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           UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

                       OFFICE OF INSPECTOR GENERAL
                         SOUTHERN DIVISION, SUITE 278
                         1375 PEACHTREE STREET, N.E.
                          ATLANTA, GEORGIA 30309
                             (404) 347-3623 AUDIT
                         (404) 347-2398 INVESTIGATIONS
                                                           REGIONAL. OFFICE:
                                                           144S ROSS AVENUE, SUITE 1200
                                                           DALLAS, TEXAS 75202-2733
                                                           (214) 6S54C21 AUDIT
                                                           (214) 655-W10 INVESTIGATIONS
                           March 13,  1989
MEMORANDUM
Subject:
From:
To:
               Audit Report No. E5cGN8-04-0329-9300028,  Costs Claimed
               Under Cooperative Agreement VO04477-02  by the
               Department of Health and Environmental  Control,
               Columbia, South Carolina
               D.  Michael Bea
               Acting Divisional Inspector General  fozf Audit

               Greer C. Tidwell
               Regional Administrator
               Region IV
SCOPE AND  OBJECTIVES

We have performed an audit of Cooperative Agreement No.  V004477-02
between  the EPA  and the South Carolina  Department of  Health and
Environmental  Control (DHEC).  Our objective was to  determine if
costs claimed  were  reasonable, allowable, and allocable under the
terms of the agreement and applicable EPA regulations.   The cost
principles contained in OMB Circular A-87 were used  to determine
the acceptability of the cost claimed.

To accomplish our  objective,  we  examined the  project  files for
fiscal years 1986  and  1987, files  generated during  our previous
audit  (see  Audit  Report   No.  E5cG4-04-0100-70767,  February 19,
1987), and DHEC's Finance and Accounting  Records.

Our examination was made in accordance with the Standards for Audit
of Governmental Organizations, Programs.  Activities and Functions,
issued  by  the Comptroller General  of   the  United  States,  and
accordingly included such  tests of the accounting records and other
auditing  procedures  as we considered  necessary  in  the  circum-
stances.   We  did  not  specifically  review the  DHEC's  system of
internal controls;   however, nothing  came to  our attention that
indicated  noncompliance with  respect to  the items not reviewed.
Field work was accomplished during the week of November 14, 1988
and covered the period of  performance from June 28,  1982 through
December 31, 1987.
                                           WASHINGTON. U. 2MB

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SUMMARY OF FINDINGS

In our opinion, subject to the effects of  EPA's ultimate resolution
of the questionable expenditures summarized below and presented in
Exhibit A, the costs claimed fairly present the financial informa-
tion in accordance with the financial provisions of the cooperative
agreement and  applicable EPA regulations.   The results  of audit
are:
               CLAIMED

Total Cost   SI.259.735
ACCEPTED

$889.101
QUESTIONED

 $370.634
FINDINGS AND RECOMMENDATION

Our review  disclosed the DHEC claimed  excessive  and unsupported
costs totaling $370,634 as discussed in the following paragraphst

1•   Contractor Change Order.

     a.  Finding.   The DHEC  claimed  $249,367 more for change order
costs  than  Region IV  had  authorized in the  final determination
letter.  Region IV limited the Federal portion of the contractor's
proposed  change  orders to  $54,000 based  on  EPA's  technical
evaluation  of  the contractor's  claim.    The Region  amended the
Cooperative Agreement  adding  $60,000, of which  EPA would fund 90
percent.  However, the DHEC  claimed  $309,367.  Under EPA's general
grant  regulations 40 CFR 31.70(c),  EPA'8  notice  of  decision is
final after  30  days  unless  the grantee requested  a  review.   The
DHEC did not appeal the final  determination letter, therefore, the
amount in excess  of  the $54,000 EPA agreed  to  pay represents an
overpayment and should be recovered  (see Site History for further
details}.

     b.   Grantee'a Comments.   The  Commissioner,  South Carolina
Department  of   Health and  Environmental Control, provided the
following  comments  (the Commissioner's  complete comments  are
attached to this  report):

     "The contractor submitted a  request for change orders in
     the amount of $542,302 which were dismissed  by the State.
     The contractor  then appealed to the  State Procurement
     Officer, who rendered  no decision.   The State was then
     forced to negotiate a  settlement or face a lengthy court
     battle with  the contractor.  The  decision was made to
     negotiate a settlement and $309,367 in change  order cost
     was approved.  Concurrence was sought and obtained from
     the U.S.  EPA Region  IV  Regional Administrator  in the
     settlement.  It was agreed that although EPA  would only

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     fund  an  additional  $54,000  of  the  $209,367  Federal
     portion  of the payment,  DHEC  had additional unclaimed
     costs  of  approximately  $150,000 to  make up  the dif-
     ference.  The State has now claimed $140,006 in addition-
     al  costs,  all of  which  has  been  disallowed by  the
     auditors  [see  following finding].

