A
/ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
MAM319ST
OFFtCE OF
THE INSPECTOR GENERAL
MEMORANDUM
SUBJECT:
Audit Report No. P5BG6-11-0030-71190
Report of Interim Audit of New York State
Department of Environmental Conservation's
Administration of its Superfund Cooperative
Agreemei
TO:
Hockman
Divisional Inspector General for Audit
Internal Audit Division (A-109)
Christopher J. Daggett
Regional Administrator, Region 2
SCOPE AND OBJECTIVES
We performed an interim audit of the New York State Department of
Environmental Conservation's (NYSDEC) administration of its cooperative
agreements with the U.S. Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980. The primary objectives of our examination were to:
1. Determine the adequacy, effectiveness, and reliability of procurement,
accounting, and management controls exercised by NYSDEC in administering
its cooperative agreements with EPA.
2. Ascertain NYSDEC's compliance with provisions of the cooperative
agreements and applicable EPA regulations.
3. Ascertain NYSDEC's compliance with provisions of the Letter of_Credit
- Treasury Financial Communications System Recipient's Manual.
4. Determine the reasonableness, allocability, and allowability of the
costs claimed under the cooperative agreements.
The audit included an examination of costs incurred and claimed under the
referenced cooperative agreements from project inception through March
31, 1986.
Our audit was performed in accordance with generally accepted auditing
standards and the Standards for Audit of Governmental Organizations,
Programs, Activities, and Functions issued by the General Accounting
Office. Accordingly, the examination included such tests of the accounting
records and such other auditing procedures as we considered necessary in
the circumstances.
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SUMMARY OF FINDINGS
I. FINANCIAL RESULTS OF AUDIT
Exhibit A (on page 25) presents the financial information on the costs
claimed, accepted, questioned and set-aside.
2. STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IMPROVEMENT
The procedures utilized by NYSDEC to procure contractual services under
its Superfund cooperative agreements were not in compliance with Federal
regulations (40 CFR Part 33). NYSDEC awarded 22 contracts, under the
existing system, for which the State claimed $7,601,269 on the Financial
Status Reports (SF 269), as of March 31, 1986. We examined NYSDEC's
Superfund procurement system on a non-statistical basis and noted the
following conditions:
o NYSDEC used the prohibited cost-plus-percentage-of-cost (CPPC)
type of contract.
o Cost analyses were not documented for procured contracts.
o EPA was involved in the contractor selection process, Increasing
the risk that EPA might be named as a defendant in litigation
concerning the State's contract award procedures.
o The request for proposals (RFP) did not state the relative
importance attached to each of the specified evaluation criterion
and a contractor was selected using criteria different than that
stated in the RFP.
o Contracts contained both clauses developed by NYSDEC and EPA
model subagreement clauses. There were conflicting clauses and
duplications between the two sets of clauses. Also, a subcontract
did not have the model subagreement clauses or its equivalent.
These conditions were primarily attributable to the lack of NYSDECfs
understanding of the applicable Federal regulations. NYSDEC was required
to comply with 40 CFR Part 33 as a condition of obtaining EPA funding.
3. CONTRACT AMENDMENTS WERE INADEQUATE
We could not determine the maximum amounts of contracts awarded under the
Hazardous Waste Site Inventory cooperative agreement. This was attributable
to contract amendments being poorly written. According to 40 CFR 33.1015,
each subagreement must contain provisions defining a sound and complete
agreement, including the total cost of the subagreement. Since the
contract maximum amounts could not be determined, NYSDEC could be charged
more than intended by Its contractors.
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REGION 2'S COMMENTS ON FINDINGS AND OUR EVALUATION
On December 8, 1986, the Assistant Regional Administrator for Policy and
Management, Region 2 provided written comments on the draft interim audit
report. The Region's comments, which took exception to certain findings
and recommendations in the draft interim audit report, addressed the
following issues (1) the report does not demonstrate that certain audit
objectives were achieved; (2) the use of prohibited type of contract; and
(3) privity of subagreement (changed to involvement in contractor selection
process). The first issue has been addressed in Appendix 1. The second
and third issues were considered and changes, where appropriate, were made
during the finalization of the interim audit report. To provide a balanced
understanding of the issues, Region 2's position on Issues (2) and (3)
have been summarized at appropriate locations in the report and the
complete response from Region 2 has been included as Appendix 1.
NYSDEC'S COMMENTS ON FINDINGS AND OUR EVALUATION
NYSDEC provided us with formal written comments on our draft interim audit
report in a letter dated December 10, 1986. The Commissioner of NYSDEC
generally concurred with our findings and recommendations, except as
noted in the Findings and Recommendations section of this report, and
indicated corrective actions were taken or were planned to resolve the
issues cited in the report with which they were in agreement. We concluded
that NYSDEC'S comments were generally responsive to our findings and
recommendations, except as noted in the Findings and Recommendations
section of this report. To provide a balanced understanding"of the
issues, we summarized NYSDEC'S position at appropriate locations in the
report and included the complete response as Appendix 2.
RECOMMENDATIONS
We recommend that the Regional Administrator, Region 2:
A. Disallow the questioned costs resulting from illegal cost-plus-percentage-
of-cost contract provisions;
B. Require NYSDEC to perform and document a review of the set-aside amounts
paid to the contractors and make an after-the-fact evaluation of the
reasonableness of both the costs and profit Incurred to date and the
estimated cost to complete each contract had NYSDEC originally awarded
these contracts according to Federal regulations;
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C. Review NYSDEC documentation and evaluation of the set-aside contract
costs and make a determination of the reasonableness of both the
costs and profit incurred to date and the estimated cost to complete
each contract;
D. Before advising NYSDEC of your determination on the reasonableness of the
costs and profit, we be afforded an opportunity to review and comment
on the documentation supporting your determination;
E. Require NYSDEC to provide the Regional Administrator and the Internal
Audit Division, Office of Inspector General with a copy of the Defense
Contract Audit Agency's audit reports approving the "handling" or
"management" fees for each contractor reimbursed such fees under
EPA's cooperative agreements;
F. Require NYSDEC to renegotiate all current CPPC type contracts to a
type acceptable under Federal regulations;
G. Instruct NYSDEC that all future contracts awarded, pursuant to Federal
participation, comply with Federal regulations (40 CFR 33.285);
H. Direct NYSDEC to prepare and document a cost analysis when appropriate
for current and future contracts and participate only in fair and
reasonable costs based upon cost analyses;
I. Instruct Regional employees not to act as members of State selection
panels until EPA's Headquarters Grants Administration Division issues
an Agencywide directive on this matter;
J. Require NYSDEC, when applicable, for future procurements, to state in
the RFP the relative importance attached to each evaluation criterion
and evalute each contract by the criteria stated in the RFP;
K. Require NYSDEC to instruct contractors to include model subagreement
clauses (40 CFR 33.1030) in all subcontracts and avoid duplication or
contradiction, between NYSDEC clauses and model subagreement clauses
in contracts awarded by NYSDEC;
L. Require NYSDEC to amend the Hazardous Waste Site Inventory Cooperative
Agreement contracts to state the contract maximum amount;
M. Require NYSDEC to state both the amount of the change and the maximum
amount of the contract in all future amendments;
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N. Require NYSDEC to make the necessary changes to its property management
system so that it conforms with Federal regulations; and
0. Require NYSDEC to comply with the special conditions of the cooperative
agreements which require Technical Program Reports to be submitted
quarterly.
ACTION REQUIRED
In accordance with EPA Directive 2750, the Action Official is required to
provide this office a written response to the audit report within 90 days
of the audit report date. The Action Official's response should include
an action plan with milestone dates for each corrective action that was
not fully implemented.
Attachment
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DISTRIBUTION
Copies
A. Office of Inspector General (A-109)
' Divisional Inspector General for Audit -
Eastern Audit Division (1)
Audit Manager, Eastern Audit Division
(New York Office) (1)
Director, Audit Operations Staff (3)
Chief, Program Analysis Unit (1)
B. Regional Office
Regional Administrator
Audit Followup Coordinator
Assistant Regional Administrator for
Policy and Management (PM-2)
Director, Division of Fiscal Management
Director, Division of Solid and Hazardous Waste
2
1
1
1
1
C. Headquarters Office
Assistant Administrator for Solid Waste and
Emergency Response (WH-562A)
Director, Grants Administration Division (PM-216)
Chief, Grants Policy and Procedures Branch (PM-216)
Director, Office of Emergency and Remedial
Response (WH-548)
Agency Followup Official (PM-225)
Attn: Resource Management Division
Associate General Counsel
Inspector General Division (LE-132I)
Associate General Counsel
Grants, Contracts, and General Law Division
(LE-132G)
Chief, Superfund Accounting Branch (PM-226)
Director, Facilities Management and Services
Division (PM-215)
1
1
I
I
i
1
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HO
Etoy
60
3^
REPORT OF INTERIM AUDIT OF
NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION'S
ADMINISTRATION OF ITS SUPERFUND COOPERATIVE AGREEMENTS
WITH EPA UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE PERIOD MARCH 8, 1982 THROUGH MARCH 31, 1986
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TABLE OF CONTENTS
SCOPE AND OBJECTIVES
SUMMARY OF FINDINGS
BACKGROUND
AUDITORS' REPORT ON COOPERATIVE AGREEMENTS
V00243582, V00247583, V00248083, V00248583, V00249083,
V00249583, V00257584, V00258584, V00258084, V00243284,
V00243784, V00262585, AND V00249685 AWARDED TO THE
NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION
AUDITORS' REPORT ON INTERNAL ACCOUNTING CONTROL
AND COMPLIANCE
FINDINGS AND RECOMMENDATIONS
1 - STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS
IMPROVEMENT
2 - CONTRACT AMENDMENTS WERE INADEQUATE
3 - MINOR FINDINGS - CORRECTIVE ACTION TAKEN
4 - MINOR FINDING - CORRECTIVE ACTION NOT REQUIRED
Page
1
2
6
8
10
12
21
22
22
EXHIBIT A -
EXHIBIT B -
EXHIBIT C -
COOPERATIVE AGREEMENTS AWARDED TO THE
NEW YORK STATE DEPARTMENT OF ENVIRON-
MENTAL CONSERVATION SUMMARY OF COSTS
CLAIMED, ACCEPTED, QUESTIONED AND
SET-ASIDE FOR THE PERIOD MARCH 8, 1982
THROUGH MARCH 31, 1986
POLLUTION ABATEMENT SERVICES, OSWEGO
COOPERATIVE AGREEMENT (VO0243582)
AWARDED TO THE NEW YORK STATE DEPART-
MENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD MARCH 8, 1982 THROUGH
MARCH 31, 1986
OLEAN WELL FIELDS COOPERATIVE AGREE-
MENT (VO0247583) AWARDED TO THE NEW YORK
STATE DEPARTMENT OF ENVIRONMENTAL
CONSERVATION SCHEDULE OF COSTS CLAIMED
AND ACCEPTED FOR THE PERIOD JANUARY 1,
1983 THROUGH MARCH 31, 1986
24
25
26
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TABLE OF CONTENTS (Continued)
EXHIBIT D -
EXHIBIT E -
EXHIBIT F -
EXHIBIT G -
EXHIBIT H -
EXHIBIT I -
EXHIBIT J -
SINCLAIR OIL REFINERY COOPERATIVE AGREE-
MENT (VO0248083) AWARDED TO THE NEW YORK
STATE DEPARTMENT OF ENVIRONMENTAL CONSER-
VATION SCHEDULE OF COSTS CLAIMED, ACCEPTED,
QUESTIONED AND SET-ASIDE FOR THE PERIOD
JULY 18, 1983 THROUGH MARCH 31, 1986 27
MARATHON BATTERY COOPERATIVE AGREEMENT
(VO0248583) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED, ACCEPTED,
QUESTIONED AND SET-ASIDE FOR THE -PERIOD
SEPTEMBER 1, 1983 THROUGH MARCH 31, 1986 28
KENTUCKY AVENUE WELLFIELD COOPERATIVE
AGREEMENT (VO0249083) AWARDED TO THE
NEW YORK STATE DEPARTMENT OF ENVIRON-
MENTAL CONSERVATION SCHEDULE OF COSTS
CLAIMED AND ACCEPTED FOR THE PERIOD
OCTOBER 15, 1983 THROUGH MARCH 31,
1986 29
YORK OIL COMPANY COOPERATIVE AGREEMENT
(V00249583) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD NOVEMBER 1, 1983 THROUGH
MARCH 31, 1986 30
VESTAL WATER SUPPLY COOPERATIVE AGREEMENT
(V00257584) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED, ACCEPTED AND
SET-ASIDE FOR THE PERIOD JANUARY 16,
1984 THROUGH MARCH 31, 1986 31
BREWSTER WELL FIELD COOPERATIVE AGREEMENT
(V00258584) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED, ACCEPTED AND
SET-ASIDE FOR THE PERIOD JANUARY 18,
1984 THROUGH MARCH 31, 1986 32
WIDE BEACH DEVELOPMENT COOPERATIVE AGREE-
MENT (V00258084) AWARDED TO THE NEW YORK
STATE DEPARTMENT OF ENVIRONMENTAL CONSER-
VATION SCHEDULE OF COSTS CLAIMED, ACCEPTED,
QUESTIONED AND SET-AS IDE FOR THE PERIOD
JANUARY 18, 1984 THROUGH MARCH 31, 1986 33
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TABLE OF CONTENTS (Continued)
EXHIBIT K -
EXHIBIT L -
EXHIBIT M -
EXHIBIT N -
EXHIBIT 0 -
HUDSON RIVER PCB REMNANT COOPERATIVE AGREE-
MENT (V00243284) AWARDED TO THE NEW YORK
STATE DEPARTMENT OF ENVIRONMENTAL CONSERVA-
TION SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD SEPTEMBER 1, 1984 THROUGH
MARCH 31, 1986
MULTI-SITE I COOPERATIVE AGREEMENT
(V00243784) [FULTON TERMINALS, CLOTHIER
AND VOLNEY LANDFILL] AWARDED TO THE NEW
YORK STATE DEPARTMENT OF ENVIRONMENTAL
CONSERVATION SCHEDULE OF COSTS CLAIMED,
ACCEPTED AND SET-ASIDE FOR THE PERIOD
DECEMBER 31, 1984 THROUGH MARCH 31, 1986
MULTI-SITE II COOPERATIVE AGREEMENT
(V00262585) [ENDICOTT WELLFIELD, HAVILAND
COMPLEX WELL AND SUFFERN VILLAGE WELLFIELD]
AWARDED TO THE NEW YORK STATE DEPARTMENT
OF ENVIRONMENTAL CONSERVATION SCHEDULE OF
COSTS CLAIMED AND ACCEPTED FOR THE PERIOD
MARCH 31, 1985 THROUGH MARCH 31, 1986
Page
34
35
36
HAZARDOUS WASTE SITE INVENTORY COOPERATIVE
AGREEMENT (V00249685) AWARDED TO THE NEW
YORK STATE DEPARTMENT OF ENVIRONMENTAL
CONSERVATION SCHEDULE OF COSTS CLAIMED AND
ACCEPTED FOR THE PERIOD APRIL 1, 1985 THROUGH
MARCH 31, 1986 37
DESCRIPTION OF HAZARDOUS WASTE SITES UNDER
THE COOPERATIVE AGREEMENTS AWARDED TO THE
NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL
CONSERVATION
38
APPENDIX 1 - REGION 2'S COMMENTS ON THE DRAFT AUDIT REPORT 45
APPENDIX 1A - OUR EVALUATION OF REGION 2'S COMMENTS 55
APPENDIX 2 - NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL
CONSERVATION'S RESPONSE TO THE DRAFT AUDIT
REPORT 59
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REPORT OF INTERIM AUDIT OF
NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION'S
ADMINISTRATION OF ITS SUPERFUND COOPERATIVE AGREEMENTS
WITH EPA UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE,
COMPENSATION, AND LIABILITY ACT OF 1980
FOR THE PERIOD MARCH 8, 1982 THROUGH MARCH 31, 1986
SCOPE AND OBJECTIVES
We performed an interim audit of the New York State Department of
Environmental Conservation's (NYSDEC) administration of its co-
operative agreements with the U.S. Environmental Protection
Agency (EPA) under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980. The primary objectives
of our examination were to:
1. Determine the adequacy, effectiveness, and reliability of
procurement, accounting, and management controls exercised
by NYSDEC in administering its cooperative agreements with
EPA.
