Guidance Memorandum No. 64).
(a) Processing and coordinating the grant application as reported on employee time sheets. $ 3,420
(b) Cost incurred for easement preparation. 2,870
(c) A 15-percent service charge was applied to all direct nonsalary costs excluding mileage.
This service charge could not be supported by the accounting records. 4,218
Total Costs Questioned $10,508
Grantee's Comments
The grantee agreed with the above questioned costs.
Engineer's Comments
(a) The firm stated that the majority of the grant application costs were incurred because the
grantee requested supplemental information and analyses.
(b) No Comment.
(c) The firm stated that the service charge was provided for in the engineering agreement and
was used to compensate for overhead costs and risks involved in the use of outside consultants.
Note 4
Of the total costs claimed by the grantee under the Project Inspection Fees cost category, we
have suspended $63,363 and questioned $7,894 for the following reasons:
Amounts
Reference
a
b
Total
Set Aside
$63,363
- 0 -
$63,363
Questioned
$5,742
2,152
$7,894
6-18
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(a) The grantee had claimed $69,105 for force account work representing resident inspection
services. The use offeree account work had not been approved by EPA. Program Requirements
Memorandum 75-15 provides for a deviation from the provisions of 40 CFR 35.935-2(a)
relating to the use of force account work on construction projects. The effect of this deviation is
to allow the use of force accounts for any Step 1, 2, or 3 work for which the Regional
Administrator has given prior written approval. Although the grantee had requested approval
for the force account work in a letter dated June 8, 1976, the Regional Administrator had not, at
the time of our audit, responded to the grantee's request. Of the total amount claimed for force
account work, $63,363 is supported by the grantee's accounting records; the remaining $5,742
is unsupported. Therefore, if retroactive approval of the force account work is granted, Federal
participation should be limited to the amount of supported costs.
(b) Questioned costs of $2,152 are inspection fees billed on Contract No. 2 invoices 17
through 20 for services after the contract completion date (June 18, 1976). Chapter VII of the
Handbook of Procedures states that increased costs resulting from lack of performance by the
construction contractor are unallowable for participation, even if the grantee elects not to
exercise its right to recover liquidated damages. No liquidated damages were assessed, although
the contract was not completed until September 19, 1976.
Grantee's Comments
(a) The grantee expressed the view that all of the force account inspection costs are proper,
and stated, "I think that we can explain these charges such that they can be determined to be
eligible."
(b) The grantee did not concur with our position on resident inspection costs incurred after
the contract completion date.
Engineer's Comment
(a) No comment.
(b) The engineer stated that a request for an extension of the contract completion date had
been submitted to EPA through the State Department of Natural Resources, but approval has
not been received. The engineer also contended that inspection costs have not been and will not
be increased due to delayed construction. The engineer stated that inspection services were not
provided during the time the contractor was not working. Therefore, inspection costs incurred
after the scheduled completion date are not added costs but costs that would have been incurred
if the project had proceeded in a normal manner.
Auditor's Comments
We believe the construction contractor will overrun the scheduled completion date even if a
time extension is granted. There is merit to the engineer's contention that no added cost will be
incurred since he did not perform during the "down period." We believe these facts should be
documented and considered at the time of final inspection. Until that time, unless the scheduled
completion date is revised, we recommend no payment for inspection services performed after
the scheduled contract completion date.
NoteS
We have questioned or set aside the following amounts of construction costs as being
ineligible for Federal participation.
6-19
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(a) Although eligible costs for construction were not questioned, we determined that
the Region had reimbursed the grantee for the Federal share of retained construction payments.
The grantee did not record or claim the retainage. The reimbursement of the Federal share
produced a temporary overpayment to the grantee. The Region should adjust for any
overpayments. Retainage should be deducted in all future partial payments.
(b) The amount suspended includes the following change orders which have not been
approved by EPA.
Change Order 3, Contract 1 $ 3,429
Change Order 5, Contract 1 4,142
Change Order 1, Contract 3 20,541
Change Order 1, Contract 5 11,955
Total JJ40.067
(c) Construction costs claimed also included sales tax not paid by the grantee and
ineligible construction. The details are as follows:
Contract Sales Tax Ineligible Construction
Not Paid
1 $ 837
2 300 $2,150*
3 250
4 310 4,000*
5 215
6 171
Total $2.083 J6.150
*Represents the cost of construction declared ineligible by EPA.
Grantee's Comments -
The grantee stated that it will no longer claim construction retainage or unpaid sales tax.
Regarding the set aside change orders, the grantee stated that the change orders have been
submitted to the state agency and are awaiting approval.
6-20
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EXAMPLE AUDIT EXHIBIT B
REPORT NO. 2
CITY OF ANYWHERE, U.S.A
SECONDARY SEWAGE TREATMENT PLANT
CONSTRUCTION GRANT XXXX
COMMENTS ON COMPLIANCE, PERFORMANCE, AND INTERNAL CONTROLS
As a part of our examination, we reviewed and tested the grantee's system of internal
accounting controls to the extent we considered necessary to evaluate the system as required by
generally accepted auditing standards. This evaluation established a basis for reliance on the
grantee's accounting control system in determining the nature, timing, and extent of other
auditing procedures necessary for expressing an opinion on the financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance that the (1) assets are safeguarded against loss from unauthorized use or disposition
and (2) financial records are reliable for preparing financial statements and maintaining
accountability for assets. The concept of reasonable assurance recognizes that the cost of a
system of internal accounting controls should not exceed the benefits derived and also
recognizes that the evaluation of these factors necessarily requires estimates and judgments by
management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most control
procedures, errors can result from misunderstanding of instructions, mistakes of judgment,
carelessness, or other personal factors. Control procedures whose effectiveness depends upon
segregation of duties can be circumvented by collusion. Similarly, control procedures can be
circumvented intentionally by management, either with respect to the execution and recording
of transactions or with respect to the estimates and judgments required in the preparation of
financial statements. Further, projection of any evaluation of internal accounting control to
future periods is subject to the risks that the procedures may become inadequate because of
changes in conditions and that the degree of compliance with the procedures may deteriorate.
The EPA "Audit Guide for Construction Grant Program," revised May 1980, requires a
review and evaluation of the adequacy of the accounting system and internal controls of the
grantee to (1) safeguard its assets; (2) check the accuracy and reliability of the accounting data;
(3) promote operating efficiency; and (4) encourage compliance with prescribed management
policies and such additional fiscal, accounting, and administrative requirements as EPA may
establish. We understand that EPA considers procedures conforming to the criteria in its audit
guide to be adequate for EPA purposes. Procedures that are not in conformity with the audit
guide indicate some inadequacy for EPA purposes. Based on this understanding and on our
study, we believe that the City's procedures were adequate (inadequate) for EPA purposes
except for (because of) the conditions described below, which we believe are material
weaknesses in relation to the grant to which this report refers. In addition to such weaknesses,
other conditions which we believe are not in conformity with the criteria referred to above are
described on the following pages.
6-21
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GRANTEE'S ACCOUNTING SYSTEM
The grantee's accounting system did not provide for (1) segregation of eligible and ineligible
costs; (2) time and effort reports to support costs of construction inspection services; (3)
adequate internal controls over cash receipts; (4) reconciliation between the General Ledger
Account, the Construction In Progress—Sewer Plant Account, and the Outlay Report and
Request for Reimbursement for Construction Programs; and (5) acquiring supporting
documentation of consulting engineer billings.
SEGREGATION OF COSTS
All costs, whether eligible or ineligible for EPA participation, were accumulated in the
Construction In Progress—Sewer Plant Account. This method of accounting makes it difficult
to determine eligible project costs for EPA participation.
Accounting systems under Federal grants must provide for segregation of costs in order to
permit grantees and EPA to determine in which costs the government will participate.
TIME AND EFFORT REPORTS
At the time of audit, time and effort reports were not used by the grantee to support costs
incurred for construction inspection by force account.
EPA requires time and effort reports to support direct salary costs to the grant project. This
enables EPA to adequately identify those costs applicable to the project.
INTERNAL CONTROLS
The grantee's internal control over cash receipts was considered inadequate. We were
advised that the accountant is solely responsible for preparing the deposits, recording to the
cash receipts journal and general ledger, and performing bank reconciliations of the various
funds maintained by the grantee. Adequate physical safeguards and separation of duties are
essential for proper internal control.
RECONCILIATION OF GENERAL LEDGER ACCOUNT
AND OUTLAY REPORT
The costs recorded in the Construction In Progress—Sewer Plant Account did not agree
with the costs reported in the Outlay Report. Our analysis of the cash disbursements journal
showed that two engineering invoices totaling $13,125.89 and grantee travel costs for $836 were
paid out of another fund. We determined that these amounts were chargeable to the
construction fund. In addition, we found that a transfer of charges for $21,840.94 to the
construction fund had been recorded twice. We were able to reconcile the Construction Fund
Account and the Outlay Report after taking these and other transactions into account.
SUPPORTING DOCUMENTATION FOR SUBAGREEMENTS
The grantee was not requiring supporting data such as names of personnel, hours worked,
rates of pay, in-house cost tickets, travel expense reports, vendor invoices, or other applicable
support to be provided by the consulting engineer for direct costs billed to the grantee. Such
support would enable the grantee to determine if the direct costs are appropriate and valid to
the grant project.