     "Interim  Audit No.  E5CM4-04-0283-50360 was subsequently
     conducted and  $275,018  of the  amount negotiated by the
     parties was accepted, subject to technical review by EPA.
     EPA  agreed to support  only $54,000 of  the  payment as
     stated above.

     "The  State did  not  appeal the  decision at  the time
     because  it was  felt an  appeal would  jeopardize it's
     position  in the court proceedings against the generators
     which was in process."

     c.   Additional Audit Comments.   On  September  27, 1985, the
Region  amended the Cooperative  Agreement  increasing the Federal
portion by  $54,000  (90% of $60,000).   The State disregarded this-
amendment and  withdrew from their letter-of-credit an additional
sum of  $209,367 to complete payment of the negotiated settlement
with the contractor.

The $150,000  of unclaimed cost  the  State indicates would offset
the over-withdrawal is not supported.  The State has recorded .an
additional $9,500 of incurred cost since the interim audit of this
cooperative agreement.  The disallowed costs of $140,006 the state
refers to are  discussed  in the following findings.
2.
Labor Coats.
     a.   Finding.   The  DHEC claimed $121,267  as State matching
costs for  salary,  fringe benefits,  and indirect coats.  However,
the costs  were not  properly supported by the  State's method of
labor  coat accounting.    To arrive  at the  $121,267,  the DHEC
subtracted budgeted  Federal  funding for Bluff Road labor costs in
the State'a  Financial Management  System (FMS)  from labor costs
charged to Bluff  Road as recorded in  the  State's Personnel Coat
and Accountability System (PCAS).   However,  the budgeted FMS and
the actual PCAS are  not  reconciled by the State.  Therefore, the
$121,267 merely represents  labor costs  incurred on Bluff Road in
excess of what was originally budgeted for Federal funding.  Since
PCAS is  not reconciled  to  FMS,  the  State cannot establish the
$121,267  was  not  already  paid by  some other Federal  grant.
Federal funding may  have already occurred because the State uses
the FMS  as  its  official  accounting  record  for  preparing  the
Financial  Status  Report.  Thus, Federal grants are charged coat
baaed on budgeted figures rather than actual.  Without  reconciling
the two accounting systems,  the  State cannot determine the  actual
labor costs paid with State  funds.

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     b.   Grantee's Comments.   The Commissioner, South  Carolina
Department  of Health  and  Environmental Control,  provided  the
following comments:

     "The State utilizes  the  Personnel Cost Accounting System
     PCAS to account for all direct  labor  costs  incurred in
     its  Environmental Programs.   The  Financial  Management
     System is  a budgeting  tool  used for distributing  the
     various  State and  Federal funds  to  cost centers  for
     accounting purposes.   The budget limits the amount of
     Federal funds which  can  be spent to the amount specified
     in the Cooperative  Agreement; however, State and Federal
     funds are not distinguished by line item.

     "The State agrees to  provide a certain number  of  full
     time equivalent man  years in the Cooperative Agreements.
     The State is not required to identify each individual by
     FTE, so it is possible that one FTE in the Agreement may
     be made up by several individuals.   The PCAS is used to
     accumulate FTE's as  well as labor costs in each program.


     "The PCAS system is  directly related to actual  payroll.
     Actual labor  costs  are  distributed  based on each  in-
     dividual's time sheet.    Therefore, actual  distributed
     cost cannot exceed  budgeted  cost.   It  is possible  for
     budgeted costs to exceed actual costs, if, for instance,
     the  Cooperative Agreement contain no  State  Matching
     Funds.   But  the State  would  not  be able to claim  the
     excess costs on the Financial Status  Report,  resulting
     in the lapse of the  Federal funds.