2. Ascertain NYSDEC"s compliance with provisions of the cooper-
ative agreements and applicable EPA regulations and in-
structions.
3. Ascertain NYSDEC's compliance with provisions of the Letter
of Credit - Treasury Financial CommunicatIons SystemRecipi-
ent1 sManual~'
4. Determine the reasonableness, allocability, and allowability
of the costs claimed under the cooperative agreements.
Specifically, our audit covered the following -cooperative agree-
ments: Pollution Abatement Services, Oswego; Olean Well Fields?
Sinclair Oil Refinery; Marathon Battery; Kentucky Avenue
Wellfield; York Oil Company; Vestal Water Supply; Brewster Well
Field; Wide Beach Development; Hudson River PCB Remnant; Mul-
ti-Site I (Fulton Terminals, Clothier, and Volney Landfill); Mul-
ti-Site II (Endicott Wellfield, Haviland Complex Well, and
Suffern Village Wellfield); and Hazardous Waste Site Inventory.
The audit included an examination of costs incurred and claimed
under the referenced cooperative agreements from project
inception through March 31, 1986.
Our audit was performed in accordance with generally accepted
auditing standards and the Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions issued by the
General Accounting Office.Accordingly,the examination included
such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
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SUMMARY OF FINDINGS
FINANCIAL RESULTS OF AUDIT
Subject to the effects on Exhibit A of EPA's ultimate resolution
of the questioned and set-aside expenditures referred to in the
Auditors' Report, Exhibit A (summarized below) presents the
financial information and financial provisions of the agreements.
Cooperative AMOUNT
Agreement CLAIMEDACCEPTEDQUESTIONEDSET-ASIDE
Pollution
Abatement
Services, Oswego $4,197,871 $4,197,871 $ - $
Clean Well Fields 750,892 , 750,892
Sinclair Oil
Refinery 931,464 610,605 15,279 305,580
Marathon Battery 513,270 104,273 11,868 397,129
Kentucky Avenue
Wellfield 394,743 394,743
York Oil Company 499,422 499,422
Vestal Water
Supply 268,177 44,276 - 223,901
Brewster Well
Field 446,597 333,798 - 112,799
Wide Beach
Development 465,497 314,192 7,205 144,100
Hudson River
PCB Remnant 2,836 2,836
Multi-Site I 438,334 82,730 - 355,604
Multi-Site II 27,512 27,512
Hazardous Waste
Site Inventory 18,239 18.239 - -
Totals $8.954,854 $7.381.389 $ 34,352 $1.539.113
Federal Share $8.847,330 $7.273.865 $ 34,352 $1,539,113
Questioned costs are costs claimed or proposed costs that we have
concluded should not be reimbursed by the Government or incurred
as part of project eligible costs because they are not allowable
under the provisions of applicable laws, regulations, policies,
cost principles, or terms of the cooperative agreements or con-
tracts. Set-aside costs are costs which cannot be accepted with-
out additional information or evaluations and approvals by re-
sponsible Agency program officials.
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SUMMARY OF FINDINGS (Continued)
1. STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IMPROVEMENT
The procedures utilized by NYSDEC to procure contractual services
under its Superfund cooperative agreements were not in compliance
with Federal regulations (40 CFR Part 33). These conditions were
primarily attributable to NYSDEC1s lack of understanding of the
applicable Federal regulations. NYSDEC was required to comply
with 40 CFR Part 33 as a condition of obtaining EPA funding.
NYSDEC awarded 22 contracts, under the existing system, for which
the State claimed $7,601,269 on the Financial Status Reports (SF
269), as of March 31, 1986. We examined NYSDEC1s Superfund
procurement system on a non-statistical basis and noted the fol-
lowing conditions:
NYSDEC used the prohibited
(CPPC) type of contract.
cost-plus-percentage-of-cost
0 Cost analyses were not documented for procured contracts.
0 EPA was involved in the contractor selection process,
increasing the risk that EPA might be named as a defendant
in litigation concerning the State's contract award
procedures.
c The request for proposals (RFP) did not state the relative
importance attached to each of the specified evaluation cri-
terion and a contractor was selected using criteria
different than that stated in the RFP.
" Contracts contained both clauses developed by NYSDEC and EPA
model subagreement clauses. There were conflicting clauses
and duplications between the two sees of clauses. Also, a
subcontract did not: have the me del subagreement clauses or
ics equivalent.
2. CONTRACT AMENDMENTS WERE INADEQUATE
The maximum amounts of contracts awarded under the Hazardous
Waste Site Inventory cooperative ogreement could not be
determined. This was attributable to contract amendments being
poorly written. According to 40 CFR 33.1015, each subagreement
must contain provisions defining a sound and complete agreement,
including the total cost of the subagreement. Since the contract
maxiuum amounts could not be determined, NYSDEC could be charged
more than intended.
EXIT CONFERENCE
An exit conference w,is
officials of the NYSDEC:
held
Jul'
1956, with the following
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EXIT CONFERENCE (Continued)
Director, Division of Solid and Hazardous Waste (DSHW);
Director, Division of Fiscal Management (DFM); Program
Research Specialist, DSHW; Associate Accountant, DFM; Chief,
Bureau of Eastern Remedial Action, DSHWj and Chief, Bureau
of Internal Audit, DFM.
Also, the Chief, New York/Carribean Remedial Action Branch,
Region 2 and an Office of Inspector General Auditor, Eastern
Audit Division attended the exit conference.
The following significant items were discussed during the audit
and communicated through Notifications of Significant Findings
and at the exit conference:
1. Significant findings and recommendations;
2. Exhibits to be presented in the audit report;
3. Explanation and justification for the auditors'
opinion?
4. The auditee's response to the draft audit report will
be incorporated into the final audit report; and
5. The final audit report is subject to the Freedom of
Information Act.
The representatives of NYSDEC and EPA Region 2 were in general
agreement with the findings and recommendations. There was some
disagreement by NYSDEC and Region 2 officials regarding our find-
ings of EPA participation in selecting contractors and the CPPC
contract.
REGION 2'S COMMENTS ON FINDINGS AND OUR EVALUATION
On December 8, 1986, the Assistant Regional Administrator for
Policy and Management Region 2 provided written comments on the
draft interim audit report. The Region's comments, which took
exception to certain findings and recommendations in the draft
interim audit report, addressed the following issues (1) the
report does not demonstrate that certain audit objectives were
achieved; (2) the use of prohibited type of contract; and (3)
privity of subagreement (changed to involvement in contractor
selection process). The first issue has been addressed in
Appendix 1. The second and third issues have been considered
during the revision of the draft interim audit report. To
provide a balanced understanding of the issues, Region 2's
position on issues (2) and (3) have been summarized at
appropriate locations in the report and the complete response
from Region 2 has been included as Appendix 1.
NYSDEC'S COMMENTS ON FINDINGS AND OUR EVALUATION
NYSDEC provided us with formal written comments on our draft
report in a letter dated December 10, 1986. The Commissioner of
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NYSDEC'S COMMENTS ON FINDINGS AND OUR EVALUATION (Continued)
NYSDEC generally concurred with our findings and recommendations,
except as noted in the Findings and Recommendations section of
this report, and indicated corrective actions were taken or were
planned to resolve the issues cited in the report with which they
were in agreement. We concluded that NYSDEC'S comments were
generally responsive to our findings and recommendations, except
as noted in the Findings and Recommendations section of this
report. To provide a balanced understanding of the issues, we
summarized NYSDEC'S position at appropriate locations in the
report and included the complete response as Appendix 2.
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BACKGROUND
The "Superfund" program was established by the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980
(CERCLA), Public Law 96-510, enacted on December 11, 1980. The
Superfund program was created to protect public health and the
environment from the release, or threat of release, of hazardous
substances from abandoned hazardous waste sites and other sources
where response was not required by other Federal laws. A Trust
Fund was established by CERCLA to provide funding for responses
ranging from control of emergency situations to provision of
permanent remedies at uncontrolled sites. CERCLA authorized a
$1.6 billion program financed by a five-year environmental tax on
industry and some general revenues. CERCLA requires that
response, or payment for response, be sought from those
responsible for the problem, including property owners,
generators and transporters.
The basic regulatory blueprint for the Superfund Program is the
National Oil and Hazardous Substances Contingency Plan (NCP), 40
CFR Part 300. The NCP was first published in 1968 as part of the
Federal Water Pollution Control Plan, and has been substantially
revised to meet CERCLA requirements. The NCP lays out two broad
categories of response: removals and remedial response.
Removals are relatively short-term responses, and modify an
earlier program under the Clean Water Act. Remedial response is
long-term planning and action to provide permanent remedies for
serious abandoned or uncontrolled hazardous waste sites.
CERCLA recognizes that the Federal government can only assume
responsibility for remedial response at a limited number of sites
representing the greatest public threat. It therefore requires
the maintaining of a National Priorities List (NPL), which must
be updated at least annually. The NPL is composed primarily of
sites which have been ranked on the basis of a standard scoring
system which evaluates their potential threat to public health.
In addition, each State was allowed to name its highest priority
site without regard to the ranking system.
CERCLA section 104(c)(3) provides that no remedial actions shall
be taken unless the State in which the release occurs enters into
a contract or cooperative agreement with EPA to provide certain
assurances, including cost-sharing. At most sites, the State
must pay 10 percent of the costs of remedial action. Pre-
remedial activities (preliminary assessments, site inspections)
remedial planning (remedial investigations, feasibility studies,
remedial designs) and removals may be funded 100 percent by EPA.
For facilities operated by a State or political subdivision at
the time of disposal of hazardous substances, the State must pay
at least 50 percent of all response costs, including removals and
remedial planning previously conducted.
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BACKGROUND (Continued)
NYSDEC is the designated State agency for identifying and ranking
sites which pose a risk to the public or the environment, and
performance of remedial investigation, design, and clean up. at
hazardous waste sites. During our audit, .NYSDEC was actively
involved in the 13 cooperative agreements, covered by this audit,
with EPA. A description of each site has been provided in
Exhibit 0.
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TICHENOR, RESLER & EICHE
CERTIFIED PUBLIC ACCOUNTANTS
THE SUMMIT. SUITE 200
4J50 BROWNSBORO ROAD
LOUISVILLE, KENTUCKY 40207
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Mr. Kenneth D. Hockman
2
sions of the agreements and applicable Federal regulations. Ex-
hibit A sets forth the costs which we questioned and set-aside in
this regard and includes an explanation of the reasons such costs
were questioned and set-aside.
In our opinion, subject to the effect of EPA's ultimate
resolution of the questioned and set-aside expenditures referred
to in the preceding paragraphs, Exhibit A presents fairly the
costs claimed by NYSDEC under the cooperative agreements with EPA
on the basis described above.
This report is intended for use in connection with the coopera-
tive agreements to which it refers and should not be used for any
other purpose.
TICHENOR, RESLER & EICHE
Louisville, Kentucky
July 25, 1986
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TICHENOR, RESLER & EICHE
CERTIFIED PUBLIC ACCOUNTANTS
THE SUMMIT, SUITE 200
4350 BROWNSBORO ROAD
LOUISVILLE. KENTUCKY 4020?
(502) 8934)700
Mr. Kenneth D. Hockman
U.S. Environmental Protection Agency
Divisional Inspector General for Audit
Internal Audit Division
Office of the Inspector General
Washington, D.C.
AUDITORS' REPORT ON INTERNAL ACCOUNTING CONTROL AND COMPLIANCE
We have examined the expenditures claimed by the New York State
Department of Environmental Conservation (NYSDEC), related to the
Pollution Abatement Services, Oswego; Olean Well Fields; Sinclair
Oil Refinery; Marathon Battery; Kentucky Avenue Wellfield; York
Oil Company; Vestal Water Supply; Brewster Well Field; Wide Beach
Development; Hudson River PCB Remnant; Multi-Site I
(V-002437-84); Multi-Site II (V-002625-85)5 and Hazardous Waste
Site Inventory cooperative agreements for the period March 8,
1982, through March 31, 1986, as detailed in Exhibit A. Our
examination was performed in accordance with generally accepted
auditing standards and the financial and compliance provisions of
the Standards for Audit of Governmental Organizations, Programs,
Ac t iv i t ie s, an d Func t ions' issued By the General Accounting
Office.Solely to assist us in planning and performing our ex-
amination, we made a study and evaluation of the significant in-
ternal accounting controls of NYSDEC. For the purpose of this
report, we have classified the significant internal accounting
controls into the following categories:
0 Disbursements
Payroll
0 Contractor procurement
0 Contractor performance and billings
0 Cash management (letter of credit system)
0 Property and equipment
Our study included all of the control systems listed above.
