UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF THE INSPECTOR GENERAL FOR AUDITS .
WESTERN DIVISION C '
211 Main Strvat, Suit* 220
San Francisco, CA 94105
415 974-7064 ~'
September 21, 1989
SUBJECT: Audit Report No. P5cG*8-08-0117-9100484
Report of Final Audit of
Cooperative Agreement No. V008496-010
Colorado Department of Health
Denver, Colorado
FROM: Truman R. Beel« __
Divisional InspecTbr^SeneralTfor Audits
Western Division
TO: Mr. James J. Scherer
Regional Administrator
EPA Region 8
SCOPE AND OBJECTIVES
A final audit has been made of Cooperative Agreement No.
V008496-010, awarded to the Colorado Department of Health (CDH).
The audit, covering the period February 1, 1985 through March 31,
1988, was performed to:
Determine the reasonableness, allocability, and
allowability of the costs claimed;
Determine the adequacy, effectiveness and reliability of
procurement, accounting and management controls exercised by
the State in administering the cooperative agreement and;
Ascertain the State's compliance with the provisions of
the:; cooperative agreement and applicable EPA regulations and
instructions.
The auditor's field work was conducted between September 12,
1988 and July 7, 1989. Audit work was conducted in accordance
with Standards for Audits of Governmental Organizations,
Programs, Activities, and Functions issued by the Comptroller
General of the United States. It was considered more efficient
to expand audit test when necessary. Accordingly, studies and
evaluations of internal controls were not made.
10
(M HEADQUARTER LIBRARY
ENVITONMENIALPROTECnONAOhW
& WASHINGTON, W. 20460
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SUMMARY OF FINDINGS
COSTS CLAIMED
In our opinion $145,855 of the $1,335,292 claimed by CDH is
acceptable in accordance with the provisions of the cooperative
agreement. The results of our audit are summarized below and
detailed in Exhibit A of the attached audit report prepared by
Leonard G. Birnbaum and Company, CPAs.
Amount Note
Cost Reviewed SI,335,292 a
Per Audit:
Cost Accepted $ 145,855
Questioned Costs:
Ineligible . $ 221,969 b
Unsupported 967,468 c
Total Questioned Costs $1,189,437
Note a. The costs reviewed represent expenditures reported by
CDH for the period February 1, 1985 through March 31/1988 on*the
Financial Status Report attached to its August 31, 1988
memorandum to EPA.
Note b. Costs questioned and considered ineligible reoresented:
(i) labor ($61,599), fringe benefits ($11,061)' travel"($10,425),
supplies ($2,400) and indirect costs ($5,684) claimed by various
Colorado State Departments which was not supported by adequate
documentation and (ii) subagreement costs ($130,800) claimed for
unallowable services, unallowable surcharges, or amounts not paid
to the contractor.
Note c. Costs questioned and considered unsupported represented
the total subagreement costs claimed ($1,098,268) less the
subagreement cost questioned as ineligible ($130,800) in note b.
above. The subagreement costs were questioned as unsupported
because of deficiencies in the manner in which CDH procured the
subagreement and because CDH had not audited the costs to
determine their allowability in accordance with the terms of the
subagreeapnt and the cooperative agreement.
COLORADtt'rSTATS DEPARTMENTS' ACCOUNTING AND PROCUREMENT SYSTEMS
The audit found that the various Colorado State Departments
reporting activity under the cooperative agreement had accounting
systems that were not sufficient for the administration of
cooperative agreements. Accounting systems often lacked support
for costs claimed and were not adequate for accumulating costs by
site/
Although CDH had self-certified its procurement system as
meeting EPA procurement requirements, the audit found that the
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procurement system did not provide for adequate cost or price
analysis prior to award of the subagreement.
COOPERATIVE AGREEMENT SPECIAL CONDITIONS
Special conditions in the cooperative agreement were not
adhered to. Special conditions in the grant required adherence
to the Federal Procurement Regulations and prohibited CDH from
claiming costs incurred strictly to assess injury to the state's
resources or for litigation or enforcement purposes. The audit
disclosed violations of both of these conditions.