     "The Auditors question the State's process of reconcil-
     ing budgeted  FMS payroll costs and actual  PCAS costs.
     The State's  process of  reconciliation  determines  that
     the level of effort is  sufficient  to  meet requirements
     of the Cooperative Agreement.  We can find no requirement
     in circular A-87 which  requires each individual to be
     reconciled to this budgeted cost.

     "Further, our  Cooperative Agreements contain  the  fol-
     lowing special condition:

          This Award and  resulting ration of funding la
          based  on  estimated  cost  requested  in  the
          application.    Final  allowable  cost for  EPA
          participation  shall not exceed 60% (appropri-
          ate statutory  limitation)  of  total  eligible
          cost or total  funds awarded.
     "We feel the State has met the requirements of circular A-87

                                4

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     and EPA in  accounting  for  actual  labor  costs.   The total
     cost identified by  PCAS  balances  to  the total  budgeted FMS
     costs.  The reconciliation process has  been further descri
     bed in our  response to EPA audit, Report No. E3BW8-04-0333.
     We feel these  controls are adequate to meet established
     requirements and provide controls to protect both State and
     Federal interests.

     "Disallowing State Matching Funds  under these conditions
     is not justified."

     c.   Additional Audit  Comments.   The State  cannot provided
documentation to support the  questioned $121,267.  Without recon-
ciling the two accounting systems,  the  State can neither establish
that the  $121,267  was  not already paid under  some  other Federal
grant, nor determine that actual labor  costs were paid using State
funds.  The State's concern over budgeted  full-time equivalents is
not at issue.

3.   Security Costs.   In our draft report, we questioned $18,739
for certain security costs for which the State could not support.
In  responding  to  the  draft, the  State  located  the appropriate
documentation.

RECOMMENDATION

We recommend that Region IV not  participate in  the dollar  amounts
questioned.  In  addition,  Region IV should recover funds due EPA
in accordance with established guidelines.

ACTION REQUIRED

In  accordance  with  EPA Directive  2750,  the  action  official is
required  to provide  this  office  with  a copy  of  the proposed
determination on the findings within 90 days of the audit report
date.

BACKGROUND

Section 104(c)(3) of the Federal Comprehensive Emergency Response
Compensation and Liability Act  of 1980  commonly referred to as
Superfund, provides  that no  remedial  action  can be taken unless
the State in which the hazardous release  occurs first enters  into
a contract  or  cooperative agreement with EPA, ensuring that the
State will, (1) assume the operation and maintenance responsibil-
ity* (2) provide a  facility for off-site disposal,  and (3) share
in the cost of the remedial action taken.

On June  28,  1982,  the  EPA awarded  Cooperative  Agreement Number
V004477-02  to  the  South  Carolina DHEC  to clean  up  the South
Carolina Recycling  and  Disposal site commonly known as the Bluff
Road site.  This cleanup was necessary to  help  control  surface and

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 ground  water  pollution  and eliminate  an  environmental  hazard
 resulting  front improper disposal of hazardous wastes.  The planned
 remedial action  used a two-phased approach.   The first phase was
 to  remove  and dispose  of the remaining  surface  drums  and other
 contaminated waste chemicals stored on site that remained after the
 original removal action was completed.   The second phase was to
 conduct a  field  investigation to  determine remaining problems and
 to  determine the most  cost  effective remedial action to be taken.
SITE HISTORY

The  DHEC's attention  to  the Bluff  Road site  was  drawn  by an
incident in October 1977.  Following a rain,  water  seeped into and
reacted with the contents of several 55-gallon drums  on site.  The
reaction formed a  dense corrosive vapor cloud over State Highway
48.   The  cloud prompted about 50  persons,  including motorists,
police, and fire department personnel  to  seek medical  attention.

The DHEC requested South Carolina Recycling and Disposal to compile
an inventory of the materials stored on site.  After a review of
the inventory,  State officials began negotiating with  the company
to remedy  site  problems.  After failing to negotiate any positive
actions,  DHEC  filed  suit against  South Carolina Recycling and
Disposal in May 1979.  The State's  suit was  not successful.