That study and evaluation was limited to a preliminary review of
the system to obtain an understanding of the control environment
and the flow of transactions through the accounting system. Be-
cause the audit could be performed more efficiently through addi-
tional analysis and substantive audit tests, thus placing very
little reliance on the internal accounting control system, our
study and evaluation of the internal accounting controls did not
extend beyond this preliminary review phase. Accordingly, we do
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Mr. Kenneth D. Hockman
Page 2
not express an opinion on the system of internal accounting con-
trols taken as a whole. Also, our examination, made in accor-
dance with the standards mentioned above, would not necessarily
disclose material weaknesses in the system of internal accounting
control. Our examination did not disclose any conditions, other
than those presented in the Findings and Recommendations section
of this report, that we believe to be a material weakness.
As a part of our examination, we performed certain tests to de-
termine whether or not Federal funds were expended in accordance
with the provisions of the cooperative agreements and applicable
Federal laws, regulations, policies, and cost principles. The
results of our tests indicate that for the items tested, NYSDEC
complied with the provisions of the cooperative agreements and
applicable Federal laws, regulations, policies, and cost princi-
ples, except for the conditions described in the Notes to the
Exhibits. Further, for the items not tested, based upon our ex-
amination referred to above, nothing came to our attention which
indicated that NYSDEC had not complied with the provisions of the
cooperative agreements and applicable Federal laws, regulations,
policies, and cost principles, beyond the conditions described in
the Findings and Recommendations.
This report is intended for use in connection with the coopera-
tive agreements to which it refers and should not be used for any
other purpose.
TICHENOR, RESLER & EICHE
Louisville, Kentucky
July 25, 1986
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cost
FINDINGS AND RECOMMENDATIONS
1. STATE'S SUPERFUND PROCUREMENT SYSTEM NEEDS IMPROVEMENT
The procedures utilized by NYSDEC to procure contractual services
under Superfund cooperative agreements were not in compliance
with Federal regulations (40 CFR Part 33). These conditions were
primarily attributable to NYSDEC's lack of understanding of the
applicable Federal regulations. NYSDEC was required to comply
with 40 CFR Part 33 as a condition of obtaining EPA funding.
NYSDEC awarded 22 contracts, under the existing system, for which
the State claimed $7,601,269 on the Financial Status Reports (SF
269), as of March 31, 1986. We examined NYSDEC's Superfund
procurement system on a non-statistical basis and noted the fol-
lowing conditions:
0 NYSDEC used the prohibited cost-plus-percentage-of-
(CPPC) type of contract.
0 Cost analyses were not documented for procured contracts.
0 EPA was involved in the contractor selection process,
increasing the risk that EPA might be named as a defendant
in litigation concerning the State's contract award
procedures.
0 The request for proposals (RFP) did not state the relative
importance attached to each of the specified evaluation cri-
terion and 'a contractor was selected using criteria
different than that stated in the RFP.
Contracts contained both clauses developed by NYSDEC and EPA
model subagreement clauses. There were conflicting clauses
and duplications between the two sets of clauses. Also, a
subcontract did not have the model subagreement clauses or
its equivalent.
A. Cost-Plus-Percentage-Of-Cost Contracts
NYSDEC entered into CPPC contracts. These contracts,
prohibited by 40 CFR 33.285 and OME Circular A-102.
Attachment D, Paragraph 12, were negotiated by NYSDEC proj-
ect managers from a standard contract format developed by
NYSDEC. NYSDEC personnel who developed the format were un-
aware that CPPC contracts were prohibited by Federal
regulations. Under the CPPC method of contract payment, the
amount of the fee is uncertain at the inception of the
contract. The profit is a fixed percentage of some other
costs incurred by the contractor. The more of these other
costs the contractor incurs, the more profit they are due.
Therefore, a contractor's profit is increased in direct
proportion to costs incurred, thus rewarding higher costs.
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FINDINGS AND RECOMMENDATIONS (Continued)
NYSDEC officials and the Chief of EPA New York/Carribean
Remedial Action Branch stated at the exit conference that
they were not in agreement with questioning the entire
contract amounts because a portion of the CPPC contracts was
prohibited. NYSDEC officials expressed further concern
about incurring additional project costs if the possibility
exists that EPA may not participate in these costs.
Questioned and set-aside costs for the Sinclair Oil Refin-
ery, Marathon Battery, and Wide Beach Development coopera-
tive agreements are located at Exhibit D, Note 2j Exhibit E,
Note 2; and Exhibit J, Note 2; respectively.
B. Cost Analyses Not Performed*
Cost analyses were not prepared on four contracts as
required by 40 CFR 33.290(a) and 40 CFR 33.250(a)(5).
NYSDEC project managers, who negotiated the contracts, stat-
ed that it was not standard procedure to prepare a formal
cost analysis document for the files. Without preparing
cost analyses to support the procurements, neither the State
nor EPA can be assured that the services of the contractors
were procured at the most reasonable costs.
Set-aside costs for the Marathon Battery, Vestal Water Sup-
ply, Brewster Well Field, and Multi-Site I cooperative
agreements are located at Exhibit E, Note 3s Exhibit H, Note
2; Exhibit I, Note 2} and Exhibit L, Note 2; respectively.
* EPA Region 2 and Headquarters staff noted a similar
finding in their Management Assistance Report, dated
C.
November 14, 1985.
Involvement in Contractor Selection Process
We tested three contracts
requirements of 40 CFR 33.245.
for compliance with the
The following contracts were tested:
Cooperative Agreement Contractor
Marathon Battery
Vestal Water Supply
Multi-Site I
Acres American, Inc,
Engineering Science
and Technology
URS Company
In all three cases, we found that an EPA Region 2 project
officer was part of the State panel that reviewed and scored
contractors' proposals and then made recommendations to
State officials on which contractor should be awarded the
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FINDINGS AND RECOMMENDATIONS (Continued)
contract. NYSDEC requested that EPA be represented on these
selection panels to provide expertise in the selection
process and to help develop a good working relationship
between the two agencies. As a result of EPA participation
in the State selection process, EPA's position that it was
not a party to any subagreement may be jeopardized. For
example, EPA involvement in the State selection process
increases the risk, however slight, that losing bidders
might succeed in naming EPA as a defendant in litigation
concerning the assistance recipient's contract award proce-
dures. This potential problem can be avoided, or at least
mitigated, by ensuring that EPA employees only provide over-
sight of the State procurement process and do not partici-
pate on State selection panels.
EPA's State Participation in the Superfund Program, Volume
II, Chapter II, Part B states in part that:
EPA's role during implementation of the Agreement is
one of oversight to ensure that the State complies with
applicable statutes, regulations, and policies....
The State is responsible for resolving all subagreement
and administrative issues associated with procurement
under the Cooperative Agreement, since EPA is not a
party to any subagreements (40 CFR 33.245). (Emphasis
added).
NYSDEC officials and the Chief of EPA New York/Carribean
Remedial Action Branch reiterated at the exit conference
that they believed having Region 2 project officers on the
selection committees.,which evaluated contract proposals did
not violate 40 CFR.33.245. In addition, Regional Counsel,
Region 2, concluded that 40 CFR 33.245 does not prohibit the
sort of participation in the State's procurement actions
which occurred here. The Regional Counsel agreed with the
draft audit finding that having an EPA employee participate
in the State's contractor selection process increases the
risk that a claim may be made against EPA. The Regional
Counsel also was of the opinion that such risk was very
small and should be balanced against EPA's benefits derived
from working with State officials.
D. Evaluation Criteria Were Not Used Properly*
We tested four contracts for proper use of evaluation crite-
ria. In two cases (the Ecology and Environment contract
under the Vestal Water Supply cooperative agreement and the
URS Company contract under the Multi-Site I cooperative
agreement), the RFP did not state the relative importance
attached to each of the criterion. Also, the URS
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FINDINGS AND RECOMMENDATIONS (Continued)
Company contract was evaluated using different criteria than
that stated in the RFP.
According to 40 CFR 33.510, the RFP must contain all eval-
uation criteria and the relative importance attached to
each. Additionally, 40 CFR 33.515 states that recipients
must base their evaluations solely on the evaluation
criteria stated in the RFP.
NYSDEC did not include the relative importance attached to
each criterion in the RFP because it believed, if the rela-
tive importance was included, the proposers would respond in
a way to yield the highest score, which would not necessari-
ly be the best presentation. NYSDEC decided that including
the relative importance of the evaluation criteria tended to
stifle the creativity of a proposer's response.
In the case where the proposals were evaluated using differ-
ent criteria than that in the RFP, the State project engi-
neer revised the RFP changing the evaluation criteria. How-
ever, the scoresheets used in the selection were based upon
the criteria stated in the original RFP.
Because of these departures from the Federal regulations,
the following may have occurred:
(1) Discriminatory selection of contractors;
(2) Awards of contracts to other than the most qualified
proposers; and
(3) Conflicts of interest.
* EPA Region 2 and Headquarters staff noted a similar
finding in their Management Assistance Report, dated
November 14, 1985.
E. Improper and Omitted Contract Clauses*
We tested the contract clauses of four contracts and one
subcontract. The four contracts, listed below, contained
NYSDEC clauses in the main body of the contract and a copy
of EPA's model subagreement clauses (40 CFR 33.1030) as an
attachment to the contract. Not all NYSDEC-developed
clauses were equivalent to EPA's model subagreement clauses
and some were even contradictory. The subcontract, which
was awarded by Dames and Moore to James L. Ward under the
Kentucky Avenue Wellfield cooperative agreement, did not
contain the model subagreement clauses or their equivalent.
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FINDINGS AND RECOMMENDATIONS (Continued)
Cooperative Agreement Contractor
Pollution Abatement Services,
Oswego Sevenson Construction Co.
Marathon Battery Acres American, Inc.
Vestal Water Supply Ecology and Environment
Multi-Site I URS Company
The subagreements awarded under the cooperative agreements
were not in compliance with 40 CFR 33.1030 which stipulates,
"Recipients must include, when appropriate, the following
clauses or their equivalent in each subagreement." The
clauses referred to describe the minimum assurances, guaran-
tees, indemnities, and other contractual requirements neces-
sary to assure that the Federal government's best interests
are protected.
For example, the following Article 11 was taken from the
Sevenson Construction Company contract under the Pollution
Abatement Services, Oswego cooperative agreement:
ARTICLE 11 FINAL PAYMENT
After the final acceptance of the work, the Engineer
shall prepare a final summary of the work done from
actual measurements and computations relating to the
same, and he shall compute the value of such work under
and according to the terms of the contract. This
summary cost shall be certified as to its correctness
by the Engineer and submitted to the Division Director
for final approval. The right, however, is hereby
reserved to the Division Director to reject the whole
or any portion of the final summary, should the said
certificate of the Engineer be found or known to be
inconsistent with the terms of the agreement or
otherwise improperly given. All certificates upon
which partial payments may have been made being merely
estimates, shall be subject to correction in the final
certificate or final summary cost.
Note that Article 11 is not equivalent to the model
subagreement clause, Article 14, relating to the same issue
taken from 40 CFR 33.1030:
ARTICLE 14 FINAL PAYMENT
Upon satisfactory completion of the work performed
under this subagreement, as a condition before final
payment under this subagreement or as a termination
settlement under this subagreement the contractor shall
execute and deliver to the owner a release of all
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FINDINGS AND RECOMMENDATIONS (Continued)
claims against the owner arising under, or by virtue
of, this subagreement, except claims which are
specifically exempted by the contractor to be set forth
therein. Unless otherwise provided in this
subagreement, by State law or otherwise expressly
agreed to by the parties to this subagreement, final
payment under this subagreement or settlement upon
termination of this subagreement shall not constitute a
waiver of the owner's claims against the contractor or
his sureties under this subagreement or applicable
performance and payment bonds.
The most noteworthy difference between the two final
payment clauses is the lack of the release of all claims
against the owner language in Article 11. This appears to
be a significant difference between the NYSDEC and U.S. EPA
clauses.
The contractor personnel who negotiated the subcontract with
James L. Ward had left the firm; therefore, no cause could
be determined for the exclusion of the model subagreement
clauses from the subcontract. NYSDEC project managers used
a standard contract format to draft the contracts. This
format included NYSDEC-developed clauses in the main body of
the contract and included a copy of 40 CFR 33.1030 as an
attachment. Neither the project managers nor subsequent
NYSDEC reviewers deleted the conflicting clauses or
prevented the contracts from being redundant.
When equivalent model subagreement clauses are not included
in subcontracts, the best interests of EPA and the State are
not adequately protected. Additionally, having the same
clauses in more than one place in a contract and clauses
which contradict each other, creates confusion as to the
actual intent of the parties. As a result, the best inter-
ests of EPA and the State were not adequately protected,
since this confusion could lead to differing interpretations
and possible litigation.
* EPA Region 2 and Headquarters staff noted a similar
finding in their Management Assistance Report, dated
November 14, 1985.
REGION 2'S COMMENTS ON FINDINGS
In response to our draft report, the Assistant Regional
Administrator for Policy and Management, Region 2, stated the
following:
A. The audit report should contain specific information to
demonstrate the basis for concluding that each contract
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FINDINGS AND RECOMMENDATIONS (Continued)
questioned was the CPPC contract prohibited by 40 CFR
33.285.
B. Two Region 2 Branch Chiefs, during the audit fieldwork,
disagreed with the auditors position of questioning the
entire contract for contracts with CPPC service fees.
C. Based upon the rationale discussed in B. above, how could
the auditors accept $2,144 of cost on Exhibits D ($329), E
($1,665) and J ($150) where the auditors found these
contracts to be the CPPC type.
OUR EVALUATION OF REGION 2'S COMMENTS
Region 2's comments were not adequate to resolve all the issues
in our draft report. The following is presented for those issues
above or addresses all the recommendations in response to Region
2's comments:
A. We have added specific information, where appropriate, to
demonstrate the basis for classifying the agreements as
CPPC.
B. After careful consideration of Region 2's comments to the
draft report, the Office of Audit has revised its position
on questioning the entire contract amount due to a CPPC pro-
vision in the contract. We, therefore, questioned the CPPC
type fee and set aside the base costs upon which the fee was
calculated. If the base costs are less than the entire
contract, then the balance of the contract (less the fee and
the base) was accepted for the purposes of this audit.