RECOMMENDATIONS
We recommend that the Regional Administrator:
1. Advise CDH that the 3221,969 of ineligible cost claimed
is disallowed for reimbursement under the cooperative
agreement.
2. Advise CDH that $967,468 of subagreement cost are
-nallowable until an audit of the subagreement costs claimed
under the cooperative agreement is made by CDH. Upon
completion of the audit, the Region should assess the
allowability of the subagreement costs.
3. Obtain recovery of the cooperative agreement funds paid
to CDH in excess of the amounts found allowable.
4. Notify CDH that no additional cooperative 'agreements
will be made to them without verification that actions have
been taken to correct their accounting system deficiencies.
In addition, the other Colorado State Departments identified
in this report as having accounting system deficiencies
should also be required to correct the deficiencies before
any additional cooperative agreement work is authorized to
them.
5. Revoke CDH's self-certification of their procurement
system until it corrects the deficiencies found in the audit
report. Also, CDH should be notified that no additional
co«»rative agreements will be made to them without EPA
fi^B- determining that their procurement system meets
codf|lrative agreement requirements.
6. Alert Region 8 staff responsible for awarding other
grants and contracts to CDH and the other Colorado State
Departments identified in this report of the accounting and
procurement system deficiencies noted in this audit report.
Although the scope of the this audit does not extend to
other cost reimbursable type agreements awarded to Colorado
State Departments by EPA, the nature of the accounting and
procurement system findings suggests similar conditions
exist under other agreements.
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7. Advise Region 8 staff responsible for administering
cooperative agreements of the importance of monitoring
compliance with special terms and conditions in such
agreements.
OTHER MATTERS
In response to the draft audit report and at the exit
conference, CDH argued that the work under the cooperative
agreement should not be subject to audit. It is CDH's position
that the work was a "purchase" of data, analyses, and work of
experts that was substantially complete before the cooperative
agreement was awarded. Therefore, CDH asserts that it is
inappropriate to expect to audit their claimed costs in
accordance with standard cooperative agreement provisions. We
believe that this issue needs to be addressed by the Regional
Administrator as he resolves the recommendations made in our
audit report.
To facilitate a better understanding of whether a
cooperative agreement is the appropriate instrument for EPA to
obtain the work performed, the following information is provided.
CDH Comments^ An exit conference was held with CDH and EPA
staff on May 22, 1989. In addition CDH was asked to provide a
written response to the draft report. CDH complied but requested
that their response not be included as an attachment to this
report. We complied with their request. However, we have
summarized their comments in the report, as appropriate. In
general, CDH did not agree with the audit's findings. CDH's
rebuttal centers primarily on the fact that the effort, which is
the subject of this cooperative agreement, was generally
completed prior to the award of the agreement and should not be
made to comply with all Federal terms and conditions
retroactively. They assert the agreement is a "purchase" and is
not auditable for events that occurred prior to the agreement.
Purpose of Cooperative Agreements. The purpose of a
cooperative agreement (as distinguished from a grant or a
contract), is to provide financial and other assistance during
the performance of an effort in which there is mutual benefit.
Accordin||ito CDH, EPA was not involved in the conduct of CDH's
work an<^»p could not have made any substantial contribution to
the scope"of work performed as expected in cooperative
agreements.
Evidence of Purchase^ There is evidence to support CDH's
position that this effort was a purchase. An agreement in
principle between CDH and EPA which related to the cooperative
agreement stated it was to purchase data, analyses and work of
experts. The agreement also stated "This purchase shall conform
with applicable federal rules and regulations regarding contracts
to purchase services and expert work products".
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Based on CDH's comments and the manner in which the effort
was conducted, we believe the question of whether this is ah
appropriate use of a cooperative agreement needs to be addressed.