6-22
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During the course of our audit, the grantee established a procedure for segregating eligible
and ineligible costs and began using time and effort reports to support force account work.
Consequently, no further recommendations on these items are made at this time.
Recommmendations on the other items are made in the Recommendations section that follows.
For the most part, costs were not questioned in this report due to inadequacies in the
grantee's accounting system. We were able, through other audit techniques, to make
determinations on costs impacted by the accounting system deficiences listed above.
Recommendations
We recommend that EPA ensure that the grantee:
(1) Improve its internal controls over cash receipts by segregating the duties that are now
performed by the accountant.
(2) Make the necessary adjusting entries in order that the Construction In Progress—
Sewer Plant Account will reconcile with the Outlay Report.
(3) Require the consulting engineer to submit supporting documentation for direct charges
billed.
Grantee's Comments
The grantee agreed to implement the above recommendations.
GRANTEE'S PROCUREMENT SYSTEM
We found that the grantee had not adequately solicited bids for the construction work as
required by the EPA regulations. Title 40 CFR 35.938-4(a) provides that when the estimated
cost of Step 3 construction is $10 million or more, notice for solicitation must generally be
published in trade journals of nationwide distribution. The estimated construction cost
exceeded $10 million for this grant, but the bids were solicited only through The City Bulletin.
Although the grantee did receive at least four bids for each contract under the project,
solicitation of bids appears to be something less than nationwide as prescribed by regulations. In
addition, we noted that the grantee failed to allow 30 days between the date of first
announcement of the call for bids and the date by which the construction bids were to be
submitted. Under 40 CFR 35.938-4(b), generally not less than 30 days' notice must be given to
assure adequate time for bid preparation.
Recommendation
We recommend that the Region require the grantee to comply with the provisions of 40 CFR
35.938-4 mentioned above.
Grantee's Comments
The grantee stated that it was unaware of these requirements, but it will comply with these
provisions on future grants.
6-23
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GRANTEE'S PROPERTY MANAGEMENT SYSTEM
The grantee did not maintain a property management system that meets the requirements of
40 CFR 30.810, which in essence states that: Property records shall be maintained accurately
and provide for: a description of the property; manufacturer's serial number or other
identification numbers; acquisition date and cost; source of the property; location, use, and
condition of the property; and ultimate disposition data including sales price or the method
used to determine fair market value if the grantee compensates EPA for its share.
Although only a few items of equipment have been purchased, as part of the construction
contract the grantee will receive laboratory equipment and office furniture that will require
property accountability.
Recommendation
We recommend that EPA ensure that the grantee establishes a property management system
in accordance with 40 CFR 30.810, to account for equipment and property purchased under the
grant.
Grantee's Comments
The grantee stated that it will install a property management system that meets the criteria of
40 CFR 30.810.
ENGINEER'S ACCOUNTING SYSTEM
The engineering firm's accounting system is considered adequate to identify and accumulate
costs under the subject contract.
ENGINEER'S PROCUREMENT SYSTEM
Since there were no major procurements under the engineering subagreement, our audit of
the engineer's procurement system was limited to a cursory review. In the areas we did examine,
there were no deficiencies noted.
6-24
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APPENDIX A
SURVEY OF GRANTEE'S ACCOUNTING,
PROCUREMENT, AND PROPERTY MANAGEMENT
SYSTEMS
INTRODUCTION
This survey should be considered as a starting point to gain a quick, preliminary
understanding of the auditee's operating system. It supplements but does not replace the
normal audit review. The normal audit review must still be performed using the detailed audit
guide, a core audit program, and the auditor's judgment.
This survey should be performed in all interim audits and all final audits except where a final
audit is performed on an auditee that has no active in-house grants. The survey is intended to be
used to analyze the grantee's accounting records and systems that pertain to the EPA grant. It
should not be applied to those systems that are not affected by the grant.
Depending on the audit, some questions may be more relevant than others. The matter of
relevancy should be settled between the field auditor and his supervisor prior to completion of
this survey.
Questions that may pertain to both the grantee and the engineer are marked with a double
asterisk. Questions that are applicable to the grantee only are not coded. Questions that pertain
to the engineer only are marked by a single asterisk.
Negative responses generally will indicate a potential problem. The degree of seriousness of
each negative answer should be discussed between the field auditor and his supervisor before
further audit action is taken.
A-l
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Survey of Grantee's Management System
Yes
No
N/A
W/P Ref.
ACCOUNTING SYSTEM
** 1. Is the accounting routine set forth in accounting manuals?
** 2. Do we have copies of such manuals in our files?
** 3. Does the auditee maintain:
a. An accrual accounting system?
b. A cash basis system? If so, are adjustments made to properly reflect the
auditee's overhead and G&A submissions on the accrual basis?
** 4. Does the auditee have an internal audit staff? If so,
a. Do they render written reports on the results of their examinations?
b. Have we reviewed their reports?
c. Are they directly responsible (and do they report) to an executive officer other
than the chief accounting officer?
** 5. Are the auditee's accounting records subjected to an independent audit at least every
two years?
** 6. Has the auditee established project accounting records to record the costs applicable
to EPA work?
** 7. Are all incurred costs of a project recorded on these records on a current basis?
** 8. Does the auditee propose and accumulate costs on all projects in a consistent and
compatible manner?
** 9. Is appropriate documentation maintained to support direct charges of:
a. Personnel?
b. Consultants?
c. Fringe benefits?
d. Materials, supplies, and equipment?
e. Travel?
f. Other costs (subcontract charges, long-distance telephone calls, etc.)?
** 10. Are costs contained in the project accounting records segregated as to their
eligibility, allowability, and allocability to the respective EPA projects?
** 11. Are controls established to ensure that:
a. Grantee costs incurred and recorded before or after the established Federal
grant period are segregated and not claimed for reimbursement unless approved?
b. Engineer costs incurred and recorded before or after the established contract
period are segregated and not claimed for reimbursement unless approved?
A-2
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Survey of Grantee's Management System
Yes
Nil
N/A
W/P Ref.
** 12. Is change order work separately identified in the respective project cost records?
** 13. Are project costs summarized and reconciled with control accounts contained in
the auditee's general ledger?
** 14. Are the project cost records used as the basis for:
a. The grantee's financial status reports and "Request for Reimbursement"
vouchers?
b. The engineer's request for reimbursement?
** 15. Are frequent comparisons made between expended and budgeted costs to provide
timely indications of potential project overruns?
16. Are approvals requested for significant deviations from amounts contained in the
grant or contractual agreement?
** 17. Is there an established policy to maintain consistent treatment and control of direct
and indirect cost distributions to avoid duplicate recoveries of cost?
** 18. Are separate cost centers established to accumulate and distribute such items as:
a. Computer usage?
b. Reproduction charges?
** 19. Are administrative service charges or material handling rates based on uniform
policies and supported by the accounting records?
** 20. Has the auditee developed indirect cost rates in accordance with Federal
requirements?
* 21. Are separate offsite indirect cost rates applied to job site labor''
** 22. Are overhead expenses distributed between the various indirect cost pools in a
systematic manner?
** 23. Does the auditee post credits for rebates, returns, and allowances as a reduction to
expenditures?
Automated Data Processing (ADP)
** 1. Is the accounting system automated? (If "no," omit questions 2 through 10.)
** 2. Are the ADP aspects of the auditee's financial accounting system documented?
** 3. Are audit trails provided that permit the tracing of any transaction back to the
original source document and forward to summary records?
** 4. Are source documents controlled from the point of origin to the point of conversion
to machine-readable media?
** 5. Is the access to machine-readable computer facilities and records (tapes, cards, etc.)
controlled?
** 6. Are rejected and erroneous data controlled until corrections are made?
A-3
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Survey of Grantee's Management System
** 7. Are positive processing controls (e.g., controls which make tests against established
criteria before processing action is taken, such as tests to determine whether updates have
been made, validity checks, limit tests, compatibility tests, field completeness tests)
programmed into the automated system?
** 8. Are provisions made for:
a. Safeguarding computer programs and data files,
b. Backup or emergency operation, and
c. Reconstruction of data files in case of catastrophe?
** 9. Does the system provide controls over the distribution of reports?
** 10. Does the auditee's internal audit stafF periodically review the ADP function with
respect to:
a. Software and hardware utilization?
b. Budgeted versus actual operating costs?
Obligations
1. Does the system include accounting for obligations/encutnbrances/commitments
(legally binding agreements)?
2. Does the system limit obligations to the amount approved for each respective budget
category?
3. Are procedures established to assure that obligations reported are supported by
appropriate purchase orders, contracts, etc.?
4. Do these procedures provide for a periodic validation of recorded obligations?
5. Are obligations entered on accounting records when the legal commitment is made
(e.g., approval and issuance of subgrant or contract)?
6. Does the system require the timely liquidation of obligations?
7. Are obligations reclassified as expenditures when the goods or services are received
or constructive receipt occurs?
Cash controls
** 1. Are details of vouchers payable or accounts payable balanced monthly with general
ledger controls?
** 2. Are bank accounts reconciled monthly by employees who do not prepare or approve
checks and who do not have access to ledgers?
** 3. Are supporting data attached to and filed with vouchers?
** 4. Are supporting data controlled and cancelled to minimize the possibility of
improper or duplicate payment?
Yes
No
N/A
W/P Ref.
A-4
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Survey of Grantee's Management System
5. Are records maintained to identify and support in-kind contributions applicable to
specific projects?