C. The $2,144 in cost which were accepted by the auditors were
not associated with the CPPC contracts.
NYSDEC'S COMMENTS ON FINDINGS
In response to our draft report, the Commissioner of NYSDEC
stated the following:
A. NYSDEC did not believe that the contracts in question were
CPPC contracts. NYSDEC uses a cost-plus-fixed fee type of
contract that fixes the profit at the time of contract
award. However, there was a provision in some of the con-
tracts that provided a management fee to the consultants for
managing subcontract agreements. The management fee was
based upon a percentage of the value of services provided by
the subcontractor. NYSDEC claimed that this method has been
accepted by the Defense Contract Audit Agency. NYSDEC also
believed that even if the contracts were determined to be
CPPC contracts, the amount questioned should be based upon
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FINDINGS AND RECOMMENDATIONS (Continued)
the costs determined on a percentage basis and not the en-
tire contract amount.
B. The Marathon Battery and Wide Beach contracts were completed
or terminated which makes any modifications impractical.
C. Future contracts will specify a .different method for
reimbursing consultants in managing subcontracts, if EPA
makes a determination that the percentage management fee re-
sults in a CPPC contract.
D. Cost analysis review has always been performed and that all
contracts awarded were at reasonable costs. NYSDEC agreed
to prepare and document cost analyses for current and future
contracts.
E. NYSDEC questioned whether the use of EPA technical represen-
tatives was a violation of the Privity of Subagreement
clause. They believed the participation of EPA personnel on
selection panels was beneficial.
F. NYSDEC concurred with our recommendation to state in the RFP
the relative importance attached to each evaluation
criterion and evaluate each contract by the criteria stated
in the RFP.
G. NYSDEC concurred with our recommendation to include model
subagreement clauses in all subcontracts and avoid
duplication or contradiction between NYSDEC clauses and
model clauses.
OUR EVALUATION OF NYSDEC'$ COMMENTS
NYSDECfs response was not adequate to resolve all the issues
raised in our draft audit report. For those recommendations that
NYSDEC concurred with, we encourage them to accomplish them time-
ly. The following is presented for those issues that were not
resolved by NYSDEC's response:
A. NYSDEC contends that the management fees were not profit and
therefore, did not result in prohibited CPPC contracts.
Whether or not there was profit involved is of no
consequence. Merely the fact the fixed percentages were
used resulted in a CPPC provision in the contracts. The
Comptroller General has supported this position since the
mid-1950's and has issued the following guidance:
[I]nasmuch as the amount paid as reimbursement for
overhead will diminish or increase in proportion
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FINDINGS AND RECOMMENDATIONS (Continued).
to the direct costs incurred rather than the over-
head incurred by the contractor, we are of the
opinion that the contracts violate the express
prohibition against the cost-plus-a-percentage-
of-cost system of contracting and, therefore, are
illegal. Furthermore, the use of fixed rates for
overhead may be unfair to either the Government or
the contractors^Such fixed ratesareinconsis-
tent with the basic principles of a cost-type con-
tract in that they will not normally result in
reimbursement of the actual cost. Accordingly,
the practice of paying overhead on the basis of
fixed percentage rates . . . should be discontin-
ued. (Emphasis added.) 35 Comp. Gen. 434, 436
(1956). Accord, 35 Comp. Gen. 590, 591 (1956).
More recent Comptroller General decisions have not been as
harsh to the contractors and have permitted a recovery of
the reasonable value of the goods or services rendered.
NYSDEC raised a valid point when it questioned whether it
was proper for the entire contract amounts to be questioned.
After careful consideration of NYSDEC's and Region 2's
comments to the draft report, the Office of Audit has
revised its position on questioning the entire contract
amount due to a CPPC provision in the contract. We,
therefore, questioned the CPPC type fee and set aside the
base costs upon which the fee was calculated. If the base
costs are less than the entire contract, then the balance of
the contract (less the fee and the base) was accepted for
the purposes of this audit.
B. NYSDEC has clearly defined what the problem is in regard to
the Privity of Subagreement finding. It is one of differing
interpretations. NYSDEC contends that participation of EPA
personnel on selection panels was merely an allowable over-
sight function, whereas we believe that such action might
make EPA appear to be a party to the subagreements. In the
absence of any guidance that clearly establishes whether or
not this specific action was or was not in contravention of
the intent of the Privity Agreement, we stand by our
original finding and recommendation.
RECOMMENDATIONS
We recommend that the Regional Administrator, Region 2:
A. Disallow the questioned and set-aside costs and require
NYSDEC to perform and document reviews of the amounts paid
to these contractors for determination of the reasonableness
of both the costs and profit incurred to date and the
estimated cost to complete each contract;
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FINDINGS AND RECOMMENDATIONS (Continued)
B. Require NYSDEC to renegotiate any current contracts with
CPPC type provisions to a contract acceptable under Federal
regulations;
C. Instruct NYSDEC that all future contracts awarded, pursuant
to Federal participation, comply with Federal regulations
(40 CFR 33.285); and
D. Instruct Regional employees not to act as members of State
selection panels until EPA's Headquarters Grants
Administration Division issues an agencywide directive on
this matter,
2. CONTRACT AMENDMENTS WERE INADEQUATE
The maximum amounts of contracts awarded under the Hazardous
Waste Site Inventory cooperative agreement could not be de-
termined. This was attributable to contract amendments being
poorly written. According to 40 CFR 33.1015, each subagreement
must contain provisions defining a sound and complete agreement,
including the total cost of the subagreement. Since the contract
maximum amounts could not be determined, NYSDEC could be charged
more than intended.
The four contracts awarded under this cooperative agreement were
RECRA Research, Wehran Engineering, Engineering Science, and EA
Science and Technology. The amendments to these contracts did
not identify if work was being assigned under the original con-
tract or if the amendments increased the overall scope of work
and thus the maximum contract amount.
Under these contracts, the scope of work was authorized in a
piecemeal fashion by NYSDEC. After one task was performed under
a contract, another task would be assigned without increasing the
overall scope of the contract. If the total work assigned ex-
ceeded the contract maximum amount, then the maximum amount was
increased by an amendment. Confusion regarding the actual con-
tract amount could result in charges to the State over the amount
intended for the contract, and possible litigation.
CORRECTIVE ACTION TAKEN BY NYSDEC
The Commissioner of NYSDEC concurred with our recommendations to
amend the contracts to state the contract maximum amount and
state both the amount of the change and the maximum amount of the
contract in all future amendments. The proposed action is
responsive to the intent of our recommendations and consequently,
we make no further recommendations.
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FINDINGS AND RECOMMENDATIONS (Continued)
3. MINOR FINDINGS - CORRECTIVE ACTION TAKEN
A. STATE'S SUPERFUND PROPERTY MANAGEMENT SYSTEM NEEDS IMPROVE-
MENT
NYSDEC's property management system did not record the fund-
ing source, the entity in whom title was vested, or the Fed-
eral share of the cost for Superfund's participation in the
purchase of nonexpendable property. NYSDEC's property man-
agement system was not designed to record this information
as required by 40 CFR 30.531 and was not changed to record
these items when the cooperative agreements were received.
As a result, EPA's participation in any subsequent disposi-
tion could be overlooked.
B. FAILURE TO FILE QUARTERLY TECHNICAL PROGRAM REPORTS
During our audit period, March 8, 1982, through March 31,
1986, NYSDEC did not submit to EPA any quarterly Technical
Program Reports (TPR) as required by the special conditions
of the cooperative agreements. NYSDEC did not submit TPRs
because the EPA project officers often made site visits.
NYSDEC believed the EPA project officers were aware of the
progress of the cooperative agreements and that submission
of the TPRs would represent a duplication of effort. As a
result of NYSDEC's failure to submit TPRs, EPA did not have
written documentation from the recipient detailing
expenditures, estimates of work completed, cost and time
variances, and dates of completion.
CORRECTIVE ACTION TAKEN BY NYSDEC
The Commissioner of NYSDEC concurred with our recommendation and
stated that NYSDEC is currently undertaking a study which will
ensure that the property system conforms with Federal
regulations. Additionally, the Commissioner agreed to comply
with the special conditions of the cooperative agreements which
require TPRs to be submitted quarterly. The proposed actions are
responsive to the intent of our recommendations and consequently,
we make no further recommendations.
4. MINOR FINDING - CORRECTIVE ACTION NOT REQUIRED
The cost-plus-fixed-fee contract between NYSDEC and URS Company
contained the following language, "In no case shall the Fixed
Fee exceed ten percent (10%) of the total direct and overhead
costs." The amended contract provided for a fixed fee amounting
to $33,083. The above contractual language provides an incentive
for the contractor to incur no less then $330,830 in direct and
overhead costs. Since profit increases in direct proportion to
costs incurred up to that amount, the contract had the
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FINDINGS AND RECOMMENDATIONS (Continued)
characteristics of a CPPC contract, which is prohibited by 40 CFR
33.285. As of March 31, 1986, the total amount of contractual
payments under this contract were $597,499. Since profit had
already increased up to 10% of the $330,830 of direct and
overhead costs, this contract no longer had the effect of a CPPC
contract. Unless further amended, profit is fixed at $33,083,
thus eliminating the incentive for the contractor to incur
excessive costs. The URS contract was the only contract we noted
with this particular CPPC type provision. Future contracts
should avoid this type provision.
EPA Region 2 and Headquarters staff noted a similar finding in
their Management Assistance Report, dated November 14, 1985.
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EXHIBITS
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EXHIBIT A
COOPERATIVE AGREEMENTS AWARDED TO THE NEW YORK
STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SUMMARY OF COSTS CLAIMED,
FOfc THi! PERIOD MARCH
COST CATEGORY
Personnel
Fringe Benefits
Travel
Equipment
Materials and
Supplies
Contractual Services
Indirect Costs
Totals
Federal Share
. ACCEPTED, QUESTIONED AND
SET-ASIDE
8, 1982 THROUGH MARCH 31. 1986
AMOUNT
CLAIMED
(Note 1)
$ 748,210
228,206
40,441
5,928
1,650
7,601,269
329,150
$8.954,854
$8,847,330
ACCEPTED
(Note 2)
$ 748,210
228,206
40,441
5,928
1,650
6,027,804
329,150
$7,381,389
$7.273.865
QUESTIONED
(Note 2)
$ -
34,352
$34,352
$34,352
SET-ASIDE
(Note 2)
$
1,539,113
$1,539,113
$1,539,113
NOTES
3, 4
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Reports (SF 269) through March 31,
1986.
Note 2 See Exhibits B thru N for schedules of costs claimed,
accepted, questioned, and set-aside by cooperative
agreement.
Note 3 The $34,352 questioned consists of $15,279 (Exhibit D),
$11,868 (Exhibit E) and $7,205 (Exhibit J).
Note 4 The $1,539,113 set-aside consists of $305,580 (Exhibit
D), $397,129 (Exhibit E) , $223,901 (Exhibit H),
$112,799 (Exhibit I), $144,100 (Exhibit J),and $355,604
(Exhibit L).
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EXHIBIT B
POLLUTION ABATEMENT SERVICES, OSWEGQ COOPERATIVE
AGREEMENT (VOOZ43582) AWARDED TO THE HEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
"SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE" PERIOD MARCH 8, 1982 THROUGH MARGinf! , 1986
COST CATEGORY
Personnel
Fringe Benefits
Travel
Equipment
Materials and Supplies
Contractual Services
Indirect Costs
Totals
Federal Share
AMOUNT
CLAIMED
ACCEPTED
(Note 1)
$
3
$4
233,750
71,447
4,651
5,928
893
,776,461
104,741
,197,871
$ 233,750
71,447
4,651
5,928
893
3,776,461
104,741
$4,197,871
$4,091,628
$4.091.628
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT C
OLEAN WELL FIELDS COOPERATIVE AGREEMENT
1^0024758^) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION"
"SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD JANUARY 1, 1983 THROUGH MARCH 31. 1986
COST CATEGORY
Personnel
Fringe Benefits
Trave1
Materials and Supplies
Contractual Services
Indirect Costs
Totals
CLAIMED
(Note 1)
$113,627
34,542
11,849
365
540,489
50.020
$750,892
AMOUNT
ACCEPTED
$113,627
34,542
11,849
365
540,489
50,020
$750.892
Federal Share
$750.726
$750,726
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT D
SINCLAIR OIL REFINERY COOPERATIVE AGREEMENT
(VQ0248083) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED, ACCEPTED, QUESTIONED AND SET-
ASIDE FOR THE PERIOD JULY 18. 1983
ED, Q
3 THRi
OUGH MARCH 31. 1986
COST CATEGORY
Personnel
Fringe Benefits
Travel
Materials and
Supplies
Contractual
Services
Indirect Costs
Totals
AMOUNT
CLAIMED
(Note 1)
$ 76,513
23,345
8,795
107
789,429
33.275
ACCEPTED QUESTIONED
$ 76,513
23,345
8,795
107
468,570
33.275
SET-ASIDE NOTE
15,279
$931.464 $610.605 $15.279
305,580
$305,580
Federal Share
$931.365 $610,506
$15.279
$305,580
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
Note 2 NYSDEC entered into a contract wih SCM Martin, Inc.
which contained a prohibited CPPC type provision
covering a 5% subconsultant management fee. CPPC type
contracts offer the possibility of the contractor
permitting the cost of the project, or a portion of it;
to be increased in order to increase their profit.
Accordingly, 40 CFR 33.285 prohibits the CPPC contract
method.
We questioned the entire fee of $15,279 and set aside
the subconsultant costs of $305,580 claimed pursuant to
this CPPC provision of the contract. The total amount
claimed for this contract as of March 31, 1986 was
$789,100. Refer to Finding l.A for additional details.
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EXHIBIT E
MARATHON BATTERY COOPERATIVE AGREEMENT
(V00248583) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED. ACCEPTED, QUESTIONED AND SET-
ASIDE FOR THE PERIOD SEPTEMBER 1. 1983 THROUGH MARCH 31. 1986
COST CATEGORY
Personnel
Fringe Benefits
Travel
Contractual
Services
Indirect Costs
Totals
CLAIMED
(Note 1)
$ 56,341
17,126
4,438
410,662
24.703
AMOUNT
ACCEPTED
$ 56,341
17,126
4,438
1,665
24.703
QUESTIONED
$ -
11,868
$513,270 $104.273
$11.868
SET-ASIDE
NOTES
397.129
$397.129
2, 3
Federal Share
$513.270 $104.273
$11,868
$397.129
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
Note 2 NYSDEC entered into a contract with Acres American,
Inc. which contained a prohibited CPPC type provision
covering a 57, subconsultant management fee. CPPC type
contracts offer the possibility of the contractor
permitting the cost of the project, or a portion of it;
to be increased in order to increase their profit.