In March 1980,  the  EPA  performed an environmental study of the area
surrounding the site.  Samples were taken from soil, surface water,
sediments  in nearby drainage  ditches,  several water supply wells,
and Myers  creek.   Samples  taken  from Myers  creek and the water
wells were considered  inconclusive.  However, levels of contamin-
ants in the drainage ditches  were significant and corresponded to
the contaminants found on site.  This study concluded that contam-
inated runoff was probably leaving the site during rainfall periods
and contaminating  shallow groundwater  near the site.  As a result
of this study,  EPA filed suit in July 1980  to:  (1)  halt further
acceptance of waste at the Bluff Road site, (2) abate the environ-
mental problems caused  by  the  existing waste,  and  (3) properly
dispose of all waste at  the site.  This suit was successful.

In early 1981,  the Bluff  Road site was evaluated for inclusion on
EPA's National Priority  List  (NPL) of  hazardous waste  sites.  The
site, identified by the State  as its number one priority, was later
included on the NPL as  the 83rd ranked site in the Nation.  In late
1981, the  State,  in conjunction with  EPA Region IV, applied for
CERCLA Trust Fund monies to cleanup the site.   On December 24, 1981
the  funds  were approved  and plans  got underway to  begin the
cleanup.   However,  a number of companies,  which had generated some
of the wastes  stored at  the  site,  expressed interest in funding
cleanup of  the area.  The companies negotiated a settlement to fund
the removal of  75  percent of the waste on the site  at a cost of
$1,865,360.  The  EPA intents to  recover  the remaining cost from

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responsible  parties that  did not  agree to  participate  in  the
cleanup.

Following the foregoing  cleanup,  the  EPA and  the State began the
remainder of the  surface cleanup under Cooperative Agreement No.
V004477.02.  In January  1983, bids were received.  The successful
bidder was  Defender Vactor Systems,  Inc. (Defender),  with a bid
$519,586.

On July  1,  1983 Defender submitted a  letter  of  substantial com-
pletion  and a notice  of intent  to  request change orders.   The
request  for change orders was  submitted in August 1983.   These
change  orders  were first  dismissed  as  being  submitted  in  an
untimely manner.    After a request  for reevaluation,  the State
declared 20 of  the change  orders as  submitted  untimely and the
remaining five as lacking merit.  Defender then filed a complaint
with the State's  procurement officer  and an  evidentiary hearing
was held in Columbia.  The hearing officer ordered the parties to
negotiate a settlement.  The original change  order requests totaled
$542,302.   Defender  and the  State  negotiated  a  settlement  of
$309,367.   The  EPA,  through a technical evaluation of the change.
orders,  agreed  that   $60,000  was  eligible and  issued  a grant
modification  for  an increase  in funding of  $54,000  for  the  90
percent  Federal portion  of  the change order costs.  However, the
State  paid  $100,000 of  the  settlement from State  funds and the
balance by withdrawing $209,367 from its letter of  credit with the
EPA.

In the interim audit  of this  Cooperative  Agreement  (see Audit
Report No.  E5cG4-04-0100-70767,  February 19,  1987),  we reported
that  the Contractor   and  the  State  had  agreed  to  settle  for
$309,367, that  the  State paid Defender $100,000  from state funds
and paid the remaining $209,367 using funds  from  the EPA letter of
credit.  The EPA,  in  a final determination  notice dated December
20, 1985, agreed to fund  only $54,000 of the  settlement.  Since the
State did not appeal the final  determination, we questioned the
excess of $155,367 over the $54,000 as an overpayment in accordance
with 40 CFR 30.1200(c).

Region IV concurred with  the audit finding that EPA's participation
was limited to $54,000 and the difference of $155,367 was unallow-
able.  However,  since this was an interim audit,  and the DHEC had
informed the Regional  Administrator  that  it had  incurred some
$150,000 of personnel,  fringe benefits, and operational costs which
it had not yet claimed, the Region did not require repayment. DHEC
recorded only $9,500 in additional costs since the interim audit.

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                            EXHIBIT A
        SUMMARY OF COSTS CLAIMED,  ACCEPTED,  AND QUESTIONED
               COOPERATIVE AGREEMENT NO.  VO04477-02
                June 28, 1982 to December 31,  1987
Classification

Salaries           $
Fringe Benefits
Travel
Indirect Cost
Contractual Services:
     Task I
     Task II
Other Cost
   Claimed  Accepted Questioned
Total
   143,026
    24,496
     6,149
    18,359

   837,436
   210,106
    20.163
$ 50,002  $ 93,024
   8,606    15,890
   6,149
   6,006    12,353
 588,069
 210,106
  20.163
Federal Sharet
     Task II** at  100%
     Remainder at 90%
Less EPA Payments

Amount Due EPA
            $210,106
             611.096
            $821,202

             998.102

            $176.900
249,367
Ref

Note 1
Note 2

Note 2

Note 3
$1.259.735  $889.101  $37
        Per the  cooperative  agreement,  Task  II  costs  were 100
     percent funded by the EPA.