6. Are excess grant funds invested for interest by the auditee where permitted?
Personnel
** 1. Does the auditee maintain an organizational chart?
** 2. Are organizational functions and duties structured to segregate as much as possible
responsibilites such as approving financial transactions, entering transactions, keeping
control records, and maintaining custody of funds and property?
** 3. Are employee time distribution records maintained to reflect the actual time spent
on each activity, including leave?
** 4. Are the individual time distribution records prepared and certified by each employee
and approved by his supervisor?
** 5. Are labor costs distributed in accordance with the time reflected on time distribution
records?
** 6. Are such labor distribution costs periodically reconciled with the actual payroll
register?
** 7. Does the auditee have written policies for overtime payments?
** 8. Are such overtime policies acceptable under the terms of the grant and applicable
Federal regulations?
** 9. Is unpaid overtime for exempt employees properly accounted for?
** 10. Are labor rates consistently applied (e.g., individual, category averages,
departmental averages)?
* 11. Are employees working under Federal grants/contracts paid at rates comparable
to the rates paid employees working on other projects?
* 12. Has the auditee established reasonable and consistent labor rates to cover the time
spent by top executives?
* 13. Are formal policies in effect with respect to bonuses, retirement plans, and/or
profit sharing?
PROCUREMENT SYSTEM
** 1. Do the procurement personnel have independent and final authority over the award
and administration of purchase contracts?
** 2. Do procurement policies and procedures require requisitioners to affirm that:
a. The items/services are really needed and not otherwise available?
b. The specifications and quality requested are actually needed?
** 3. Does the formal selection process attempt to restrict the use of sole-source contracts
and promote competitive bidding to the maximum extent possible?
Yes
No
N/A
W/P Ref.
A-5
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Survey of Grantee's Management System
Yes
No
N/A
W/P Ref.
a. Is written justification required when noncompetitive selection is used in lieu of
formal public advertising on major procurements?
b. Are all responsible bidders allowed a reasonable time in which to submit their
offers?
** 4. Wherever possible, do major procurements require the use of:
a. Source lists and catalogues?
b. Vendor files which cover:
(1) Technical and financial capabilities?
(2) Quality and delivery experience?
** 5. Is documentation maintained to support the costs or prices negotiated on all major
purchases and contracts?
** 6. Are procedures in effect to assure that required conditions stipulated in the grant
general provisions and appropriate clauses outlined in EPA regulations are incorporated
into procurement agreements?
** 7. Are procedures established to ensure that the type of purchase contract utilized is
appropriate for the procurement being undertaken and acceptable to the Federal
government?
PROPERTY MANAGEMENT SYSTEM
1. Does the auditee maintain property records for all government-furnished property
and equipment which show:
a. A description of the item?
b. The date acquired?
c. A property tag I.D. number or manufacturer's serial number?
d. The location of the property?
e. The cost or value?
f. The condition of the item?
g. The percent of Federal participation?
2. Are periodic inventories made to validate government property information?
3. Are differences between physical and book inventories analyzed, and are the
resulting adjustments approved?
4. Does the auditee follow different accounting policies with respect to major and
minor equipment expenditures?
5. Are procedures established to assure that required EPA approval is obtained for
purchases or any changes in use or disposition of grant/contract property?
A-6
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Survey of Grantee's Management System
6. Do the procedures require that EPA receive its appropriate share of any proceeds
from disposition of the property?
7. Has the auditee established procedures for classifying and recording property
improvements, major repairs, and the rearrangement of machinery and equipment?
Yes
No
N/A
W/P Ref.
A-7
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APPENDIX B
BOND CALCULATION GUIDANCE
Bond issue costs are allowable if incurred under Public Law 84—660, but are unallowable
under Public Law 92-500.
The primary guidance for eligible bond cost for construction grants is included in
Construction Grant Memorandum 70-5, dated February 13, 1970, which is quoted below:
Subject: Uniform Determination of Bond Issue Costs for Construction Grants
It has been noted that some differences exist between Regions in the method of determining
bond charges eligible for grant participation. Therefore, in order to provide for uniformity,
the following procedures are to be followed in computing such costs.
Bond costs eligible for Federal participation are those associated with the bond funds
actually needed to finance the applicant's share of the eligible costs. Bond funds used in
computing bond costs, then, will normally include the total eligible cost of the project less
any funds from Federal and State sources. If a portion of the grantee's contribution comes
from sources other than a bond issue, a further deduction would be necessary. In those cases
where State grants consist of annual payments over an extended period and it is necessary to
issue bonds to prefinance the State grant, the eligible cost for computing allowable bonding
costs need not be reduced by the amount of the ultimate State grant.
Eligible bond issue costs include those costs associated with printing, advertising, issuing,
and other costs subsequent to the bond election.
Federal and State grant amounts, plus any funds from other sources, will be computed on a
percentage basis, based on the funds expended for construction of the project. If a project has
proceeded on a reimbursable basis, bond costs based on all bonds used during the
construction are eligible, even though reimbursement is made at a later date.
After determining the percentage of Federal and state grants to be considered (plus any local
funds from sources other than bonds), the eligible bond issue costs are determined by use of the
formula explained in Example 1.
Examples 2 and 3 cover some of the problem areas which may arise. In addition, the
following comments should clarify most of the situations encountered.
COMMENTS ON SPECIAL SITUATIONS
1. If the bond issue is increased during the project period, all bonds issued and all related
eligible costs are used in the bond formula.
2. If other Federal agencies participate in the eligible cost, the percentage reduction from
"K" is increased as shown in Example 1. A HUD grant is usually applicable to the ineligible
portion of the project; in such cases, this step is disregarded.
3. Where there is an increase in the Federal grant subsequent to the bond transaction and
the grantee is legally bound to pay bond costs relative to the original grant amount, no
adjustment of the K factor is required. The same applies to state participation. In essence, the K
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factor should be based on funds available (Federal, state, and other) at the time the grantee
negotiated for the bonds.
4. Studies for determining water or sewage rates are sometimes included in reported legal or
bonding cost and not identified. Such studies are considered general administration of the
municipality and thus not eligible for Federal grant participation.
5. Immaterial differences in the bond cost calculation should be disregarded.
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BOND COST CALCULATIONS
EXAMPLE #1 - NORMAL BOND CALCULATION
Bond Formula
S
F =
KC
F = Eligible bond issue costs to be calculated
S = Total eligible project costs, exclusive of bond issue costs—$180,029
K = 100% less percentage of Federal grants, state grants, other
financing, and grantee cash. For this example, K=45% (100%-(30+15 + 10).
B = Amount of bond issue—$192,000
C = Total bond issue costs—$4,500
Example
S
F =
_
F =
KC
$180.029
$192.000 _i
45% x $4,500
$180.029
~ $192,000
$2,025
r-, $180,029
r =
NOTE: In rare instances, an amount slightly greater than C, allowable bond costs, will be
obtained for F. In such cases, use C.
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BOND COST CALCULATIONS
EXAMPLE #2 - APPLICATION OF GRANTEE CASH TO INELIGIBLE COSTS
S = $81,145
C = $972
B = $60,000
F = Eligible bond issue costs to be calculated
Determination of Ineligible Costs
Total Project Costs $82,145
Eligible Project Costs $81,145
Ineligible Project Costs $1,000
Source of Funds
Federal Grant 55%
Grantee Cash $5,000
Determination of Percentage of Grantee Cash
$5,000 - $1,000 (Ineligible) = $4,000 = cash available for eligible project costs*
3> 4,UU(J A nr» c c
$8U45 = 4'9% °f S
Computation of K
K = (100% less 55% grant less 4.9% grantee cash) = 40.1%
Computation of F
S
F =
KC
$81.145
$60.000 _i
.401 x $972
F = $531
* Local funding should be applied to the ineligible project costs first, and the remainder
should be used to reduce K.
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BOND COST CALCULATIONS
EXAMPLE #3 - SIGNIFICANCE OF SOURCE OF FUNDS
Computation of S
Construction Cost $120,220
Technical Service 13,310
Administrative 600
Bond Cost (Omitted)
S = $134.130
Source of Funds Percent of
Amount Total
Federal Grant $44,260 33
Bond issue 75,000 56
$119,260
Balance unaccounted for* 14,870 11
S = $134.130 100
Computation of K
K = 100% less 33% (Federal) less 11% (local) = 56%
Computation of C
Legal Costs $1,500
Printing Costs 500
Advertising Costs 187
C = $2.187
Computation of F
„ $134.130
F = $75.000 _t
$2,187 x .56
F = $2.227
Since F is greater than C, use $2,187 as eligible bond cost.
The balance unaccounted for is assumed to come from local funds unless the funds were
obtained by means of a loan, in which case the percentage obtained by loan would not be
deducted from the K factor. In the example above, if the $14,870 had been obtained by loan, K
would be 100% less 33%, or 67%.
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APPENDIX C
SUPPLEMENTAL AUDIT PROCEDURES FOR RELOCATION COSTS
APPLICATION OF AUDIT PROCEDURES
These audit procedures supplement the "Audit Guide for Construction Grant Program."
EPA Divisional Assistant Inspectors General for Audits will authorize independent public
accountants and EPA auditors to use these supplemental procedures whenever a construction
project includes relocation costs. The procedures must be followed explicitly because they are
the audit application of EPA regulations, 40 CFR, Part 4, that pertain to payments made to
displaced persons.