Accordingly, 40 CFR 33.285 prohibits the CPPC contract
method.
We have questioned the entire fee of $11,868 and set
aside the subconsultant costs of $237,360 claimed pur-
suant to this CPPC provision of the contract. The to-
tal amount claimed for this contract as of March 31,
1986 was $408,997. Refer to Finding l.A for additional
details.
Note 3 A cost analysis was not prepared for the Acres Ameri-
can, Inc. contract, as required by 40 CFR 33.290(a).
All costs under this contract ($408,997) would have
been set aside since no cost analysis was prepared.
However, a portion of these costs were questioned
($11,868) and set aside ($237,360) as a result of a
CPPC provision (See Note 2 above). Consequently, we
set aside the balance of this contract, amounting to
$159,769, due to NYSDEC not performing cost analysis.
Refer to Finding l.B for additional details.
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EXHIBIT F
KENTUCKY AVENUE WELLFIELD COOPERATIVE AGREEMENT
(V00249083) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD OCTOBER 15, 1983 THROUGH MARCH 31, 1986
COST CATEGORY
Personnel
Fringe Benefits
Travel
Materials and Supplies
Contractual Services
Indirect Costs
Totals
CLAIMED
(Note 1)
$ 42,971
13,124
3,063
26
316,684
18.875
$394,743
AMOUNT
ACCEPTED
$ 42,971
13,124
3,063
26
316,684
18.875
$394,743
Federal Share
$394.743
$394,743
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT G
YORK OIL COMPANY COOPERATIVE AGREEMENT
(V00249583) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD NOVEMBER 1, 1983 THROUGH MARCH 31, 1986
COST CATEGORY
Personnel
Fringe Benefits
Travel
Contractual Services
Indirect Costs
Totals
AMOUNT
CLAIMED
(Note 1)
$ 64,648
19,633
2,708
384,335
28.098
$499.422
ACCEPTED
$ 64,648
19,633
2,708
384,335
28.098
$499.422
Federal Share
$498,437
$498.437
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT H
VESTAL WATER SUPPLY COOPERATIVE_AGREEMENT
Ivp0257584) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION""
SCHEDULE OF COSTS CLAIMED, ACCEPTED AND SE1NASIDE
FOR THE PERIOD JANUARY 16. 1984 THROUGH MARCH 31. 1986
AMOUNT
COST CATEGORY
Personnel
Fringe Benefits
Trave1
Contractual Services
Indirect Costs
Totals
Federal Share
CLAIMED
(Note 1)
$ 25,243
7,626
511
223,901
10,896
$268.177
ACCEPTED
$25,243
7,626
511
SET-ASIDE
NOTE
223,901
$223,901
$268,177 $44,276 $223,901
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
Note 2 We set aside $223,901 because a cost analysis was not
prepared for the Ecology and Environment contract, as
required by 40 CFR 33.290(a). The set-aside amount
represents all costs claimed under this contract
through March 31, 1986. Refer to Finding l.B for addi-
tional details.
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EXHIBIT I
BREWSTER WELL FIELD COOPERATIVE AGREEMENT
TVO0258584) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED. ACCEPTED AND Slf^ASIDE
FOR THE PERIOD JANUARY 18, 1984 THROUGH MARCH 31. 1986
AMOUNT
CLAIMED
(Note 1)
$ 22,441
6,871
369
407,156
9,760
$446,597
$446,597
ACCEPTED
$ 22,441
6,871
369
294,357
9,760
1133 , 791
$333,798
SET-ASIDE
$
112,799
$112,799
$112,799
NOTE
COST CATEGORY
Personnel
Fringe Benefits
Travel
Contractual Services
Indirect Costs
Totals
Federal Share
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
Note 2 We set aside $112,799 because a cost analysis was not
prepared for the contract between GHR Engineering and
Dunn Geoscience, a subcontractor under the cooperative
agreement. The contractor must comply with the cost
and price considerations in 40 CFR 33.290 when awarding
subagreements, as stated by 40 CFR 33.295(i).
Additionally, 40 CFR 33.290(a) requires a cost analysis
for each negotiated subagreement estimated to exceed
$10,000. The set-aside amount represents all costs
claimed under this contract through March 31, 1986.
Refer to Finding l.B for additional details.
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EXHIBIT J
WIDE BEACH DEVELOPMENT COOPERATIVE AGREEMENT
(V00258084) AWARDED TO THE NEW YORK STATE"
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS CLAIMED, ACCEPTED, QUESTIONED AND SET-
ASIDE FOR THE PERIOD JANUARY 18. 1984 THROUGH MARCH 31. 1986
*3!
THI
AMOUNT
COST CATEGORY
Personnel
Fringe Benefits
Travel
Materials and
Supplies
Contractual
Services
Indirect Costs
Totals
CLAIMED
(Note 1)
$ 48,431
14,699
2,987
19
378,309
21.052
ACCEPTEDQUESTIONEDSET-ASIDE NOTE
$ 48,431
14,699
2,987
19
227,004
21.052
$465.497 $314,192
7.205
$7,205
144,100
$144.100
Federal Share
Note 1
Note 2
$465.497 $314.192
$7.205
$144.100
The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31, jfe
1986. W
NYSDEC entered into a contract with Ecological
Analysts, Inc. which contained prohibited CPPC type
provisions covering a 57, subconsultant management fee
and a 57, fee assessed to actual direct non-salary
expenses. CPPC type contracts offer the possibility of
the contractor permitting the cost of the project, or a
portion of it; to be increased in order to increase
their profit. Accordingly, 40 CFR 33.285 prohibits the
CPPC contract method.
We questioned the combined fees of $1,952 and $5,253
assessed on subconsultants costs and actual direct
non-salary expenses, respectively. Additionally, we
set aside the $39,040 and $105,060 of subconsultant and
direct non-salary expenses, respectively, claimed
pursuant to these CPPC provisions of the contract. The
total amount claimed for this contract as of March 31,
1986 was $378,159. Refer to Finding l.A for additional
details.
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EXHIBIT K
HUDSON RIVER
(V00243264
DEPARTMENT
SCHEDULE
PCS REMNANT COOPERATIVE AGREEMENT
) AWARDED TO THE NEW YORK STATE
OF ENVIRONMENTAL CONSERVATION
OF COSTS CLAIMED AND ACCEPTED
FOR THE PERIOD SEPTEMBER 1, 1984 THROUGH MARCH 31,
COST CATEGORY
Personnel
Fringe Benefits
Indirect Costs
Totals
Federal Share
AMOUNT
CLAIMED
(Note 1)
$1,634
498
704
$2,836
$2,805
1986
ACCEPTED
$1,634
498
704
$2,836
$2,805
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT L
MULTI-SITE I COOPERATIVE AGREEMENT
[FULTON TERMINALS7 CLOTHIER AND VOLNEY LANDFILL]
(V00243784) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
SCHEDULE OF COSTS_CLAIMED, ACCEPTED AND gET^ASIDE
FOR THE PERIOD DECEMBER 31, 1984 THROUGH MARCH 31TT986
AMOUNT
COST CATEGORY
Personnel
Fringe Benefits
Travel
Materials and Supplies
Contractual Services
Indirect Costs
Totals
CLAIMED
(Note 1)
$ 46,810
14,409
1,070
240
355,604
20.201
$438.334
ACCEPTED
$46,810
14,409
1,070
240
20.201
$82.730
SET-ASIDE
NOTE
355,604
$355.604
Totals
$438,334 $82,730
$355,604
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
Note 2 We set aside $355,604 because a cost analysis was not
prepared for the URS Company contract, as required by
40 CFR 33.290(a). The set-aside amount represents all
costs claimed under this contract through March 31,
1986. Refer to Finding l.B for additional details.
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EXHIBIT M
MULTI-SITE II COOPERATIVE AGREEMENT
(ENDICOTT WttLLFIELD, HAVILAND COMPLEX WELL
AND SUFFERN VILLAGE WELLFIELD)
(VO0262585) AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION
""SCHEDULE OF COSTS CLAIMED AND ACCEPTED
FOR THE~PERIOD MARCH 31, 1985 THROUGH MARCH 3l, 1986
COST CATEGORY
Personnel
Fringe Benefits
Indirect Costs
Totals
AMOUNT
CLAIMED
(Note 1)
$15,801
4,886
6.825
$27,512
ACCEPTED
$15,801
4,886
6.825
$27,512
Federal Share
$27.512
$27,512
Note 1 The amounts claimed represent expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT N
HAZARDOUS WASTE SITE INVENTORY COOPERATIVE AGREEMENT
(V00249685^ AWARDED TO THE NEW YORK STATE
DEPARTMENT OF ENVIRONMENTAL CONSERVATION"
""SCHEDULE OF COSTS CLAIMED AND ACCEPTED '
FOR THE PERIOD APRIL 1. 1985 THROUGH MARCH 31> 1986
COST CATEGORY
Contractual Services
Totals
Federal Share
AMOUNT
CLAIMED
$18,239
ACCEPTED
$18.239
$18.239
$18.239
Note 1 The amount claimed represents expenditures reported on
the Financial Status Report (SF 269) through March 31,
1986.
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EXHIBIT 0
DESCRIPTION OF HAZARDOUS WASTE SITES UNDER THE COOPERATIVE
AGREEMENTS AWARDED TO THE NEW YORK STATE DEPARTMENTOF
ENVIRONMENTAL CONSERVATION
Pollution Abatement Services, Oswego (V00243582)
Pollution Abatement Services (PAS) was an inactive waste site on
approximately 15 acres of land. The site was located immediately
east of the City of Oswego, New York. Two small streams flowed
adjacent to the property. Wine Creek flowed along the western
border and White Creek along the eastern border. The two creeks
converged just north of the property and flowed into Lake Ontario
which is approximately 1,800 feet to the north.
PAS operated a high temperature liquid waste disposal facility
during the period from 1970 through 1976. New York State closed
the operation due to the continuing failure to meet air
standards. In spite of previous cleanup efforts by EPA and New
York State, large quantities of oil and hazardous chemicals re-
mained on the property. Approximately 14,000 deteriorating bar-
rels and six storage tanks containing industrial wastes were on
the site.
Clean Well Fields (V00247583)
The concern at the Olean Well Fields site was contamination of
drinking water. This resulted in the closure of both public and
private water supply wells. The primary contaminant was
trichloroethylene (TCE) which was first discovered in the
ground water in November 1980. The source of this contamination
had not been defined. These contaminated wells were located in
the City of Clean, New York. There were approximately 100
private wells being used in the contaminated area.
Sinclair Oil Refinery (V00248083)
The Sinclair Oil Refinery site was located in Wellsville, New
York. It was situated on the Genesee River about % mile upstream
from the intake of the Village of Wellsville's water supply which
served 6,000 people. The Sinclair Oil Refinery operated from the
turn of the century until 1958 when the 100 acre site was
acquired by, and then divided between, the Village and Town of
Wellsville. The site was subsequently parcelled and sold. It
was reported that materials from past spills had saturated the
soil beneath much of the 90 acre refinery portion of the
property, and had leached into the Genesee River.
Marathon Battery (V00248583)
The Marathon Battery plant was located in a mostly residential
area and manufactured nickel-cadmium batteries from 1952 to 1979.
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EXHIBIT 0
(CONTINUED)
Until the early seventies, the plant's nickel and cadmium process
wastes were discharged through an outfall pipe into a cove at the
back of the foundry. The alkalinity within the cove resulted in
the deposition of large amounts of insoluble cadmium and nickel
compounds. It was suspected that cadmium wastes were also dis-
charged directly into the Hudson River.
Because of the contamination the recreational uses of the cove,
as well as a 290 acre bird sanctuary, were threatened. Lab-
oratory analyses indicated high levels of cadmium in the cove's
fish, crabs, other aquatic organisms, and marsh vegetation.
Although there was no indication of any ground water
contamination problem, wells which serviced the battery plant, a
school, and a mobile home park were in the vicinity. In addi-
tion, surface water supply intakes were located downstream on the
Hudson River.
Kentucky Avenue Wellfield (V00249083)
The Kentucky Avenue Wellfield was owned by the Elmira Water Board
(EWB) and provided about 10 percent of the water produced by the
EWB until it was closed in September 1980, following the discov-
ery of high levels of TCE. Contamination of the Kentucky Avenue
Wellfield with TCE was first detected during a "hot spot"
inventory of wells near the abandoned Westinghouse Chemical
landfill on May 20, 1980. The landfill was located approximately
1% miles northwest of the Kentucky Avenue Wellfield.
In addition to the Westinghouse landfill, several potential
sources of contamination of the Kentucky Avenue Wellfield had
been identified by an EPA historical aerial photographic study
and from information contained in NYSDEC files. The wellfield
was bordered by industrial areas and barren land. The barren
land was the former sites of the Old Horseheads Landfill and the
Kopper Company Wood-Preserving Facility.
York Oil Company (V00249583)
The York Oil Company site was originally developed as a waste oil
recycling facility. This 17 acre site eventually became a stor-
age facility of tanks and lagoons for polychlorinated biphenyl
(PCB) laden waste oils. The site was located approximately one
mile northwest from the Hamlet of Moira in Franklin County, New
York. Bordering the site was North Lawrence Road on the north,
Wangum Road on the northeast, an abandoned railroad grade on the
south, and a wetlands area in the west. There were an estimated
1,700 residents within a three mile radius of the site; however,
the immediate area was sparsely populated with only 11 families.
When the cooperative agreement was initiated, the site consisted
of two steel storage tanks, one graded lagoon, and two consol-
.39.
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EXHIBIT 0
(CONTINUED)
idated lagoons filled with contaminated soils and sludges capped
with kiln dust and sand.
Vestal Water Supply (V00257584)
The Vestal Water Supply site was located in the Town of Vestal,
Brootne County, New York and consisted of a municipal water supply
well which became contaminated with synthetic organics. The
major public health threat resulted from high levels of
1,1,1-trichloroethane, TCE, and other organic solvent related
compounds. These were detected in the spring of 1980.