The Region should consider the authoritative basis for awarding
the cooperative agreement. . EPA guidance on the appropriate use
of contracts, grants and cooperative agreements indicates that
cooperative agreements are assistance instruments to be used when
substantial involvement is anticipated between the agency and
recipient during the performance of the contemplated activity.
The state's response to the draft audit report indicates the
award of the cooperative agreement was consideration given to
.settle EPA and CDH differences over authority to proceed at Yak
tunnel. The facts also appear to establish that the primary
efforts of CDH's were already accomplished at the time the
cooperative agreement award was made.
ACTION REQUIRED
In accordance with EPA Order 2750, the Action Official is
required to provide this office with a copy of the proposed
determination on the findings within ninety (90) days of the .
audit report date.
The EPA, Office of the Inspector General, has no objection
to the release of this report at the discretion of the
responsible program official.
Please refer to the audit report number on all related
correspondence. If you have any questions concerning this
rscort, please contact Allen Orand of our San Francisco office at
FTS 454-7084.
BACKGROUND
Cooperative agreement no. V0008496-010 was awarded to CDH
on June 29, 1987 in the amount of $1,336,179. The period of
performance, through amendment no. 3. was February 1, 1985
through April 30,1988. The cooperative agreement was granted a
deviation from 40 CFR 30.800 which permitted that costs incurred
prior to award of the agreement were authorized.
Thad||irpose of the cooperative agreement was to allow the
State of^Oiiorado to complete evaluation of the extent and degree
of contamination of the YAK tunnel/California Gulch site, and
prepare a risk assessment and evaluate remedial alternatives
relating to that site.
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£ Al-T I
REPORT OF AUDIT
Report of Final Audit of Cooperative Agreement
V008496-010 Awarded by the EPA, Region VIII
to the Colorado Department of Health, Office of
Health Protection Under the Comprehensive
Environmental Response, Compensation and
Liability Act of 1980.
Audit Report No. P5CG8-08-0117
Date: August 30, 1989
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TABLE OF CONTENTS
Scope and Objectives 1
Summary of Findings 2
Background : 3, 4
Findings and Recommendations
1. Superfund Procurement System and 11-17
Subagreement Administration
2. Superfund Accounting System 18-22
3. Compliance with Superfund Cooperative 23-25
Agreement Special Conditions
Exhibit A - Colorado Department of Health 26-31
Cooperative Agreement V008496-010
Schedule of Costs Claimed and
Results of Audit for the
period ended March 31, 1988
t
Schedule A - Schedule of Costs Claimed by 32-44
Colorado State Departments and
Results of Audit Review
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LEONARD G. BIRNBAUM AND COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
August 30, 1989
A, SCMNilOfV
N f UtOJOA
SUBJECT:
444 CASTRO STREET. SUITE 1105
MOUNTAIN VI6W. CA 94041
TEL: 41S-9&S-8814
FAX: 415-969-4712
OTHER OFFICES:
SUMMIT. N-J. 201-273-2844
WASHINGTON. D.C. 7O3-522-7622
ALBUQUERQUE. MM. 505-883-5811
TWX: 710 832-0995
CABLE: LEIPER. D.C,
FROM;
TO:
Audit Report No. P5CG8-08-0117
Report of Final Audit of Cooperative
Agreement No. V008496-010
Between the EPA Region 8 and
the Colorado Department of Health
Denver, Colorado
Leonard G. Birnbaum and Company
444 Castro Street, Suite 1105
Mountain View, California 94041
Truman R. Beeler
Divisional Inspector General for Audit
Western Division
Environmental Protection Agency
211 Main Street, Suite 201C
San Francisco, California 94105
Scope and Objectives
We have performed a final audit of the costs claimed by the
Colorado Department of Health Services Office of Health
Protection under Cooperative Agreement No. V008496-010 with EPA
Region 8 under the Comprehensive Environmental Response,
Compensation, and Liability Act, (CERCLA) Section 104, as
amended. The primary objectives of our review were:
(1) to determine the reasonableness, allocability, and
allowability of the costs claimed under Cooperative Agreement No.