People who are displaced or whose realty is acquired after January 1, 1971, due to an EPA-
assisted project are entitled to compensation as provided by the Uniform Relocation Assistance
and Real Property Acquisition Policies Act of 1970. Auditors shall use the following checklist
when examining relocation costs. Applications for benefits must be filed within 18 months from
the date the displaced person moves from the acquired real property or the date of final payment
for such property, whichever is later, unless this time period is extended by the EPA
Administrator.
ALLOWABLE COSTS
A. Dwelling and Personal Property
1. Transportation of people and personal property to a replacement site, not to exceed 50
miles unless justified.
2. Packing, crating, unpacking, and uncrating of personal property, and the cost of
advertising for such services.
3. Storage of personal property, generally up to 12 months.
4. Insurance premiums covering loss or damage of personal property in transit or storage.
5. Lost, stolen, and damaged property; removal, reinstallation, and modification of
property.
6. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move unless approved by the EPA Administrator.
7. In lieu of actual reasonable moving and related expense, payments to each occupant of a
dwelling of (a) a $200 dislocation allowance and (b) a moving expense allowance not to exceed
$300 based on state highway department or Federal Highway Administration allowance
schedules.
8. A replacement housing payment not to exceed $15,000, provided the displaced owner-
occupant actually owned and occupied the dwelling not less than 180 days prior to initiation of
negotiations, and the displaced owner-occupant purchases and occupies a replacement
dwelling. The $15,000 allowance is the lower of (a) $15,000 less payment for any increased
mortgages, interest costs, or incidental closing costs, (b) the difference between the acquisition
price of the acquired dwelling and the estimated cost of a replacement dwelling, or (c) the
difference between the acquisition price of the acquired dwelling and the actual price of the
replacement dwelling.
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9. A replacement housing payment not to exceed $4,000 is payable to a displaced tenant or a
displaced owner-occupant of a dwelling for less than 180 days, provided he occupied the
dwelling for not less than 90 days and is not eligible for the $15,000 replacement housing
allowance. A displaced owner-occupant is entitled to the $4,000 payment, rather than the
$15,000 payment, if he elects to rent, rather than buy, a replacement dwelling.
Computation of the $4,000 payment is as follows:
a. Displaced tenant. 48 times the reasonable monthly rent for a comparable
replacement dwelling less 48 times the average month's rent paid by the displaced tenant for the
three months preceding the initiation of negotiation.
b. Displaced tenant by displacing agency. 48 times the reasonable monthly rent for a
comparable replacement dwelling less 48 times the monthly economic rent, but no more than
would be received under the $15,000 payment provision.
c. Displaced homeowners. 48 times the reasonable monthly rent for a comparable
replacement dwelling less 48 times the monthly economic rent, but no more than would be
received under the $ 15,000 payment provision.
In no event shall the rental payment, plus the monthly average rental or economic rent,
exceed the rental of the replacement dwelling.
Monthly economic rent is either the result of an analysis of the available private rental
market, an analysis of at least three comparable replacement dwellings available on the private
market, or any method approved by the EPA Administrator.
10. Should a tenant elect to purchase a house within one year from displacement, the
replacement housing payment shall be the down payment, plus incident settlement costs, using
a conventional loan, and shall include points or a loan service fee. The maximum payment is
$4,000; if more than $2,000, the tenant must match the excess dollar for dollar up to the $4,000
maximum Federal payment.
11. The rules for determining the cost of a replacement dwelling are the same as those used
to set monthly economic rent (Item 9).
12. Land values associated with the replacement housing payment shall be determined as
follows:
a. A dwelling located on a tract typical for the area—probable selling price of a
comparable replacement dwelling less the acquisition price of the acquired property.
b. A dwelling located on a tract larger than typical for the area—probable selling price of
a comparable replacement dwelling on a typical tract less the estimated value of the dwelling on
a tract typical for the area.
c. A dwelling located on a tract having a fair market value higher than residential use—
probable selling price of a comparable replacement dwelling on a typical tract less the estimated
value of the dwelling assuming it was located on a tract typical for the area.
13. No part of a replacement housing payment may be made for any portion of a dwelling
used in connection with a business or farm.
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14. Each individual or family occupying a multiple dwelling is entitled to separately
calculated replacement housing payments.
15. Displaced homeowners of a multifamily building are entitled to payment based on the
cost of a comparable one-family unit in a multifamily or single-family structure.
B. Business or Farm
1. Packing, unpacking, crating, and uncrating of personal property, the advertising for such
services, and storage of personal property (generally up to 12 months).
2. Insurance premiums covering loss or damage while in transit or storage.
3. Lost, stolen, and damaged property; removal, reinstallation, and modification of personal
property.
4. Movement of personal property by the displaced person, not to exceed the cost of a
commercial move unless approved by the EPA Administrator.
5. Should the cost of moving the property be disproportionate to its value, reimbursement
will be the difference between liquidated value of the property to be moved and the replacement
cost at the relocated site. This is applicable to junkyards, stockpiled sand, gravel, minerals,
metals, etc.
6. Should the cost of moving outdoor advertising displays equal or exceed their in-place
value, such displays may be acquired along with the realty, unless prohibited by state law.
7. The expenses of searching for a replacement farm or business (limited to $500 unless
approved by the EPA Administrator):
a. Travel cost.
b. Extra cost of meals and lodging.
c. Time spent in search at the displaced person's salary rate, not to exceed $ 10 hourly.
d. Necessary brokers' fees to locate a replacement business or farm if approved by the
displacing agency.
8. Actual direct loss of tangible personal property as a result of relocation:
a. Business or farm operation discontinued—fair market value of personal property for
continued use at the displaced location, or estimated cost to move same up to 50 miles,
whichever is less.
b. Personal property abandoned—reimbursement same as 8a above.
The cost of removal of personal property will not be offset against any payments due
displaced persons. The displaced person must make a bona fide effort to sell property not
moved.
9. A displaced person in business may elect, in lieu of reimbursement for moving and related
expenses, a fixed amount equal to the average annual net income of the business if that business:
substantially contributes to the displaced person's income and cannot be relocated without
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substantial loss of income; is not part of a firm engaged in similar business having one other
location; is not being acquired by a state or Federal agency; and is not an outdoor advertising
business.
10. A displaced person in farming may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net earnings. Should the
acquisition be partial, payment can be made only if the remaining property is not an economic
unit.
11. A displaced nonprofit organization may elect, in lieu of reimbursement for moving and
related expenses, a fixed amount equal to the average annual net income, provided (a) the
organization cannot be relocated without a substantial loss in existing patronage and (b) the
organization is not part of a commercial enterprise having one other location, engaged in
similar activity, which is not in itself being displaced.
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APPENDIX D
CRITERIA FOR ELIGIBILITY AND ALLOWABILITY OF SELECTED
ITEMS OF COSTS
INDIRECT COSTS
Indirect costs are those incurred for a common or joint purpose, benefiting more than one
project or cost objective, and not specifically identifiable to the particular project or cost
objective benefited. Indirect costs consist of items of a general overhead nature such as office
space, utilities, and telephone. The costs are allowable only if determined on the basis of a
negotiated indirect cost agreement and incorporated in the grant agreement. (See 40 CFR
30.715-2.)
TRAVEL COSTS
Grantee travel costs—allowable travel costs include travel considered necessary and directly
related to accomplishing project objectives. Travel not directly related to construction and/or
startup of the facility, including trips to professional meetings, symposia, lectures, etc., is not
allowable as a direct charge to the project. Travel not directly related to a specific project may,
however, be recovered under an indirect cost agreement (FMC 74-4).
Consulting engineer travel costs—allowable travel costs include travel considered necessary
and project related, including on-site travel costs. Costs of relocation of employees and their
families may be considered allowable when such travel is justified and approved by the grantee.
The cost of transportation between living quarters and the construction site is normally
unallowable. In unusual circumstances, where job sites are located in isolated areas and living
quarters are not available within 30 miles, travel costs between living quarters and the job site
are considered allowable (FPR l-15.2andFPR 1-15.4).
BOND COSTS
All costs under PL 92-500 grants associated with the approval, preparation, issuance, and
sale of bonds (including bond counsel and underwriters' fees) are ineligible for grant
participation. Interest on bonds or any other form of indebtedness is unallowable (FMC 74—4).
LIQUIDATED DAMAGES
Monies received by grantees in the form of liquidated damages shall have no effect on the
determination of allowable costs of grant projects. However, any additional costs—
construction, engineering, legal, or administrative—generated because of a contractor's lack of
performance should be covered by the liquidated damages received. Thus, any such increase in
cost as a result of lack of performance is unallowable for participation even if the grantee elects
not to exercise its right to recover liquidated damages.
BID BOND FORFEITURE
All bid bond forfeitures should be treated as a reduction to project construction costs.
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STUDIES, REPORTS, AND FEDERAL REQUIREMENTS
Rate Studies
Rate studies are eligible if required for the establishment of user charge or industrial cost
recovery systems in order to comply with 40 CFR 35.925-11. Such studies require prior
approval either in the grant agreement or an amendment thereto. Allowable costs may include
legal, CPA, and engineering fees related to the studies. (In order to avoid double payment, care
must be exercised to ensure that such work is not incident to a general contractual obligation.)