Brewster Well Field (V00258584)
The Brewster Well Field was located on the northern bank of the
East Branch Croton River about 3/4 of a mile east of the Village
of Brewster, Putnam County, New York. It consisted of two well
fields, three deep wells, and two separate shallow wells. The
Brewster Well Field served as a water supply for 1,600 residents
of the Village, AGO residents of the Town of Southeast, several
businesses, and a rail yard.
During a routine survey in 1978, the State Department of Health
detected volatile halogenated organics (VHO) in the water supply
at levels exceeding the State's guidelines and Well Field No, 1
was ordered shut down. VHO contamination was also present in
Well Field No. 2, but within the State's acceptable limits.
Due to the shortfall in supply caused by the shutdown of Well
Field No. 1, the standby pump station at the East Branch Croton
River was activated and Deep Well No. 2 was added to the system.
Until January 1981, the commingling of these three sources
reduced the VHO content of the water delivered to the dis-
tribution system to acceptable levels.
Because of serious drought conditions in January 1981, the East
Branch Croton River could no longer be used as an emergency sup-
ply. Faced with a serious emergency, the Putnam County Health
Department authorized returning Well Field No. 1 to production
provided the customers boiled their water prior to drinking or
cooking.
Two new shallow production wells were connected to the system by
mid-1981, allowing Well Field No. 1 to be taken off-line. Soon,
Well Field No. 2 and Deep Well No. 2 showed increases in VHO at
levels exceeding State guidelines. The State then requested
their removal from operation and the activation of the standby
pumping station.
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EXHIBIT 0
(CONTINUED)
Wide Beach Development (V00258084)
The Wide Beach Development covered approximately 60 acres Located
in Southern Erie County within the Township of Brany, New York.
It was bounded on the south by the Cattaraugus Indian
Reservation, on the west by Lake Erie, and on the east and north
by private property. The community consisted of 66 homes
utilizing individual wells.
For at least 10 years, until 1978, waste oil contaminated with
PCB was utilized for roadway dust control. Reportedly, about
25, 55-gallon drums of oil were used two to three times per year
on the roadway in the residential community. An Erie County
Department of Environment and Planning investigation of an odor
and subsequent sampling indicated the presence of PCB in the air,
roadway dust, vacuum cleaner dust, soil, and water taken from
private wells.
Hudson River PCB Remnant (VQ0243284)
The Hudson River PCB Remnant sites consisted of PCB contaminated
sediments located in five discrete deposits along the edges of
the Hudson River. The deposits were exposed in a 1% mile stretch
of the River that began at the Town of Fort Edward and ended just
south of the Village of Hudson Falls.
During the 30 year period ending in 1977, an estimated 0.89 to
1.1 million pounds of PCB were discharged into the Hudson River
from two General Electric capacitor manufacturing plants at Fort
Edward and Hudson Falls. Much of the discharged PCB was absorbed
by the bottom sediments of the river and accumulated behind the
Fort Edward Dam, located approximately five miles downstream of
the General Electric discharge points. When the dam was removed
in 1973, a large amount of the PCB contaminated sediments was re-
leased and migrated downstream.
Multi-Site I (VQQ24378A)
1. Fulton Terminals
The Fulton Terminals site was an abandoned petroleum tank-storage
facility located within the corporate limits of the City of
Fulton, Oswego County, New York. From 1972 until 1979, this
facility was used to store hazardous wastes, most of which were
intended to be processed at Pollution Abatement Services in
Oswego, New York. Wastes were stored in both above-ground and
underground tanks.
In late 1981, the principals of Fulton Terminals, Inc. agreed to
cooperate with NYSDEC in a voluntary cleanup program. The vol-
untary cleanup lasted until March 1983, when the principals were
fined by NYSDEC for using an unlicensed handler of PCB waste.
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EXHIBIT 0
(CONTINUED)
2. Clothier
The Clothier site was located in the Town of Granby, Oswego Coun-
ty, New York and was used until 1974 as a disposal site for
barrels of waste from Pollution Abatement Services. Inspections
revealed that many of the barrels were in poor condition and
leaking.
NYSDEC brought suit against Clothier in November 1976 for operat-
ing an illegal dump. This action resulted in the granting of a
temporary permit and a period of one year to clean up the site.
Work was done in 1977 to cover the materials dumped on the site.
This work resulted in barrels being broken open and drained and
Clothier was cited for failing to meet the conditions of the
lawsuit.
One soil and two surface water samples were taken at the site by
the New York State Department of Health in 1978. The soil sample
was found to contain 92 parts per million of PCB. The surface
water samples were analyzed for PCB and the following organic
chemicals: trichlorethane, carbon-tetrachloride, chloroform,
TCE, tetrachloroethylene, bromoform, and dibromochloroethane.
None of these compounds were detected.
3. Volney Landfill
Volney Landfill, also known as the Oswego County Sanitary Land-
fill, was located on the west side of Silk Road in the Town of
Volney, Oswego County, New York. The landfill was situated on
the site of a former sand and gravel pit operated by the Oswego
County Highway Department. When the landfill was in operation it
served a population of about 34,000 people.
The Volney Landfill was purchased by Oswego County between 1975
and 1976. Prior to that time it was privately owned and served
the communities of Granby, Volney and Fulton. The landfill,
started in 1968, handled municipal refuse only. In the early
1970's the prior operator agreed with Pollution Abatement Ser-
vices of Oswego to accept 800 barrels of waste which were report-
edly disposed of at the landfill.
A large number of surface and ground water samples were taken at
and in the immediate vicinity of the Volney Landfill. An inves-
tigation in 1978 included stream sampling at the landfill and
ground water sampling at several private drinking wells.
Bromoform, bromodichloromethane, and dibromochloromethane were
found in a well approximately 1,000 feet north of the landfill.
Subsequent analyses in 1979 and 1980 found benzene, bromoform,
methylene chloride, and dichloroethane at wells on properties
near the landfill. In addition, leachate samples taken at the
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EXHIBIT 0
(CONTINUED)
landfill leachate cistern and southeast monitoring wells showed
low levels of phenols, TCE, PCB, and tetrachloroethylene.
Multi-Site II (V00262585)
1- Endicott Wellfield
In November 1982, the Village of Endicott detected the presence
of vinyl chloride in the Ranney production well. The Ranney well
was a significant source of the water for the Village,of Endicott
and provided the major portion of the water supply. The quantity
of water derived from this well could not be replaced by existing
wells in the Village water system.
Vinyl chloride and TCE in concentrations of three and two parts
per billion (ppb), respectively, were found in water surveillance
samples taken by the New York State Department of Health in 1982.
The drinking water guideline for vinyl chloride was five ppb.
2. Haviland Complex Well
The Haviland Complex was the name given to an area that covered
several blocks in the Town of Hyde Park, Dutchess County, New
York. The Dutchess County Health Department sampled the wells in
this area between December 1982 and January 1984. The analyses
showed that two of the four wells that supplied an apartment
house development, and seven private wells were contaminated with
TCE, perchloroethylene, vinyl chloride, chlorobenzenes, and other
volatile organic chemicals above the 50 ppb level for an
individual parameter and/or above the 100 ppb level for all
contaminants.
3. Suffern Village Wellfield
The Suffern Village Wellfield consisted of four wells in the Vil-
lage of Suffern, Rockland County, New York. Approximately 11,000
residents were served at an average rate of 1.5 million gallons
per day from the wellfield, which was immediately adjacent to the
Raraapo River in the northwest corner of the village limits. In
September 1978, the Rockland County Health Department detected
over 100 ppb of the solvent 1,1,1-trichloroethane in well number
4. Well numbers 1, 2, and 4 were closed in December 1978 due to
the contamination.
During an investigation in 1979, the Health Department identified
Tempcon Corporation as a likely source of the solvent
contamination. Tempcon has since removed its suspected dry well
and no longer uses 1,1,1-trichloroethane in its operations.
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EXHIBIT 0
(CONTINUED)
Hazardous Waste Site Inventory (V00249685)
Phase I site investigations were intended to provide a prelimi-
nary characterization of hazardous substances present at each
site, estimate pathways by which pollutants might migrate away
from the original site of disposal, determine what resources
might be affected by pollutants from the site, observe how the
disposal area was used or operated, and gather information re-
garding who was responsible for wastes at the site.
A Phase I investigation included compilation of existing informa-
tion about the site, site inspection, full data review, computa-
tion of a preliminary Hazard Ranking Score (HRS) according to
EPA's model, proposal of a site work plan, cost estimate for a
Phase II investigation, and preparation of a summary report.
Preliminary data and evaluations from Phase I investigations were
then used to determine what actions, if any, should next be un-
dertaken at the site.
Phase II site investigations were ordered by NYSDEC at sites
where Phase I results suggested that a significant threat to the
environment existed. Phase II investigations were intended to
confirm or disprove the existence of a significant environmental
threat. However, they were not intended to be sufficiently
detailed to determine the full extent of contamination, evaluate
remedial alternatives, or prepare a conceptual design for
construction.
The work plan prepared as part of the Phase I study served as the
basis for the Phase II investigation. Through detailed field
inspection, Phase II added to the body of data compiled in Phase
I. Geophysical studies, soil borings, ground water monitoring
wells, test pits, sampling, and analysis were techniques employed
in Phase II. This new information was used to assign a final HRS
score to the site, and was reported in a final site assessment
report.
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APPENDIXES
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,c: DEC 8
W
UNITED SI ATES ENVIRONMENTAL PROTECTIOK .G6NCY
REGION»
APPENDIX 1
CT. Draft Report on Interim Review of NYSDEC's Administration
of Superfund Cooperative Agreements
FROM: Herbert
Assistant Regi^iT Administrator for Policy & Management (2-PM)
TO:
Kenneth D. Hockman
Divisional Inspector General for Audit
Internal Audit Division (A-109)
Our comments concerning the above-referenced report are attached
for your consideration. In our judgment, the report is more
appropriately classified as a review rather than an interim audit.
To support our position, we find that three out of four stated
objectives were not achieved; that costs have been accepted based
upon a review of contractor billings and payments rather than con-
tractor records, thereby precluding a final regional determination
on such costs; that statements in the draft report are inconsistent
with stated objectives of the report and other statements within
the report; and that the report finds certain contracts to be a
prohibited type of contract without providing any information to
support this finding. Finally, our Regional Counsel has refuted
the auditor's conclusion that EPA was not set apart from the con-
tractor selection process as required by 40 CFR 33.245. These
points are discussed in detail in the attachment to this memorandum.
Due to the extent and nature of these comments, we request the
opportunity to review and comment upon the report before it is
issued in final. I believe you will want to consider carefully
the advisability of issuing the report as it currently stands.
If you or your staff need further information or wish to discuss
these comments further, please call me at FTS-264-3520, or Helen
Becjgun at FTS-264-9860.
Attachment
cc: Paul D. McKechnie (DIGA, Eastern Division)
Michael Goldstein (OIG, Eastern Division)
REGION II FORM 132O-1 (9/65)
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Draft Report on Interim Review of NYSDEC'j
Administration of SuperEund Cooperative Agreements
I.
Report Does Not Demonstrate That Certain Objectives Were
Achieved.
Results of Review;
Draft Report Page 1, Items 1, 3, 4; "The primary objectives
of our review were to:
Determine the adequacy, effectiveness, and reliability of
procurement, accounting, and management controls exercised
by NYSDEC in administering its cooperative agreements with
CPA.
0 Ascertain NYSDEC's compliance with provisions of the
Letter-of-Credit Treasury Financial Communications System
Recipient's Manual.
Determine the reasonableness, allocability, and allowa-
bility of the costs"claimed under the cooperative agree-
ments."
(A fourth audit objective was achieved and is not included
in this discussion)
REGION II Response
In our judgment, the three objectives cited above were not
achieved. Furthermore, the results of the auditor's review
contain internal inconsistencies. The following points
support these conclusions:
0 Regarding NYSDEC's procurement, accounting and management
controls, the auditor's report on internal accounting
control and compliance (page 15) states that "... our
studv and evaluation of internal accounting controls
did not extend beyond this preliminary review
%
>hase.
\J JL M l\J V. C A V^ 11\* U^ y V w w* *. *J y - **_*» ^ w ^ j - ~r__^~ E ^^^
Accordingly, we do not express an opinion on the system
of internal accounting controls taken as a whole. Also,
our examination...would not necessarily disclose material
weaknesses in the system of internal accounting control.
(underlining added). The auditor's qualification to the
scope of his review is inconsistent with the first objec-
tive stated above. Since the auditor did not extend his
review of controls beyond a "preliminary review phase
and "would not express an opinion on iNYSDEC'sl system
taken as a whole," the auditor, therefore, did not
"determine the adequacy, effectiveness, and reliability.
of...controls exercised by NYSDEC," as required by the
first objective.
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'.-jrW
- 2 -
In addition, the auditor concludes, on page 16 of the
report, that "our examination did not disclose any cri-
teria, other than those presented in the Findings and
Recommendations section of this report, that we believe
to be a material weakness." Such a conclusion is clearly
inconsistent with the auditor's statement on page 15
that his review "would not necessarily disclose material
weaknesses."
Regarding NYSDEC's compliance with letter of credit require-
ments, the report does not discuss compliance with letter
of credit reqicements at all. While the auditor identifies
letter of credit as one of the categories of internal
accounting control to be evaluated, the auditor has
qualified the scope of work of his audit as "not extending
beyond this preliminary review phase," and as "... not
necessarily disclosing material weaknesses in the system
of internal accounting control." Thus, we cannot rely
upon the report to provide any assurance regarding NYSDEC's
administration of letter of credit. This is another area
of inconsistency between the objective and results of
the review.
Regarding the determination of "reasonableness, alloca-
bility and allowability of costs claimed under the coopera-
tive agreements," we note that the auditor's scope of
work includes only a review of contractor billings and
payments, rather than an audit of contractor records. We
do not agree with the auditor's acceptance of contractual
costs in the absence of an audit. Where the method of
compensation under a contract is based upon reimbursement
for costs incurred, contractor records must be audited
in order to determine final allowability. The Region
connot render a final decision on the allowability of
contractual costs as presented in this review, if such
contractual costs are to be audited against contractor
records in the future.
Thus, we again find that an objective of the review was
not achieved. Also, we find the auditor's acceptance of
costs to be inconsistent with the basis of his review,
i.e., contractor billings and payments rather than con-
tractor records.