Note 1:   Cost questioned  represents  salary costs of individuals
          assigned to other Federal or State programs.  The  costs
          for these individuals have already been  claimed on  other
          programs; therefore, to allow DHEC to claim these  costs
          as part  of  its state matching costs would result in a
          double payment.  The State  has  not adjusted or removed
          the  salary  costs   from  the  programs  in which   these
          individuals are  assigned.   The  accepted amount is that
          cost actually recorded  in DHEC's  official accounting
          records.

Note 2i   Cost questioned represents fringe benefits and indirect
          cost applicable to the salary cost questioned in Note  1.
                                8

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Note 3:   Cost questioned  represents  the difference between what
          DHEC agreed  to  pay  the cleanup contractor  for change
          order costs and the change order costs the EPA agreed to
          participate  in.   After  a technical evaluation  of the
          change  orders submitted  by Defender  Vactor,   the EPA
          agreed, to participate  in  $60,000 of the added charges.
          However, the State's negotiated a settlement with Defen-
          der for  $309,367 and claimed the full  amount under the
          cooperative  agreement.   However, the EPA had  issued a
          letter of decision on December 20, 1985, indicating the
          amount eligible  would  be  $60,000 and gave the State 30
          days to  appeal.   The State did not appeal.   Therefore,
          according to  40  CFR 31.79(c),  EPA's notice of decision
          is final.

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             South Carolina Department of Health
                   and Environmental Control
     f
      m '
MAR  2 1989
 2600 Bull Street
Columbia, S.C. 29201


  Commissioner
 Michael D. Jarrctt
                               February  23,  1989
                                                             OFFICE OP INSPECTOR
                                                                      AUDIT
         CSKZRAL
        Board
Toney Graham, Jr., M.D., Chairman
Henry S. Jordan, M.D., Vice-Chairman
  John B. Pate. M.D., Secretary
    William E. Applegate
     Oren L. Brady. Jr.
     John Hay Bumss
    Euta M. Colvin, M.D.
     0. Michael Beard
     Acting Divisional  Inspector General  for Audit
     United States Environmental Protection Agency
     Office of Inspector  General,  Southern Division
     1375 Peachtree Street,  N.E.
     Atlanta, Georgia   30309
                               RE:   Draft Audit Report E5cGN8-04-0329
     Dear Mr. Beard:
     Enclosed you will  find a response prepared by our Environmental
     Quality Control  staff  to the above referenced draft audit report.
     We believe that  this draft audit basically deals with two main
     issues.

     The first and most important issue deals with documentation of our
     labor costs through our Personnel Cost Accounting System (PCAS).
     By letter of January 10,  1989,  to Michael D. Simmons, then Acting
     Divisional Inspector General for Audit, we feel that we have
     adequately responded to this matter and corrective action has been
     implemented (Draft Audit Report E3bW8-04-0333).

     The second issue contained in this draft audit report deals with
     circumstances surrounding the necessary clean-up of the Superfund
     site located on  Bluff  Road in Columbia.  Our Environmental Quality
     Control staff felt that it would be beneficial to list a chronolo-
     gy of the events surrounding this clean-up from our perspective,
     because of the length  of time this issue has been outstanding.

     We are interested  in resolving these matters as quickly as possi-
     ble.  We believe that  the end result will be a recognition of the
     fact that EPA has  received full benefit for the dollars that it
     has invested in  this agency.

     Please let me know if  further information is desired.

                               Sincerely,
                               Michael D.
                               Commission
     «DJ/br
            Appendix I
            Page 1  of 8

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                   RESPONSE TO EPA AUDIT ESCGN8-04-0329
     A.  Change Orders

          The Bluff Road disposal site of the South Carolina Recycling  and
Disposal Company  (SCRDC) has  been a concern of  the Department for  almost
twelve years.  From the time that  DHEC's attention was first drawn to  the
site, much effort has been expended by State DHEC and Federal EPA to ensure
that the  most  thorough  clean-up  possible was  attained  at  the  lowest
possible cost.   Although  this effort  was  expended in  good  faith,  the
  ditors have disallowed  certain claims as  frivolous on purely  technical
"grounds and  have not  considered  all the  circumstances involved  in  the
decisions that had to be made by the State and EPA.