Financial Reports and Studies
To the extent that such reports constitute "rate studies" for user charges and/or industrial
cost recovery procedures, the costs are allowable, provided that such studies are approved in
advance by the Regional Office and that the results of such studies are acceptable to EPA.
Financial reports which constitute studies of, for example, the local tax base or tax structure, to
determine the financial capabilities of the applicant or the financial feasibility of the proposed
undertaking, are similarly allowable. The costs of all other financial reports and studies should
generally be considered unallowable because such studies constitute a normal function of
government.
In this regard, the Regional Office should adhere to a strict interpretation of the term
"studies." Generally, "studies" refers to preliminary reviews, examinations, analyses, etc. The
interpretation must not be extended to include preparing procedures, designing implementation
schemes, drafting statutes or regulations, delineating boundaries relating to finances, issuing
bonds, adjusting tax rates, establishing assessment districts, or performing other activities
which are a normal function of government and as such are unallowable.
Establishment of Special Assessment Districts
The "mechanics" of establishing special assessment districts developed, for example, on the
basis of rate studies, are a normal function of government, and as such their associated costs are
unallowable. Included in this restriction are legal, administrative, and engineering costs
associated with activities such as (1) drafting and reviewing statutes/ordinances, (2) preparing
regulations, (3) delineating district boundaries, and (4) holding elections.
This policy extends equally to the establishment of any "special districts" such as election,
service, or rate districts (including Regional Authorities) related to the grant project.
Public Liaison Services
Such services are generally unallowable since they constitute a type of public information
service and as such are not directly related to or necessary for the construction of the treatment
works.
Public Participation
EPA regulation 40 CFR 35.903 states that "The Act requires EPA and the States to provide
for, encourage and assist public participation in the Construction Grants Program." Public
participation in the facility planning process has been required since February 11, 1974 (40
CFR 35.917-5). Effective February 16, 1979, public advice is also required during the adoption
process for the user charge and industrial cost recovery systems (40 CFR 35.929-2(e) and
35.928-l(h)). For grants awarded after September 30, 1979, the Step 1 grant application must
include a public participation program (40 CFR 35.920-3).
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Grantees' reasonable costs of public participation which are identified in a public
participation work plan, or which are otherwise approved by EPA, are allowable (40 CFR
35.94CM(t)). Although all costs of citizens groups or other interested parties are unallowable,
consultant engineering services (if in accordance with the subagreement between the grantee
and its engineer) and the costs of a task force or advisory committee set up by the grantee to
assist in the planning process may be allowable.
Assistance with State and Federal Regulations
The cost of assistance associated with addressing state and Federal regulations and
procedures which are basic to the functions of general government (such as preparation of
applications and related documents or obtaining state construction and discharge permits) are
unallowable. Costs growing out of meeting specific Federal statutory requirements such as
public hearings and other activities related to the user charge study, facilities planning,
National Environmental Policy Act (NEPA), Uniform Relocation Assistance and Real
Property Acquisition Policies Act, etc., are allowable.
If such costs entail assistance which is readily available through Federal or state offices, such
as interpretation of regulations or explanation of grant procedures, they should be disallowed.
(In order to avoid double payment, care must be exercised to assure that such work is not
incident to a general contractual obligation.)
Redesign/Replanning Costs Resulting from Changes in Federal Requirements
In those cases in which an applicant's completed or partially completed planning and/or
designs are rendered invalid or unacceptable by changes in Federal requirements, both the
original cost plus the redesign or replanning costs are allowable. The Regional Office must
assure itself that the planning and/or design thus invalidated was undertaken in good faith by
the applicant and was not the result of a disregard for existing Federal directives by either the
applicant or his agent.
Costs of Implementing the Uniform Relocation Assistance and Real Property Acquisition Policies Act
of 1970 (PL 91-646)
Four basic categories of costs associated with this Act may be considered allowable:
(1) Moving and related expenses;
(2) Replacement housing;
(3) Relocation assistance advisory services (entailing direct services of the grantee in
assisting the displaced person(s)); and
(4) Acquisition of real property.
Documented allowable costs from these categories incurred on or after July 1, 1972, will be
treated as other allowable project costs and reimbursed at the same percentage rate. In the case
of costs resulting from acquisition or displacement occurring before July 1, 1972, EPA shall pay
the full amount of the first $25,000 of such costs for each displaced person. Allowable costs
should be determined in accordance with 40 CFR 4 and guidelines w.hich will be issued
pursuant thereto. (See Appendix C of this guide for audit procedures.)
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Field Surveys to Identify Cultural Resources
Reasonable costs incident to field surveys to identify historical, architectural, archeological,
and cultural resources in the primary impact area of grant projects are allowable. Allowable
costs must be determined on a case-by-case basis and may include the cost of on-site
inspections, review of pertinent documents, photographic reconnaissance, services of
archeologists or historians, etc.
Such costs should receive prior approval and delineation by the EPA Regional Office. Survey
costs associated solely with the examination of the National Register of Historic Places are
unallowable. EPA may participate in the cost of intensive surveys (e.g., "digging") only when a
sufficient amount of information exists to indicate that there is a reasonably high probability of
discovering important cultural resources.
See PRM 75-27, dated November 2, 1975, for additional guidance on this subject.
Industrial Planning
Step 1 related costs of industrial planning conducted and paid for by an industry whose
wastes will be treated in a municipal system are not allowable. (See 40 CFR 35.925-15.)
Patent Royalties
During the construction of waste treatment works, royalties paid for the use of or for rights
in patents may be allowable costs. Costs incurred to make related studies and determinations
required by EPA are also allowable. These costs should receive prior approval by the EPA
Project Officer.
See PRM 79-2, dated November 13, 1978, for additional guidance on this subject.
FACILITIES' SITE-RELATED COSTS
Site Acquisition Versus Site Preparation Costs
All costs associated either directly or indirectly with the acquisition of any land used for or
incidental to the construction of treatment plants, lagoons, force mains, gravity sewers, outfall
lines, appurtenant piping and structures, and pumping stations—whether by purchase, rental,
lease, or easement—are ineligible. Similarly, all legal, realty, engineering, and grantee costs
associated with such ineligible acquisition are unallowable, as are the costs of easements, rights-
of-way, non-construction-related surveying, plat preparation, meetings, etc.
The cost of land used as an integral part of the treatment process, such as spray irrigation
sites, may be eligible if approved and in accordance with pertinent regulations (40 CFR 940-3)
and/or guidelines (PRMs 75-25, dated July 18, 1975; 77-5, dated December 15, 1976; and
78-4, dated February 14, 1978). Legal, administrative, and engineering costs associated with
the acquisition of grant-eligible land are allowable for grant participation.
Costs associated with the preparation of the treatment works site (including appurtenant
features) before, during, and (to the extent agreed upon in the grant agreement or amendment
thereto) after construction are generally eligible. These costs include such items as: grade and
construction-staking surveys; surveying for alignment and slope; and preparation of working
drawings and plans dealing with site preparation, locations, grades, slopes, distances, depths,
and alignments. Also eligible are costs such as fine-grading, seeding, and protective trees and
shrubs.
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Costs related to reasonable site screening or other aesthetic purposes are also allowable.
Criteria for participating in aesthetics-related work include: support expressed in NEPA-
related studies, approved facility plans, and necessary screening of adjacent properties (when
the facility is in constant public view).
Certificate as to Title to Project Site
Except in the case of grant-eligible land, legal costs associated with certifying as to the
adequacy of the grantee's interest in the project site should be considered a normal function of
government incident to the project, and as such they are unallowable.
Acquisition of Privately or Publicly Constructed Waste Treatment Facilities
Costs incurred by a grantee associated with the acquisition of privately or publicly owned
waste treatment facilities are eligible if the cost is reasonable and the acquisition was determined
necessary by the Regional Administrator in accordance with guidance issued by the
Administrator and was approved in the grant agreement (40 CFR 35.940-3).
Individual Systems
After October 1, 1978, the cost of constructing a privately owned alternate wastewater
treatment works serving one or more principal residences or small commerical establishments
which are not part of a conventional treatment works may be eligible (40 CFR 35.918).
Demolition of Existing Structures
Demolition of existing structures constitutes an allowable cost provided that the structures
are on the facility site (including rights-of-way for the eligible sewer lines) and that construction
cannot be undertaken without such demolition. Offsite demolition is unallowable. Aesthetics-
related demolition is allowable only if it conforms to the criteria relating to the allowability of
site preparation outlined above.
If demolition of existing structures is required on a site not previously owned by the grantee,
the grantee must address such demolition in the cost-effectiveness analysis and demonstrate to
the satisfaction of the Regional Office that in choosing the site appropriate consideration was
given to the cost of demolition.
Removal, Relocation, and/or Replacement of Utilities
Costs associated with the removal, relocation, and/or replacement of utilities (water,
electricity, etc.) are allowable when such activity is incident to and necessary for the
construction of the eligible facility. However, participation in the cost of replacing existing
utilities with utilities having a greater capacity than those originally in place can only be allowed
if mandated by local, state, or Federal codes, ordinances, or statutes. If a mandate for greater
capacity does not exist, any additional cost must be borne by the grantee.
The provision of new or increased utility service when required for the facility (e.g.,
construction of a new facility or increased capacity) being constructed is an allowable cost
provided that the grantee (utility customer) would ordinarily be required to pay for such
installation.