Region IIRecommendations
The report should be re-evaluated in terms of its stated
objectives. Statements which are inconsistent with
either the objectives of the audit or the qualified scope
of the auditor's review, as discussed above, should be
deleted from the report.
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- 3 -
All schedules of accepted and questioned costs should
be deleted from the response wherever contractual costs
in the schedules will require future audit of contrac-
tors' records (i.e., where the compensation is based
upon costs incurred).
In view of the above recommendations, the report's status
as an interim audit should be reconsidered for
classification as an "interim review."
II. Use of Prohibited Type of Contract.
Results of Audit
Draft report. Pages 17 and 18; "NY.SDEC used the prohibited
cost-plus-percentage of-cost (CPPC) type of contract."
Draft report. Pages 28, 29, 34;
The auditor questioned payments made to contractors totalling
$1,576,256 on three cooperative agreements (Sinclair Refinery
Marathon Battery, and Wide Beach) because the auditor found
that contracts were the prohibited CPPC type.
Region II Response
The audit does not contain any information to demonstrate the
basis for concluding that each contract questioned was the
CPPC contract prohibited by 40 CFR 33.285. The auditor states
only that "NYSDEC entered into CPPC contracts," and then pro-
ceeds to explain why CPPC contracts are unallowable. Extracts
from each contract should be provided in the report to support
the auditor's finding, or other information as appropriate.
During the audit field work, Region II staff were informed by
the auditor that a service fee had been charged by prime con-
tractors as a percentage of costs claimed by subcontractors,
and that contracts with such service fees were to be questioned
in their entirety as CPPC contracts. At that time, two Region
II Branch Chiefs informed the auditor that they disagreed with
the auditor's position that these CPPC service fees resulted
in the entire contract being questioned as a CPPC type of
contract.
We believe that an unallowable service fee in a contract does
not render an entire contract unallowable. The auditor roust
consider all of the elements of the contract, not simply the
service fee, before questioning the alienability <*" «£t8
under the contract. While we cannot determine if contracts
-48-
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>*' r
_ 4 .
with CPPC service fees have been classified as CPPC
contracts in the draft report, due to Lack of information
in the report, we would continue to disagree with such a
classification.
0 The auditor questioned $1,576,253 in progress payments on
three cooperative agreements because the auditor found
that contracts under these agreements were CPPC. Costs
claimed of $2,144 were accepted on these agreements [$329
(Exhibit D) + $1,665 (Exhibit E) * ($150 (Exhibit J) =
$2,144)). Using the auditor's rationale (which we take
issue with because it is based on contractor billings and
not contractor records), the report should have questioned
all costs on these contracts, rather than accepting $7,144
based upon progress payments*
Region II Recommendations
0 The final report should document the basis for the finding
that contracts under three cooperative agreements were the
prohibited cost-plus-percentage-of-cost (CPPC) type.
0 The final report should identify the profit or service
fee which has been claimed as a percentage of contractor
or subcontractor costs. In its resolution of the final
review, the Region would disallow such a profit or service
fee, even though we would not make a final determination
of the allowability of contractual costs since contractors'
records were not reviewed.
III« Privity of Subaqreement.
Result of Audit
Draft report, Page 17: "EPA and the United States were not
set apart from the contractor selection process as required
by 40 CFR 33.245."
Region II Response:
The auditor found three cases where a Region II project
officer was part of the NYSDEC panel that reviewed and
scored contractor's proposals and then made recommendations
to State officials on which contractor should be awarded
the contract. The auditor concluded that "As a result
of EPA participation in the state selection process, EPA's
position that it was not a party to any subagreement may
be jeopardized."
-49-
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- 5 -
We do not agree with the auditor's conclusion that EPA
involvement on a technical review panel is in conflict
with 40 CFR 33.245. EPA's participation on a state con-
tractor proposal technical review panel does not make
EPA a party to the subagreement or to the solicitation
of the request-for-proposal. Agency program policy is
to offer technical assistance to states; such assistance
has included the evaluation of proposals received from
consulting engineers being considered for contracts by
states.
On the basis o£ the finding in the audit report, we re-
quested and received a legal opinion which supports this
position. The legal opinion, which is attached and
incorporated herein, finds that:
"Section 33.246 does not prohibit the sort of
participation in the State's procurement actions
which has taken place in the contracts which
were audited. A decision as to whether to for-
bid such participation in the future depends
upon a consideration of the risks and benefits
of it, not upon a rule.
While it is true, as the auditors assert, that
having an EPA employee participate in New York's
contractor selection process increases the risk
that some sort of claim may be made against the
EPA, it is our opinion that such a risk is very
small and that the likelihood of any such claim
being held meritorious is extremely small. These
small risks may be considered against whatever
benefits may be reaped from providing the State
with technical assistance and from furthering
good working relationships with State officials."
Region II Recommendation
In view of the legal opinion we have received, we recommend
that this issue be deleted from the report, along with recom-
mendation E on page 22 of the report.
IV. Report Recommendations
Results of Auditt
Draft Report (pq.2); "We recommend that the Rgional Adminis-
trator ... disallow the questioned costs until NYSDEC performs
and documents a review of the amounts paid to the contractors
and makes a determination of the reasonableness of both the
costs and profit incurred to date and the estimated cost to
complete the contract."
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- 6 -
Region II Response
We disagree with this recommendation for reasons which have
been discussed in earlier comments and are highlighted below:
0 The auditor has not demonstrated why certain contracts
have been found to be unallowable cost-plus- percentage-
of-cost (CPPC) contracts, and why almost all costs under
these contracts should be questioned.
0 If it is only the service fee which is CPPC, only the service
fee is unallowable, not the entire cost of the contract.
We request that the auditor separately identify the amount
of the unallowable service fee claimed for each contract in
the final report.
* Contractual costs should not be accepted or disallowed
until they have been audited against contractors' records,
unless audit is waived or not required. If the contracts
in question are based on costs incurred, NYSDEC cannot
determine the reasonableness of the costs incurred to date
as the auditor would have them do, in the absence of an
audit of the contractor records.
Again, we do not believe that a review of contractor billings
and payments constitutes an interim audit of costs incurred
under cooperative agreements.
Region II Recommendations
We recommend that recommendation A, page 21 of the report, be
deleted.
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OATL: HOV I * 1956
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION II
FROM:
Draft Report on Interim Audit of HYSDEC's Administration of
EPA Superfund Cooperative Agreements
Douglas R. Blazey
Regional Counsel
iO: Herbert Barrack
Assistant Regional Administrate? for Policy
and Management
In your memorandum of October 21, 1966, concerning the above-
captioned draft interim audit, you askod for "a legal opinion...
addressCing] the auditor's position...that 'EPA and the United
States were not set apart from the contractor selection
process as required by 40 C.P.R. 33.245'."
Background
The auditors noted in their draft report that in three cases
which they examined "an EPA Region II project officer was
part of the State panel that reviewed and scored contractors'
proposals and then made recommendations to State officials on
which contractor should be awarded the contract." Draft
Interim Audit Report at 16. The auditors also stated (id. at
18, 19):
As a result of EPA participation in the State selection
process* EPA's position that it was not a party to
any subagreement may be jeopardized.
For example, EPA involvement in the State selection
process increases the risk that losing bidders might
succeed in naming EPA as defendant in litigation
concerning the assistance recipient's contract award
procedures. In addition, EPA involvement in the State
selection process increases the risk that other
persons might succeed in naming EPA as a defendent in
litigation concerning the performance of the contract
(e.g., contractor claims or tort claims).
On the basis of this analysis, the auditors drew the following
summary conclusion (id. at p. 3): "EPA and the United States
were not set apart from the contractor selection process as
required by 40 CFR 33.245." They went on to recommend
that the Regional Administrator ensure "that EPA employees
only provide oversight of the State procurement process and
do not participate on State selection panels." Id., pp. 19,
22.
-52-
REGiON II FOAM 132O-1 (»/SS)
-------
-2-
As the auditors themselves note, the participation of EPA
officials in the State's procurement process is limited to
assisting in the review and scoring of technical proposals.
That review and scoring is done by a committee prior to the
time when the proposals are presented to the State's award
official.
The Regulatory Requirement
The regulatory provision on which the auditors base their
conclusion and recommend*tions is found in Subpart B -
"Procurement Requirements* of 40 C.F.R. Part 33 - "Procurement
Under Assistance Agreements.* It provides:
$33.245 Privity of subagreement.
Neither EPA nor the United States shall be a_ party to any
subagreement nor (sic) to any solicitation o*r request
for proposals (emphasis added).
Discussion
Section 33.245 clearly provides that neither EPA nor the
United States may be a party to a contract; it does not*
despite the auditors' sweeping statement to the contrary,
require that EPA be totally "set apart from the contractor
selection process.* In the subagreements examined by the
auditors, the parties to the contracts were the State and
private firms. Furthermore, standard state contracts for
such work incorporate by reference Section 33.245's pro-
hibition on EPA being a party, thus putting the contractor
and others on notice that EPA was not in privity with the
parties to those contracts. Since EPA is not a party to any
of the contracts in question and since state contracts stipu-
late (by reference) that EPA shall not be a party, there is no
basis for finding it a party merely because it rendered
technical assistance in awarding the contract.
Although the auditors hypothesize that EPA might be drawn
into disputes over contract awards, claims arising out of
con.tract performance, or tort claims, they present no examples
of how that has happened in the past or how it might happen
in the future.
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Since it is impossible to prove a negative, it is impossible
to establish conclusively that the consequences hypothesized
by the auditors will not ensue from EPA'a limited participation
in New York's contractor selection process. Nevertheless/ it
is clear that some of the auditors' concerns are completely
baseless since there is no possible nexus between the results
which they fear and the actions of which they complain. For
examplei by definition contract administration or management
is different from contract procurement or award. A contractor
claim can arise only out of the administration or management
of a contract. The auditors cite no examples of EPA officials
participating in the administration or management of contracts.
Without such participation in the administration or management
of a contract* there is no rational basis for concern that
EPA should be involved in litigation regarding the administra-
tion or management of that contract. Similarly, it is imposs-
ible to visualize how a tort claim could arise out of anything
but contract performance - something in which EPA officials
are not alleged to be involved.
Conclusions and Policy Considerations
Section 33.245 does not prohibit the sort of participation in
the State's procurement actions which has taken place in the
contracts which were audited. A decision as to whether to
forbid such participation in the future depends upon a consider-
ation of the risks and benefits of it* not upon a rule.
While it is true* as the auditors assert* that having an EPA
employee participate in New York's contractor selection
process increases the risk that some sort of claim may be
made against the EPA, it is our opinion that such a risk is
very small and that the likelihood of any such claim being
held meritorious is extremely small. These small risks may
be considered against whatever benefits may be reaped from
providing the State with technical assistance and from furthering
good working relationships with State officials.
cc: James Marshall, 20EP
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APPENDIX 1A
OUR EVALUATION OF REGION 2'S COMMENTS
Accounting Controls
The purpose of an engagement to express an opinion on an entity's
system of internal accounting control differs from the purpose of
the study and evaluation of internal accounting controls made as
part of an audit. The auditor's study and evaluation of internal
accounting control is an intermediate step in forming an opinion
on the financial statements. It establishes a basis for
determining the extent to which auditing procedures are to be
restricted and assists the auditor in planning and performing his
examination. In an audit, the auditor may decide not to rely on
prescribed control procedures because he concludes either (a)
that the procedures are not satisfactory for his purposes or (b)
that the audit effort required to test compliance with the
procedures to justify reliance on them would exceed the reduction
in effort that could be achieved by such reliance. Accordingly,
the study and evaluation of the system of internal accounting
control in an audit is generally more limited that that made in
connection with an engagement to express an opinion on the system
of internal accounting control.
The second generally accepted standard of auditing fieldwork
requires that the independent auditor study and evaluate the
existing system of internal accounting control to establish its
reliability and to determine the extent of testing that must be
made. The study and evaluation of internal accounting control by
the independent auditor has a specific limited purpose, which is
to determine the scope of the audit.
Statement on Auditing Standards (SAS) Number 43"..clarifies the
minimum study and evaluation of the system of internal accounting
control contemplated by the second standard of fieldwork. The
review of the internal accounting control environment and the
flow of transactions. The minimum documentation required under
this section is also clarified. Documentation may be limited to
a record of the auditor's reasons for deciding not to extend his
review of the system of internal accounting control past the
minimum level. If the auditor does not plan to rely on internal
accounting control, he need not document his understanding of the
internal accounting control system." The statement goes on to
say"., the purpose of the review of the system is to obtain
sufficient knowledge and understanding about the accounting
system and the internal accounting control system: (a) to make a
determination of whether there are internal accounting control
procedures that may provide a basis for reliance thereon in
determining the nature, extent, and timing of substantive tests;
or (b) to aid the auditor in designing substantive tests in the
absence of such reliance."
.55.
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OUR EVALUATION OF REGION 2'S COMMENTS (Continued)
APPENDIX 1A
(CONTINUED)
The preliminary phase of a review of accounting controls should
be designed to provide the auditor with an understanding of the
control environment and the flow of transactions through the
accounting system. An understanding of the control environment
should provide the auditor with a general knowledge of such
matters as the organizational structure, the methods used by the
entity to communicate responsibility and authority, and the
methods used by management to supervise the system, including the
existence of an internal audit function, if any. An
understanding of the flow of transactions should provide the
auditor with a general knowledge of the various classes of
transactions and the methods by which each significant class of
transactions is authorized,- executed, initially recorded, and
subsequently processed, including the methods of data processing.
The auditor's understanding ordinarily is obtained by a
combination of previous experience with the entity, inquiry,
observation, and reference to prior year working papers,
client-prepared descriptions of the system, or other appropriate
documentation.
On completion of the preliminary phase of the review, an auditor
may conclude that further study and evaluation are unlikely .to
justify any restriction of substantive tests. . An auditor also
may conclude that the audit effort required to study and evaluate
the design of the system and to test compliance with the
prescribed control procedures to justify reliance on them to
restrict the extent of substantive tests exceeds the reduction in
audit effort that could be achieved by such reliance. Such a
conclusion may result from consideration of the nature or amount
of the transactions or balances involved, the data processing
methods being used, and the auditing procedures that can be
applied in making substantive tests. Either conclusion would
cause an auditor to discontinue further study and evaluation of
the internal accounting control system and to design substantive
tests that do not contemplate reliance on such internal
accounting control procedures.