          After initial efforts to get SCRDC  to clean up the site  failed,
other avenues  were  explored.  An  evaluation  of the  site  under  CERCLA
(Superfund) criteria resulted in the  site being designated as the  State's
number 1 priority  and also  being placed  on the  EPA's National  Priority
List.  EPA Region IV urged the State in 1981 to apply to EPA in Washington,
D.C., for Superfund monies to clean-up  the site.  The funds were  approved
in December 1981.

          At about  the  same  time,  approximately  three-fourths  of  the
  Ferators responsible  for the  waste at  the site  initiated a  voluntary
                                                                   Appendix I
                                                                   Page  2 of 8

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 action to clean-up their portion of the waste.   The contributions  amounted
 to  $1,579,760  for  the  surface  clean-up  and  $91,140  for  groundwater
 remediation.  The S.C. D.H.E.C.  contributed an additional $6,000.00.    One
 of the generators, RAD  Services, Inc., provided  the clean-up services   in
 lieu of payment.

           The majority of the  funds were received by  March 19,  1982,   and
 the clean-up was begun.
           On March 23,  1982,   a partial  consent  decree  was  entered  in  the
 United States District  Court  for  the District of  South Carolina,  Columbia
 Division,  between  the  United  states of  America  and  the State  of  South
   rolina,  plaintiffs, and the responsible parties  agreeing to contribute to
 the  clean-up.  The consent decree   absolved  those  responsible parties   from
 liability  under C.E.R.C.L.A.,  and provided  for  the timely  disposition  of
 their  portion of the  waste.   Those generators not  a party  to the  decree,
 also called  the  Settlement Agreement, remained  liable for  treble  damages
 under  the  Act.
          The U.S.  Justice Department,   representing  EPA,   brought   action
under the Act to  require  the   remaining  responsible  parties  to  pay for   the
remainder of the  clean-up.  The  State, represented by  the Legal  Department
of S.C. D.H.E.C., also  joined  in the  suit  to  recover any costs  incurred   by
the State.
          The clean-up proceeded   rapidly  from   this  point  and the  action
covered by the Settlement Agreement was substantially completed by the  end
                                                                   Appendix I
                                                                   Page 3 of 8

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   the  year.  RAD  Services did  an excellent  job and  carried out  their
responsibility as agreed without incident.

          On May 6, 1982, the State applied for a Cooperative Agreement for
action at  the  site to  clean-up  the remaining  25%  of the  waste.   The
application was approved, and  Cooperative Agreement number V004477-02  was
awarded  on  June  28,  1982.   This  document  was  unprecedented  in  its
complexity,  containing  33  special   conditions.   The  usual   agreement
contains an average of three special conditions.

          The State was in favor of  allowing Rad Services to complete  the
clean-up, because they  were on  site and could  complete the  work at  the
   est cost and  in the shortest  period of time.   However, the State  was
required to competitively bid the job.

          Because  of  the  complexity  of  the  Law  and  the  Cooperative
Agreement, neither the State nor EPA was competent to develop a request for
proposals.  A private contractor was engaged for this purpose.  The bidders
were not successful  in understanding  the resulting  bid document,  having
their initial bids thrown out by the State at the request of EPA.

          The job was re-bid in January 1983.  The State was of the opinion
that the successful bidder. Defender Vactor Systems, was not qualified, and
that their bid of $519,506 was too  low.  However, the State was forced   to
accept the  bid  in the  interest  of  completing the  work.   Payments   to
 [fender were $828,953 after change orders.  Rad Services original bid was
$685,908.                                                          Appendix I
                                                                   Page 4  of 8

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          Defender's progress  at the  site was  closely monitored  by  the
State.  Although the relationship between the state and the contractor  was
somewhat strained, resulting from a lack  of experience on both sides,  the
surface  clean-up  was  substantially  completed  by  July  1,  1983.   The
contractor  submitted  a  request  for  change  orders  in  the  amount  of
$542,302 which were dismissed by  the State.  The contractor then  appealed
to the State Procurement Officer, who rendered no decision.  The State  was
then forced to negotiate a settlement  or face a lengthy court battle  with
the contractor.   The  decision was  made  to negotiate  a  settlement  and
$309,367 in  change  orders  were approved.   Concurrence  was  sought  and
obtained from  the  U.S.  EPA  Region  IV  Regional  Administrator  in  the
settlement.  It was agreed that although EPA would only fund an  additional
^4,000 of the $209,367 Federal portion of the payment, DHEC had additional
unclaimed costs of approximately $150,000  to make up the difference.   The
State has now claimed $140,006 in  additional costs, all of which has  been
disallowed by the auditors (See Section B and C).