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Restoration of Streets and Rights-of-Way
The cost of restoring streets and/or rights-of-way to their original condition is an allowable
cost if the need for such restoration results directly from the construction of the eligible project.
Allowable restoration may include, for example: refilling and patching of street and roadway
surfaces (generally limited to the width of the trench), fine-grading and reseeding of off-street
rights-of-way, reasonable tree plantings, and restoration of sidewalks.
EQUIPMENT, TOOLS, PARTS, AND SUPPLIES
In accordance with 40 CFR 30.810, the grantee is required to maintain property
accountability on all equipment, tools, parts, and supplies purchased under the project.
Mobile Equipment
Generally, such equipment is allowable if it is identified by the grantee, approved in advance
of purchase by the Regional Office, and directly necessary for the operation and/or
maintenance of the overall wastewater treatment facility. Such equipment must be necessary for
the transmission of wastewater or sludge or for the maintenance of plant grounds and/or
equipment. Allowable items include but are not limited to:
a. Portable standby generators.
b. Large portable emergency pumps to provide "pump-around" capability in the event
of pump station failure or pipeline breaks.
c. Sludge tanks and trailers and other necessary transport and handling equipment in
those cases where the location of the ultimate sludge disposal site requires such equipment.
However, cars and trucks are unallowable except for specialized sludge-handling or transport
equipment.
d. Grounds and building maintenance apparatus. Such apparatus may include, for
example, mowers and snow removal equipment (in certain geographic areas). Regional Offices
may use such criteria as cost effectiveness, potential for abuse, and frequency of use in
considering allowability. Requests for participation based upon less than 100-percent use
should be agreed to only in special situations and prorated accordingly.
Office Equipment and Furnishings
Such items as identified by the grantee and approved in advance by the Regional Office, when
installed or located at the treatment works and necessary to the administrative and/or technical
(including training and meetings) functioning of the works, may be allowable. In larger
facilities, allowability may be extended to reasonable special-purpose rooms and equipment
related to the function of the facility. There may well be instances in which the Regional Office
will need to exercise judgment, as in the case of "luxurious furnishings," televisions, etc.
Shop Furnishings
Reasonable furnishings for shop areas such as shelves, bins, and workbenches are allowable
costs.
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Laboratory Equipment and Supplies
Generally, laboratory items are allowable if identified by the grantee and approved prior to
procurement by the Regional Office as necessary to conduct tests required for plant operation.
In addition, the cost of a reasonable inventory of chemicals and supplies necessary to start
operation of the plant is allowable. An EPA publication, "Estimating Laboratory Needs for
Municipal Wastewater Treatment Facilities," discusses equipment needed for various size
plants.
Safety Equipment
Based upon the specific needs of individual facilities, necessary and reasonable safety
equipment is an allowable cost. Generally, such equipment should be delineated in the
operation and maintenance manual; the approval of that document may constitute the basis for
EPA's participation. NOTE: Such equipment should meet applicable Federal, state, local, and
industry safety regulations and standards.
Tools
Allowable tools are only those which are specified as special-purpose tools necessary for the
repair and adjustment of specific process components by the equipment
suppliers/manufacturers or approved by the Regional Office. All other tools are unallowable.
Replacement Parts
Replacement parts identified and approved in advance by the Regional Office as necessary to
assure uninterrupted operation of the facility may be included as allowable costs. Allowable
replacement items are only those which constitute parts of major systems components and
which are: (1) not immediately available and/or whose procurement involves an extended "lead
time," (2) identified as critical by the equipment supplier(s), or (3) critical but not included in
the inventory provided by the equipment supplier(s). In those instances where adequate
"backup" components are built into the system, a reduction in replacement parts should be
made.
Items of routine "programmed" maintenance such as ordinary piping, air filters, couplings,
hoses, and bolts are unallowable. See the EPA Technical Bulletin, "Design Criteria for
Mechanical, Electric and Fluid System and Component Reliability," for additional discussion.
Collection-System Maintenance Equipment
EPA will participate in the cost of collection-system maintenance when the grantee
demonstrates that the equipment:
(1) Is needed frequently,
(2) Is necessary to preclude the discharge or bypassing of raw sewage; or
(3) Is necessary to provide for the health, safety, and welfare of the citizens.
Such equipment must be reasonable and approved by the Regional Office.
EPA participation in the cost of such equipment purchased in connection with a
construction grant shall be based upon a proration of the portion of the collection system in
which EPA participates to the total system. Thus, if EPA participates in 65 percent of the
D-7
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grantee's total collection system, the allowable costs shall constitute 65 percent of the cost of
such equipment purchases pursuant to the grant agreement. Generally, the proration should be
based upon the relative lengths of the new to the total system rather than cost or size.
Project Inspection
Costs associated with technical inspections of the eligible project before and during
construction (including time extensions approved by change order) are allowable. Such costs
must be clearly documented, and to avoid double payment, the work must not be incident to a
general contractual obligation.
Ground-Water-Monitoring Facilities
Costs associated with the construction of ground-water-monitoring equipment and facilities
may be considered allowable only in those cases in which, as a direct result of project
construction, the possibility of ground-water deterioration, depletion, or modification exists.
Allowability may not be extended to the operation, surveillance, and/or analyses associated
with these facilities. Such facilities require the prior approval of the Regional Office.
Biological "Seeding"
Under certain conditions (climatic, geographic, nature of wastes, etc.), reasonable costs
associated with the purchase and/or transportation of biological seeding materials required for
initiating (or expediting the initiation of) the treatment process operation are allowable.
SUBAGREEMENT COSTS
The following requirements are mandated under PL 84-660, PL 92-500, and EPA
regulations 40 CFR 30.800 and 30.805.
Service Charges
Service charges are defined as any supplemental charges added to other direct costs
(nonsalary) which are claimed on an actual cost basis. Regardless of contract terms, the actual
cost of service charges must be supported by accounting records. If the service charges are not
supported or if the actual cost is less than the amount claimed, the total or the difference is
unallowable for Federal participation. This is in accordance with the ASCE manual, which
states that the service charge is for expenses to be reimbursed by the client.
Fringe Benefits
Regardless of contract terms, the actual cost of fringe benefits must be supported by
accounting records when they are claimed as a direct charge. If the charges are not supported or
if the actual cost is less than the amount claimed, the total or the difference is unallowable for
Federal participation. Where the fringe benefits are claimed as a direct charge and also included
in the multiplier, the duplicate direct charge is unallowable for Federal participation.
Labor Charges and Related Costs
Regardless of contract terms, where charges have been made to the grant and there was no
cost incurred, the charges should be questioned. Labor charges and related costs for straight
time or overtime hours which are billed but for which cost has not been incurred will be
unallowable for Federal participation. (Compensatory time will be considered in determining
actual labor costs incurred. However, compensatory time is allowable only if it is incurred in
D-8
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APPENDIX E
CONSULTING ENGINEER SUBAGREEMENTS—RECORDS
SUBJECT TO AUDIT
Method of Compensation (1)
Type of Records
(2)
Percent of
Construction Cost
(ASCE Curve)
(3)
Salary
Cost Plus
Multiplier
(4)
Time and
Materials
(Per Diem)
(5)
Cost Plus
Fixed
Fee
(6)
Firm
Fixed
Price
(7)
Yes
Yes
No
Yes
Yes
Yes
Yes
No
No
Category A: Technical
and professional
project records Yes Yes
Category B: Financial
records of direct
costs for the
services performed No Yes
Category C: Financial
records pertaining to
profit and overhead No No
Notes:
(1) An engineering subagreement may provide for more than one method of
compensation based on the different services provided. Records under each method of
compensation under a subagreement are subject to audit individually in accordance with the
guidance provided in Appendix D to Subpart E of 40 CFR 35, paragraph A.2.d. In addition,
under agreements covering both grant-eligible and ineligible work, access to records will be
exercised to the extent necessary to allocate contract work or costs between work eligible for
Title II construction grant assistance and work or costs which are ineligible (Appendix D,
paragraph A.2.c).
(2) Where there is an indication of fraud, gross abuse, or corrupt practices, EPA will
exercise its right of access to records in all categories (Appendix D, paragraph A.2.b).
(3) Agreements based upon a percentage of construction cost. Category B and C records
will not be audited. However, terms of the agreement, including the total amount of
compensation, will be evaluated for fairness, reasonableness, and consistency with historical
and advisory guidelines in general use and acceptable locally (such as ASCE Manual 45 or other
analyses or data relied upon or utilized by the contracting parties in negotiation of the
agreement). Such evaluation shall also consider comparable contracts for which EPA grants
have been awarded (Appendix D, paragraph A.2.b(l)).
Total allowable fees under percentage-of-construction-cost type contracts are conditioned by
the following (Appendix D, paragraph B.5):
(a) Applying the accepted fee rate to the low bid where design work (Step 2) is
essentially continuous from start of design to bid opening (Step 3) and bid opening occurs
within a year of design completion;
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(b) Where design work is not continuous from start of design to bidding or one
year or more elapses between substantial Step 2 completion and bid opening, the total allowable
contract costs may not exceed the lower of:
1. The consulting engineer's construction cost estimate provided at the time of
such substantial completion plus an escalation of this construction cost estimate of up to five
percent, but not to exceed the consulting engineer's total compensation based on the low bid for
construction; or
2. The consulting engineer's construction cost estimate provided at the time of
such substantial completion plus a consulting engineer's compensation escalation not to exceed
either $50,000 or the consulting engineer's total compensation based upon the low bid for
construction.