Therefore, a complete review of the internal accounting control
system was determined not to be cost effective in the audit of
the New York Cooperative Agreements. However, testing of the
specific controls affecting only the specific types of
transactions within the scope of our audit is possible through
dual purpose tests. In an engagement, corroborative evidential
matter is obtained by performing compliance and substantive
tests. Compliance tests are performed to provide reasonable as-
surance that a client's system of internal controls is function-
ing as prescribed. On the other hand, substantive tests are em-
ployed by the auditor to determine the validity and the propriety
of accounting transactions and balances. SAS-1 (Section 320)
states that although the purposes of compliance tests and sub-
stantive tests are different, both purposes are often achieved
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APPENDIX 1A
(CONTINUED)
OUR EVALUATION OF REGION 2'S COMMENTS (Continued)
simultaneously through the tests of details. A test of details
would be considered a dual purpose test if (1) both the
compliance test objective and the substantive test objective are
achieved concurrently by the test and (2) the auditor designs the
test for a dual purpose. This was the case in the New York
Cooperative Agreements audit.
Procurement and Management Controls
It is the responsibility of management to achieve the objectives
of the organization. Administrative controls such as those
encountered in procurement encompass the procedures and recording
functions that become the basis for management decisions.
Administrative controls promote operational efficiency and
adherence to managerial policies. The procurement and management
controls included in the reports first primary objective were
tested independently of the accounting controls covered by our
report on NYSDEC's internal accounting controls. Therefore,
Region 2's comment should not apply to them.
In addition, the "Standards for Audit of Governmental
Organizations, Programs, Activities, and Functions" issued by the
General Accounting Office requires:
Either the auditors' report on the entity's financial
statement or a separate report shall contain a statement of
positive assurance on those items of compliance tested and
negative assurance on those items not tested. It shall also
include material instances of noncompliance and instances or
indications of fraud, abuse, or illegal acts found during or
in connection with the audit.
Therefore, our report is consistent with current professional and
governmental reporting requirements.
Letter of Credit Compliance
Our report identifies systemic, or material isolated, instances
of noncompliance with currently promulgated Agency procedures and
policies. Additionally, through our positive and negative
assurances, the report indicates that no letter of credit
issues arose, that were considered noteworthy, in relationship to
the cooperative agreements audited. To include the favorable
results of all audit procedures which indicated that required
procedures were being properly performed would make the report
much longer.
Audit of Cost Reimbursement Contract Costs
All categories of costs claimed in the NYSDEC report were audited
on a limited basis. This means that no costs were tested 100%.
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OUR EVALUATION OF REGION 2'S COMMENTS (Continued)
APPENDIX 1A
(CONTINUED)
Limiting audit procedures is accepted by both the American
Institute of Certified Public Accountants (AICPA) auditing
standards and by the General Accounting Office auditing
standards. Statement on Auditing Standards (SAS) No. 39 Audit
Sampling and SAS No. 47 Audit Risk and Materiality in Conducting
an Audit, promulgated by the AICPA,related to auditsamp1ingT
Auditsampling applies when the auditor desires to draw a
conclusion about an account balance or class of transactions and
he applies tests to less than 100% of the population. Our audit
procedures complied with SAS No. 39 and SAS No. 47. Due to the
nature of sampling, some of the cost reimbursement contractual
costs would very likely not be audited. We believe, based upon
our auditing procedures performed on these costs, that our opin-
ion is correct as stated. We examined adequate supporting re-
cords, which were required by NYSDEC to be submitted by the con-
tractor, to support the invoice amount which enabled us to accept
the c.osts for the cost reimbursement contracts which we audited
as part of our sample. Our acceptance of costs based on the
audit of costs claimed under the cooperative agreements does not
preclude Region 2 or NYSDEC from auditing costs for cost
reimbursement contracts at the contractor level.
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COMMIttlONC*
kl v APPENDIX 2
STATE OF New YORK
DEPARTMENT OF
ENVIRONMENTAL CONSERVATION
ALBANY, New YORK 12233- IOIO
HENRY G. WILLIAMS
DEC 10 19*
Dear Mr. Hockman:
The New York State Department of Environmental Conservation (NYSOEC)
welcomes the opportunity to review and comment on the draft of the "Report
of Interim Audit of New York State Department of Environmental
Conservation's Administration of its Superfund Cooperative Agreements with
EPA under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 for the period of March 8, 1982 through March 31,
1986," dated September 30. 1986.
The NYSDEC 1s constantly striving to Improve the administration of Its
Superfund Cooperative Agreements with the United States Environmental
Protection Agency (USEPA). A recent example Is the designation of a key
staff person 1n the NYSDEC1s Division of Solid and Hazardous Waste to
ensure that Division contracts, Including those emanating from the
Superfund Cooperative Agreements with USEPA, are developed, processed, and
managed 1n the most effective and efficient manner possible in conformance
with State and applicable federal laws. More emphasis Is being placed on
centralizing the focus of administrative, fiscal and legal needs of the
contract document in order to optimize technical staff time for the
technical development, conduct and oversight of the actual work.
Our specific comments with respect to the recommendations on pages 21
through 24 of the draft report follow:
0 Page 21, Recommendation 1A: "Disallow the questioned costs
until NYSDEC performs and documents a review of the amounts paid to
the contractors and makes a determination of the reasonableness of
both the costs and profit Incurred to date and the estimated cost to
complete the contract."
The questioned costs are based upon the auditors'
interpretation that the NYSDEC used the cost-pius-percentage-of-cost
(CPPC) type of contract which is prohibited by 40 CFR 33.285.
The NYSDEC does not use the cost-plus-percentage-of-cost type
of consultant contract where the contractor's profit is expressed as
a percentage of the total value of services provided. The NYSDEC
uses a cost-plus-fixed fee type of contract for consultant services.
As such, the fee (profit) is fixed at the time of contract award and
is not affected by the final value of the services provided unless
the contract's scope of work is modified. A number of our
consultant contracts do, however, include a provision for a
management fee which is to reimburse the consultant for managing
subcontract agreements procured by the consultant. The management
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Kenneth Hockman
2.
fee 1s expressed as a percentage of the value of services provided
by the subcontractor and Is premised upon the fact that the
consultant's effort and cost 1n managing a subcontract 1s
proportional to the value of the subcontract. The management fee Is
not profit, but reimbursement for costs Incurred In managing
subcontracts.
The concept of this direct cost management fee has been
reviewed by another federal agency (the Defense Contract Audit
Agency IDCAAJ) and has been found to be acceptable. The enclosed
Exhibit B from the Ecological Analyst, Inc. contract for the Wide
Beach RI/FS 1s Included as an example of the DCAA's
allowance/acceptance of such subcontractor's management fees.
As a practical matter and on a worst case basis (assuming
that the auditors are correct In their Interpretation that the CPPC
method was used), the costs that shou.ld be questioned relate only to
the subcontractor's management fee and not the entire contract
amount. The dollar value of the subcontractor's management fee 1s
only a small percentage of the entire dollar amount of the contract
and, therefore, questioning the entire contract 1s Inappropriate.
For example, the Department's contract with SMC Martin 1s a cost-
pi us-flxed-fee contract; that Is, SHC Martin will be reimbursed for
the actual direct costs (such as labor, supplies, subcontractor
services and travel), for Indirect costs and will be paid a fixed
fee (profit). The fixed fee was negotiated and agreed upon at the
time of contract award. The SMC Martin contract does Include a
provision whereby SMC Martin 1s reimbursed for Its costs to
administer subcontracts based upon a percentage of the value of the
subcontract work performed. Based on the estimated value of work
which would be subcontracted by SMC Martin ($462,000), the
subcontract management cost was estimated at $23,100, or five
percent of the value of the subcontract work. If 1t 1s determined
that this method of reimbursement 1s not consistent with 40 CFR
33.285, the SMC Martin contract can be modified to provide
reimbursement to SMC Martin for the Identifiable costs associated
with the management of subcontract work in a manner consistent with
40 CFR Part 33. In the meantime, the Department believes that the
portion of the costs associated with the SMC Martin contract which
should be questioned Is $21,036.30, the amount paid to SMC Martin as
the subcontract management fee as of September 1986. We do not
believe that $789,100 should be questioned when the contract
provision amount In question Is only $23,000.
Page 21. Recommendation 18: "Require NYSOEC to renegotiate the
contracts to a type acceptable under Federal regulations."
The Marathon Battery and Wide Beach contracts are completed or
terminated which makes any modifications to the contracts
Impractical.
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Kenneth Hockman 3,
Page 21, Recommendation 1C: Instruct NYSOEC that all future
contracts awarded, pursuant to Federal participation, comply with
Federal regulations (40 CFR 33.285}."
Concur. We would appreciate a determination from USEPA as to
whether the management fee for subcontracts heretofore mentioned
represents the CPPC method prohibited by 40 CFR 33.285. If so,
future contracts can specify a different method 1n which to
reimburse the consultants for Identifiable costs 1n managing
subcontracts.
Page 21, Recommendation ID: "Direct NYSDEC to prepare and
document a cost analysis when appropriate for current and future
contracts and participate only 1n fair and reasonable costs based
upon cost analyses."
Concur. However, It should be noted that a rigorous and
thorough cost analysis review has always been performed and 1t is
the NYSOEC's position that all contracts were signed at reasonable
costs. We believe that financial Interests of the New York State
and the federal governments are protected. In general, the NYSDEC
has been able to negotiate consultant contracts with costs less than
comparable USEPA contracts. The overhead rate and profit allowed In
NYSDEC managed contracts are usually less than those acceptable to
USEPA.
Page 22, Recommendation IE: "Inform Region 2 personnel that:
their role 1n the state procurement process is one
of oversight and not actual Involvement through
participation on State selection panels;
Instruct Region 2 personnel not to participate on
State selection panels;
inform NYSDEC that EPA is available for technical,
legal, and administrative advice during the procurement
process, but that EPA personal [sic] cannot participate
on any State selection panel that scores and ranks
proposals."
As a standard practice, the NYSOEC states in the requests for
proposal (RFP) for consulting services that "Neither the United
States nor the United States Environmental Protection Agency is, or
will be, a party to this request for proposal or any resulting
contracts." Our contracts for consulting services contain the 40
CFR 33.245, Privity of Subagreement, and more recently the NYSDEC's
standard consulting contract contains the following:
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Kenneth 0. Hockman
"Privity Agreement"
This AGREEMENT Is expected to be funded with funds
from the United States Environmental Protection Agency
(USEPA). Neither the United States nor any of Its
departments agencies or employees 1s, or will be, a party
to this AGREEMENT. This AGREEMENT 1s subject to
regulations contained In 40 CFR Part 33 1n effect on the
date of the assistance agreement award for this project."
Whether participation of USEPA Region II technical staff 1n the
evaluation of proposals contravenes the Intent of the Privity
Agreement Is a legal question which USEPA counsel should evaluate.
We have Interpreted that the participation of a USEPA technical
representative as one of five members of a selection panel to be
Important and useful technical assistance.
Page 22, Recommendation IF: "Require NYSDEC, when applicable,
for future procurements, to state 1n the RFP the relative Importance
attached to each evaluation criterion and evaluate each contract by
the criteria stated 1n the RFP."
Concur.
Page 22, Recommendation 1G: "Require NYSDEC to Instruct
contractors to Include model subagreement clauses (40 CFR 33.1030)
1n all subcontracts and avoid duplication or contradiction, between
NYSOEC clauses and model subagreement clauses 1n contracts awarded
by NYSDEC."
Concur.
Page 23, Recommendation 2A:
contract maximum amount."
Concur.
'Amend the contracts to state the
Page 23, Recommendation 2B: "State both the amount of the
change and the maximum amount of the contract 1n all future
amendments."
Concur.
Page 24, Recommendation 3A: "Make the necessary changes to
their property management system so that it conforms with Federal
regulations."
Concur. The Department is currently undertaking a study which
will ensure that the property management system conforms with
federal regulations.
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Page 24, Recommendation 38: "Comply with the special conditions
of the cooperative agreements which require TPRs to be submitted
quarterly."
Concur.
Me appreciate your solicitation of comments on the draft report for
the purpose of making the final report factual, fair, and technically
accurate.
Sincerely
Hehry G. Williams
Enclosure
Mr. Kenneth D. Hockman
Divisional Inspector General for Audit
United States Environmental Protection Agency
401 H Street S.W.
Room 300, North East Mall
Washington, D.C. 20460
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EXHIBIT B
SUMMARY OF ESTIMATED
DIRECT PROJECT RELATED
NON-SALARY COSTS
Category
Subcontractor Services
Subcontractor Management Fee (5 percent)
Chemistry
Field Trailer/Met Station
(Rental, Equipment Usage. Utilities)
Health and Safety Equipment
Snipping
Transportation
Subsistence
Report Production
. (Computer, Printing, Graphics, Binding)
Miscellaneous Direct Costs
(Copies, Phone, Technical Equipment Usage, Postage,
Expendible Technical Equipment, etc.)
Direct Cost Management Fee (5 percent)
Total
*Direct Cost Management Fee
Estimated
Direct Camt
$ 45,280
2,264
91,138
4,000
3,250
5.800
15,048
9,300
8,925
9.050
7.325
$201,380
EA's accounting system has been set up to comply vith federal cost
accounting regulations in regard to accumulating contract costs.
Our accounting practices have been audited by numerous federal and state
agencies, including the Defense Contract Audit Agency (DCAA) and found
to be in compliance vith accepted cost accounting principles.
To summarize our accounting system, costs are first accumulated as either
Direct (directly associated vith and chargeable to a client project) or
Indirect (not directly attributable to a client project). The Indirect
Costs are further accumulated as either Overhead (attributable to the
performance of client projects) or G&A (attributable to the overall
management of the company, i.e. account, finance, corporate management).
The Overhead Rate ia computed as a percentage of direct labor costs vhile
the G&A Rate ia computed as a percentage of total costs (both direct
costs and overhead).
Under this accounting method, ve believe it is appropriate to recover the
G&A costs associated vith processing not only on subcontractor costs but
on all direct costs for contracts.
Our most recent DCAA audit resulted in an approved rate of 13.51 for all
direct costs, but for this project ve have agreed 'to a reduced rate of
51. This vill allow us a nominal recovery of our costs associated vith
providing goods and services to the project.
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U.S. Environmental Protection
library, ROO-; °*04
401 M Street, S.W.
DC 20480
5
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