V008496-010.
(2) to determine the adequacy, effectiveness and
reliability of procurement, accounting, and management controls
exercised by the State in administering the subject cooperative
agreement.
(3)>i-to ascertain the State's compliance with the provisions
of the cooperative agreement and applicable EPA regulations and
instructions.
Our audit was performed in accordance with the applicable
Standards for Audit of Governmental Organizations, Programs,
Activities and Functions issued by the Comptroller General of the
United States, and included tests of the accounting records and
other auditing procedures as were considered necessary in the
circumstances. Since it was considered more efficient to expand
the audit tests when necessary, a study and evaluation of
internal accounting controls was net made.
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The audit included a review of the costs incurred and
claimed and the accounting systems employed by five different
Colorado Agencies involved with the subject Cooperative Agreement
(CA). The CA was awarded to the Colorado Department of Health
(CDH). The four other state agencies which were reimbursed costs
pursuant to the CA included, the Colorado Attorney General's
Office (AGO), the Colorado Division of Wildlife • (CDW), the
Colorado Division of Geological Survey (CGS), and the Colorado
Division of Mined Land Reclamation (MLR).
Summary of Findings
In our opinion, the accounting system used by each of the
five Colorado Agencies involved with this CA and the procurement
procedures followed by the AGO required substantial improvement
to effectively administer the Cooperative Agreements.
Specifically, the review indicated that the responsible Colorado
State Agency (Agencies) had not (i) fully complied with the
procurement requirements contained in 40 CFR Part 33, (ii)
implemented accounting controls which fully met the requirements
of 40 CFR 30.510, and (iii) satisfactorily complied with all
Cooperative Agreement special conditions.
Copies of our draft audit report were provided to the CDH on
March 24, 1989. CDH responded to the draft report on April 28,
1989. An exit conference was held on May 22, 1989 with both CDH
and EPA Region 8 representatives in attendance. In general the
CDH disagreed with our findings. CDH asked that a copy of their
response not be included as an enclosure to this report.
However, CDH advised that their response could be quoted as
necessary to make their position on the various issues known.
Accordingly, the pertinent CDH comments have been summarized or
quoted and incorporated throughout this report along with
additional auditor comments when applicable.
The results of audit are summarized in the following
subparagraphs and detailed, along with related recommendations in
the Findings and Recommendations section of this report. Details
on the audit of costs claimed, accepted and questioned under the
CA are included in Exhibit A and the supporting Schedule A to
this report!
•%f:
1. SuperfundProcurement System
The procedure utilized by the AGO to procure contract
service under the subject Superfund Cooperative Agreement did not
assure complete compliance with the requirements of 40 CFR Part
33. Costs of.the only subcontract awarded accounted for Sl.l
million of the total $1.3 million claimed under the CA. The
subcontract was awarded without the required cost or price
analysis. This condition was due to inadequate consideration of
the circumstances (single available contractor ) involved in
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awarding the contract. Therefore, the award did not conform with
40 CFR Part 33.
2 . Superfund Accounting System
The five Colorado Agencies claiming costs under the
subject CA did not fully comply with the requirements of 40 CFR
30.510. The review indicated that accounting systems used by the
various agencies did not adequately account for labor or other
direct costs (travel or supplies) on a site-specific basis.
Therefore, it was necessary for each of the agencies to
reconstruct the costs claimed under the cooperative agreement for.
audit purposes.
3. Compliance with Special Conditions;
CDH management procedures need improvement to assure
compliance with the special conditions included in the subject
CA. While CDH met the majority of the special conditions, it had
not complied with these applicable to (i) adherence to the
Federal Procurement Regulations and (ii) eliminating amounts
spent solely to assess the extent of injury to the State's
natural resources, or for litigation and/or enforcement purposes.
As a consequence of our audit, we questioned $221,969
as ineligible and questioned an additional $967,468 as
unsupported out of the $1,335,292 claimed under the C.A. The
details relating to the questioned amounts are included in
Exhibit A and Schedule A to this report.