(c) Where the low bid for construction would have resulted in a higher
consulting engineer's total compensation than provided in paragraph B.S.b of Appendix D, the
Regional Administrator may also consider a reasonable additional compensation for updating
the plans and specifications, revising cost estimates, or similar services.
(4) Agreements based upon salary cost times a multiplier, including profit. Category A
and B records will be audited. Category C records will not be audited. However, terms of the
agreement, including the total amount of compensation and the multiplier, will be evaluated for
fairness, reasonableness, and consistency with historical and advisory guidelines in general use
and acceptable locally (such as ASCE Manual 45 or other analyses or data relied upon or
utilized by the contracting parties in negotiation of the agreement). Such evaluation shall also
consider comparable contracts for which EPA grants have been awarded. Items of overhead or
other indirect costs will only be audited to the extent necessary to assure that types of costs
found both in overhead and reimbursable direct costs, if any, are properly charged (Appendix
D, paragraph A.2.b(2)).
(5) Time and materials (per diem) agreements. Category C records will not be audited.
Category A and B records will be audited to the extent necessary to determine that hours
claimed and classes or personnel used were properly supported. The per diem rates will be
evaluated in accordance with appropriate portions of paragraphs A.2.b(l) and (2) of Appendix
D. (See Appendix D, paragraph A.2.b(3).)
(6) Cost plus a fixed fee (profit). All direct costs and overhead and other indirect costs
claimed will be audited to determine that they are reasonable, allowable, and properly
supported by the consulting engineer's records. The amount of fixed fee will not be questioned
unless the total compensation appears unreasonable when evaluated in accordance with
paragraphs A.2.b(l) and (2) of Appendix D. (See Appendix D, paragraph A.2.b(4).)
(7) Firm-fixed-price (lump sum) contracts. Category B and C records will not be audited.
The contract amount will not be questioned unless the total compensation appears
unreasonable when evaluated in accordance with appropriate portions of paragraphs A.2.b(l)
and (2) of Appendix D. (See Appendix D, paragraph A.2.b(5).)
E-2
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APPENDIX F
CONSULTING ENGINEER SUBAGREEMENTS—ALLOWABLE
METHODS OF COMPENSATION
Date of Grant Method of Compensation
Award
Percent of Salary Time and Cost Plus Firm
Construction Cost Cost Plus Materials Fixed Fixed
(ASCE Curve) Multiplier (Per Diem) Fee Price
Prior to July 1, 1975—a
grant steps Yes Yes Yes Yes Yes
July 1, 1975, through
March 1, 1976
Step 1 No (1) No (1) Yes Yes Yes
Step 2 No (2) No (2) Yes Yes Yes
Step 3 Yes (3) Yes (3) Yes Yes Yes
After March 1, 1976
Step 1 No (1) No (1) Yes (5) Yes Yes
Step 2 No (2) No (2) Yes (5) Yes Yes
Step 3 No (4) No (4) Yes (5) Yes Yes
Notes:
(1) This method of compensation is unallowable unless "work was initiated" before July
1,1975 (Appendix D, paragraph B.I). The definition of "work initiated" for Step 1 is as follows
(40 CFR 35.905^):
(a) Before November 1, 1974: the execution of a subagreement for any element of
Step 1 project work; issuance of a notice to proceed; or a work order for Step 1 work.
(b) After October 31, 1974: the date of approval of a plan of study.
In addition, this method of compensation will not be questioned when reimbursed in
conjunction with a Step 3 award for work within the scope of Step 2 work "contracted for"
prior to July 1, 1975 (Appendix D, paragraph B.2.). Note the words "contracted for" as
opposed to "grant award." In this context, "contracted for" relates to the engineering
subagreement.
(2) This method of compensation is unallowable unless "work was initiated" before July
1, 1975. The definition of "work initiated" for Step 2 is as follows:
(a) Before November 1, 1974: the execution of a subagreement for plans and
specifications; issuance of a notice to proceed; or a work order for Step 2 work.
(b) After October 31, 1974: the date of approval of facilities plans.
In addition, this method of compensation will not be questioned when reimbursed in
conjunction with a Step 3 award for work within the scope of Step 1 and 2 work contracted for
prior to July 1,1975.
F-l
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(3) Although Appendix D is silent on Step 3 grants awarded during this period, the
Headquarters Grants Administration Division (GAD), in a memorandum to Region 9 dated
August 18, 1976, provided the following guidance:
Neither PG 53 nor Appendix D requires the renegotiation of Step 3 engineering agreements,
even if they are of the types prohibited under 35.937-1.
While EPA does not require this renegotiation, there is nothing to prevent a grantee or state
from requiring renegotiation if it desires to do so.
(4) Multiplier agreements are not allowable except for subagreements executed prior to
March 1, 1976, which cover more than one step (40 CFR 35.937-11). However, such
agreements are subject to the requirement that the subagreements may have to be renegotiated
to either the cost-plus-fixed-fee or firm-fixed-price method of compensation prior to the grant
award action for the next step (Appendix D, paragraph B.6). Headquarters GAD's
memorandum to Region 9 dated August 18, 1976, provided further guidance in this regard:
Under the provisions of 35.937-11, Appendix D is applicable to all existing engineering
agreements for which grants are awarded on or after March 1, 1976. Therefore, for Step 3
grants awarded after March 1, renegotiation of such contracts is not required (presuming of
course that the Step 2 work was initiated before June 30, 1975).
The definition of "initiation of work" is provided in Note 2 above.
(5) 40 CFR 35.937-l(e) provides certain restrictions on the use of time and material
subagreements when the amount is expected to exceed $ 10,000.
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APPENDIX G
CONSULTING ENGINEER SUBAGREEMENTS
SUBJECT TO 40 CFR 35.937-5, -6, AND -7
(NEGOTIATION AND SUBMISSION OF EPA FORM 5700-41)
Date of Grant Award Applicability
Prior to March 1, 1976 No
March 1, 1976, to June 30, 1976 Yes (1) and (2)
After June 30, 1976 Yes (1)
Notes:
(1) Subagreements executed prior to March 1, 1976, which cover more than one step
may be exempted until the next step is awarded (40 CFR 35.937-11). The exemption does not
apply to Step 2 work initiated after June 30, 1975 (40 CFR 35, Subpart E, Appendix D,
paragraphs B.3 and B.6). Nor does it apply to Step 3 grants where the Step 2 work was initiated
after June 30, 1975. (See Headquarters Grants Administration Division's memorandum dated
August 18, 1976.)
(2) For grant applications submitted between December 17, 1975, and February 28,
1976, the subagreements are not exempted subject to Note 1 above. Grant applications
submitted prior to December 17, 1975, may be exempted. (See Alm/Breidenbach Class
Deviation dated May 11, 1976.)
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APPENDIX H
INTERPOLATION OF FEE PERCENTAGE
When construction costs, or other bases of compensation, fall between two known points on the fee curve, it is
necessary to use interpolation to arrive at the applicable fee percentage. Most engineering agreements specify the use
of straight-line interpolation between points. In the absence of a specified method of interpolation, the use of the
straight-line method will result in a slightly higher, but insignificantly different, amount of allowable costs. An
explanation of straight-line interpolation follows:
Audit Question: What percent design fee corresponds to construction costs of $9,750,000?
Construction Cost Fee Percentage
Lower Limit
Upper Limit
Absolute Difference
$5,000,000
10,000,000
$5,000,000
6.42
6.03
.39
(Above data based on ASCE 1972 Curve "A" (page H-2).
The interpolation can be made in either of two directions (from the "bottom up" or from the "top down"). Thus,
there are two ways to compute the "incremental difference" (shown below). Both methods give the same results.
Whichever direction is chosen, the auditor must be sure that he is consistent in the approach.
Construction Cost
Lower Limit
Incremental Difference
$9,750,000 Upper Limit
5,000,000 -or- Construction Cost
$4,750,000
Incremental Difference
$10,000,000
9,750,000
$250,000
The interpolation may be expressed in ratio form, for each of the two methods above, as follows:
(Incremental Cost Difference)
(Absolute Cost Difference)
(Incremental Cost Difference
(Absolute Cost Difference)
$4,750,000 = ? (Incremental Fee Difference)
$5,000,000 .39% (Absolute Fee Difference)
$ 250,000 =
$5,000,000
Cross multiplying, the unknown is solved as shown below:
= $4,750,000 x .39% =
(1) Incremental
Fee Difference
$5,000,000
? (Incremental Fee Difference)
.39% (Absolute Fee Difference)
$18,525 = .37%
$5,000,000
6.42% - .37% = 6.05%
NOTE: When method (1) is used (from the "bottom up"), the result must be deducted from the higher fee
percentage.
(2) Incremental
Fee Difference
= $350,000 x .39% = $975
$5,000,000 $5,000,000
6.03% + .02% = 6.05%
= .02%
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Figure H-l
CURVE A, MEDIAN COMPENSATION FOR
BASIC SERVICES EXPRESSED AS A PERCENTAGE OF
CONSTRUCTION COST FOR PROJECTS OF
ABOVE-AVERAGE COMPLEXITY (1971)
8
c
n
1
0
1
0
9
8
7
6
5
4
0.(
n 0.05
\
\
>
\
\
\
\
^
\
III 1 IN
Net construction % from
cost Curve A-1971
$100,000
200,000
500,000
1,000,000
5,000,000
10,000,000
50,000,000
100,000,000
1
\
\
\
^
s
11.63
10.25
8.52
7.53
6.42
6.03
5.70
5.64
">,
^-N
0.1 0.5 1 5 10
Net construction cost, in millions of dollars
««.