          Interim Audit No. ESCM4-04-0283-50360 was subsequently  conducted
and $275,018 of the amount negotiated by the parties was accepted,  subject
to technical review  by EPA.   EPA agreed to  support only  $54,000 of  the
payment as stated above.

          The State did not appeal this decision at the time because  it was
felt an  appeal would  jeopardize it's  position in  the court  proceedings
against the generators which was in process.
aoai
                                                                   Appendix I
                                                                   Page 5 of 8

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       B.    State Matching Cost

            The State  utilizes  the  Personnel  Cost  Accounting   System   to
  account  for all direct labor costs incurred in its  Environmental   Programs.
  The Financial Management System is  a budgeting tool  used for  distributing
  the various  State  and  Federal  funds  to  cost  centers  for   accounting
  purposes.   The budget limits the amount of Federal  funds which can be spent
  to the amount specified in the Cooperative Agreement.  The budget is   based
  on each  line item in the Cooperative Agreement; however, State and Federal
  funds are  not distinguished by line item.

            The State  agrees  to  provide  a certain  number  of   full  time
Jfejuivalent man  years in  the  Cooperative Agreements.   The State  is  not
  required to identify each individual by FTE, so it  is possible that one FTE
  in the Agreement may be made up by several individuals.  The PCAS system is
  used to  accumulate FTE's as well as labor costs in  each program.

            The PCAS system  is directly related  to  actual payroll.   Actual
  labor costs  are  distributed  based  on  each  individual's  time  sheet..
  Therefore/ actual  distributed cost  cannot exceed   budgeted cost.   It  is
  possible for budgeted costs to exceed  actual costs,  if, for instance,  the
  Cooperative Agreement contained  no State  Matching Funds.   But the  State
  would not  be able to claim the excess costs on the  Financial Status Report,
  resulting  in the lapse of the Federal funds.
            The  Auditors question the State's process of reconciling budgeted
 FMS   payroll   costs  and  actual  PCAS  costs.   The  State's  process   of
 reconciliation                                                     Appendix I

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'determines  that  the  level  of  effort  is  sufficient to meet the  requirements
 of  the  Cooperative Agreement.  We  can find no  requirement in circular  A-87
 which requires each  individual to  be reconciled  to this budgeted cost.

          Further, our  Cooperative Agreements  contain the following special
 condition:

            This  Award and  resulting  ration of  funding is based on estimated
            cost  requested  in  the application.  Final allowable cost for EPA
            participation shall not exceed 60%  (appropriate statutory
            limitation)  of  total eligible program cost or total funds
            awarded.
          This condition  indicates  EPA  bases  its determination of  Federal
participation  on   total  effort  and  actual  cost.   An  after  the   fact
determination of  Federal  participation by  percentage  of cost  does  not
support methods which would   reconcile budgeted costs  at  the beginning  of
the grant.

          We feel the State has met  the requirements  of circular A-87  and
EPA in accounting   for actual  labor  costs.  The total cost  identified  by
PCAS balances to the total budgeted FMS costs.  The  reconciliation  process
has been further described in  our response to  EPA audit E3BW8-04-0333.    We
feel these  controls  are adequate  to  meet established   requirements  and
 provide controls to protect both State and Federal  interests.

          Disallowing State Hatching  Funds under these  conditions is   not
        '                 *r
justified.                                                         Appendix I
                                                                        7 of 8

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     C.  Questioned cost  represent  funds  expended  for security services  by

a private contractor at the  Bluff   Road site.   The State has  documentation

to substantiate these costs.
                                                                   Appendix I
                                                                   Page 8 of 8

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                                                      Appendix II
                           DISTRIBUTION

Chief, Financial, Management Branch
Chief, Grants & Contracts Administration Unit
Chief, Facilities Construction Section

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