-.
^
• • i
* 50
100
Source: ASCE Manual No. 45.
H-2
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NOTE: Using method (2) (from the top down), the result is added to the lower fee percentage.
The total design fee in this case would be computed as follows:
$9,750,000 (total construction costs) x 6.05% = $589,875.
NOTE: The design fee percentage would be applied to eligible construcion costs to obtain accepted design costs per
audit.
H-3
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APPENDIX I
APPLICATION OF PARAGRAPH B.5
OF APPENDIX D TO 40 CFR 35, SUBPART E
The following example is intended to clarify the provisions, and to provide a working model,
of the application of paragraph B.5 (determining total allowable contract costs for grant
payment where work for the design step is not essentially continuous from start of design to
bidding, or one year or more elapses between substantial completion of Step 2 design work and
bid opening for Step 3 construction).
The provisions of Appendix D are applicable to all existing construction grants, regardless of
statutory authority or date of award. Thus, Appendix D applies to both PL 84-660 and 92-500
grants.
1. COMPUTATION OF ALLOWABLE COST
Appendix D provides no limitations on percentage-of-construction-cost fees under projects
completed before December 17, 1975.
When construction was initiated before December 17, 1975, Appendix D provides that
allowable costs for a percentage-ofconstruction type of contract will be based on construction
contract awards and change orders approved by the grantee before December 17, 1975.
When construction was initiated after December 17, 1975, Appendix D provides that in no
event will allowable costs for a percentage-of-construction type contract be based on an amount
exceeding the low bid for construction. This specifically excludes the cost of change orders and
cost overruns from the computation basis. The method of computing allowable cost depends on
the time between substantial completion (discussed in Section 2 below) of plans and
specifications and bid opening.
a. Less Than One Year. If less than one year elapses between substantial completion and bid
opening, paragraph B.S.a. of Appendix D limits allowable cost to the amount obtained by
applying the applicable fee curve percentage to the low bid for construction.
Example:
Facts
Substantial completion of design—June 20, 1975
Bid opening—April 2, 1976
Low bid $5,000,000
Changes orders 1,000,000
Total construction cost $6,000,000
Fee curve at $5,000,000 = 6.42%
1-1
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Application
Low bid $5,000,000
Fee curve percentage X .0642
Allowable fee $321.000
b. More Than One Year. When one year or more elapses between substantial completion
of design and bid opening, paragraph B.S.b limits allowable costs to the lowest of:
(1) The applicable fee curve percentage applied to the total of the consulting engineer's
construction cost estimate provided at substantial completion of plans and specifications
plus an escalation of five percent of the estimate.
(2) The applicable fee curve percentage applied to the consulting engineer's construction
cost estimate provided at substantial completion of plans and specifications. A consulting
engineer's compensation escalation of up to $50,000 is added to the resultant amount.
(3) The applicable fee curve percentage applied to the low bid for construction.
Examples:
Facts
Substantial completion of design—September 15, 1974
Bid opening—December 6, 1975
Award of construction contract—January 22, 1975
Engineer's estimate at substantial $4,000,000
completion
Low bid 5,000,000
Total construction cost 6,000,000
(1) Engineer's estimate of construction $4,000,000
Allowable escalation x 1.05
$4,200,000
Applicable fee curve percentage
(interpolated) x .0664
$ 278.880
1-2
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(2) Engineer's estimate of construction $4,000,000
Applicable fee curve percentage
(interpolated) x .0670
$268,000
Engineer's compensation escalation 50,000
_$318.000
(3) Low bid $5,000,000
Applicable fee curve (from curve
percentage) x .0642
$321.000
Method (1) above resulted in the lowest compensation; therefore, allowable compensation in
the example would be example (1), or $278,880.
2. SUBSTANTIAL COMPLETION
No precise definition of "substantial completion" of design has been made within EPA.
Therefore, auditors must apply their judgment to the circumstances of each grant to ascertain
the date of substantial completion. Design is normally substantially complete when no major
additions or revisions are required to complete the plans and specifications.
Evidence of substantial completion may consist of one or more of the following:
a. Dates shown on plans or specifications.
b. Transmittal of plans and specifications from the consultant to the grantee.
c. Submission of plans and specifications to the state and EPA for review.
d. Minutes of board meeting in which completed plans are accepted or discussed.
e. Grant application checklists in which completion date is annotated.
f. Engineer's billings which show percentage of completion of design.
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APPENDIX J
EPA DIVISION AUDIT OFFICES AND COGNIZANT
GEOGRAPHIC AREAS
Address of Cognizant
EPA Division Audit Office
Divisional Assistant Inspector
General for Audits
Mid-Atlantic Division
Environmental Protection Agency
Crystal Mall #2, Room 716
Washington, D.C. 20460
(703) 557-7700
Divisional Assistant Inspector
General for Audits
Eastern Division
Environmental Protection Agency
90 Church Street, Room 802
New York, New York 10007
(212) 264-5730
Divisional Assistant Inspector
General for Audits
Northern Division
Environmental Protection Agency
1 North Wacker Drive
Chicago, Illinois 60606
(312) 353-2486
Divisional Assistant Inspector
General for Audits
Western Division
Environmental Protection Agency
215 Fremont Street
San Francisco, California 94105
(415) 556-1954
Divisional Assistant Inspector
General for Audits
Southern Division
Environmental Protection Agency
1371 Peachtree Street, NE
Atlanta, Georgia 30309
(404) 881-3623
Geographic Area
Pennsylvania, Delaware,
Maryland, Virginia,
West Virginia, and
Washington, D.C.
Maine, Connecticut, New York,
Massachusetts, Rhode Island,
Vermont, New Hampshire,
New Jersey, Puerto Rico,
and the Virgin Islands
Ohio, Michigan, Wisconsin,
Minnesota, Indiana, Illinois,
Iowa, Nebraska, Missouri,
and Kansas
Colorado, Utah, Nevada,
Hawaii, Washington, Oregon,
California, Idaho, Montana,
Wyoming, Arizona,
North Dakota, Alaska,
South Dakota, Guam,
American Samoa, Trust
Territories of the Pacific
Islands, and Wake Island
Alabama, North Carolina,
South Carolina, Florida,
Georgia, Mississippi, Texas,
Arkansas, Tennessee,
Kentucky, Oklahoma,
New Mexico, and Louisiana
•U.S. OOVEBSMENT PRINTING OFFICE t 1980 0-311-132/63
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APPENDIX K
REFERENCES
Audit Guide for EPA Contracts, Environmental Protection Agency (Washington, D.C.:
February 1976).
A udit Guide for Reviewing Indirect Cost Allocation Plans and Rate Proposals, Environmental
Protection Agency (Washington, D.C.: Publication pending).
Audits of State and Local Governmental Units, American Institute of Certified Public
Accountants (New York: 1974).
"Construction and Architect-Engineer Contracts," Public Contracts and Property
Management, Code of Federal Regulations 41, Subpart 1-15.4 (U.S. Government Printing
Office, Washington, D.C.). Also codified in the Federal Procurement Regulations, Subpart
1-15.4.
Consulting Engineering—A Guide for the Engagement of Engineering Services, American
Society of Civil Engineers, Manual No. 45 (New York: rev. 1972).
"Contracts with Commercial Organizations," Public Contracts and Property Management,
Code of Federal Regulations 41, Subpart 1-15.2 (U.S. Government Printing Office,
Washington, D.C.). Also codified in the Federal Procurement Regulations, Subpart 1-15.2.
"Cost Principles Applicable to Grants and Contracts with State and Local Governments,"
Federal Management Circular, FMC 74-^4, General Services Administration, Office of Federal
Management Policy (July 18, 1974). Also referenced in "Project Costs," Protection of the
Environment, Code of Federal Regulations 40, Subpart F, Section 30.710(a).
Federal Water Pollution Control Act, Public Law 84-660 (July 9, 1956).
Federal Water Pollution Control Act Amendments of 1972, Public Law 92-500 (October 18,
1972).
Federal Water Pollution Control Act Amendments of 1977, Public Law 95-217 (December 27,
1977).
Handbook of Procedures—Construction Grants Program for Municipal Wastewater
Treatment Works, Environmental Protection Agency (Washington, D.C.: February 1976).
Protection of the Environment, Code of Federal Regulations 40, Parts 30 and 35, revised
through July 1, 1979, and related implementing Federal Registers (U.S. Government Printing
Office, Washington, D.C.).
Standards for Audit of Governmental Organizations, Programs, Activities, and Functions, U.S.
General Accounting Office (U.S. Government Printing Office, Washington, D.C.: 1972).
"State and Local Assistance," Protection of the Environment, Code of Federal Regulations 40,
Subchapter B, Part 35 (U.S. Government Printing Office, Washington, D.C.).
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"Uniform Administrative Requirements for Grants-in-Aid to State and Local Governments,"
Federal Management Circular, FMC 74-7, General Services Administration, Office of Federal
Management Policy (September 13, 1974).
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