CDH Ccnments. CDH generally disagreed in whole or in part
with the various costs questioned and the deficiencies cited in
our audit report. CDH's specific comments have been included and
discussed in this report.
Background
On December 11, 1980, Public Law 96-510, the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA)
was enacted by Congress. CERCLA, commonly known as the
"Superfund* law, was passed to provide the needed general
authority*aihd to establish a Trust Fund for Federal and state
governments to respond directly to 'any problems at uncontrolled
hazardous waste disposal sites, not only in emergency situations,
but also at sites where longer term permanent remedies are
required. CERCLA was established to fill the gap in the national
system to protect public health and the environment from
hazardous substances by authorizing Federal action to respond to
the release, or threatened release, from any source, including
abandoned hazardous waste sites, into any part of the
environment.
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The blueprint for the Superfunci program under CSRCLA is the
National Contingency Plan (NC?), first published in 1968 as part
of the Federal water pollution control plan. The NCP lays out
three types of responses for incidents involving hazardous wastes
which require immediate removal, planned removal, and remedial
response. The first two types of responses were modifications of
the earlier program under the Clean Water Act. However, remedial
response is a new type of response intended to deal with the
longer terra problem of abandoned or uncontrolled sites.
CSRCLA requires the establishment of a National Priority
List (NPL) of hazardous waste sites for remedial action. In
October 1981, EPA compiled an interim priorities list of 115
hazardous waste sites. The sites were nominated by the EPA
Regional Offices and the states, primarily on the basis of
potential threat to the public health; the threat to the
environment was also considered. In September 1983, EPA
published the first NPL of 406 sites.
Section 104{c)(3) of CERCLA provides that no remedial
actions shall be taken unless the state in which the release
occurs first enters into a contract or cooperative agreement with
assurance of payment of 10 or 50 percent of remedial costs. The
state must agree to contribute 10 percent if the site was
privately owned. At publicly owned sites (one owned by the state
or a political subdivision thereof), the state is required to pay
50 percent of all remedial action costs. Certain segments of
CA's for remedial investigations, feasibility studies, designs,
and initial action can be funded up to 100 percent fay EPA.
CA V008496-010 was awarded to the Colorado Department of
Health, Office of Health Protection on June 29, 1987 in the
amount of $1,336,179. The Project and Budget Period included in
the CA was February 1, 1985 through December 31, 1987. The
Project and Budget periods were extended to March 31, 1988 by
Amendment No. 2 to the CA. Amendment No. 3 subsequently extended
the Project Period to April 30, 1988. The CA included a
deviation from 40 CFR 30.308 of the general grant regulations
which permitted that costs incurred prior to award of the
agreementiwould be allowable. The purpose of the CA was to allow
the Stat«||;Of Colorado to complete evaluation of the extent and
degree ofContamination of the YAK tunnel/California Gulch site
located near Leadville, Colorado, and to prepare a risk
assessment and evaluate remedial alternatives relating to that
site. The CA was intended to reimburse the State of Colorado for
certain costs incurred for various tasks related to this effort.
Special Condition Section, b (4) to the CA specified that "No
funds shall be spent under this Cooperative Agreement solely to
assess the extent of injury to the State's natural resources, nor
for litigation and/or enforcement expenses".
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CDH Response.
1. The EPA and the State of Colorado entered an agreement
whereby EPA purchased information and data pertaining to the Yak
site from Colorado for the recited amount. The Agreement
operated as a settlement of the differences between the federal
and state governments regarding their authority to proceed at the
Yak site. By EPA's choice, a Cooperative Agreement was the
vehicle selected to channel payment pursuant to the underlying
agreement to the State.
Alternatively, if it is now decided that the activities
subsequent to the Cooperative Agreement are to be governed by
federal procurement regulations, one must inquire about what was
procured and who did the procurement. Colorado asserts that the
federal government procured information from Colorado which the
State previously compiled from the efforts and investigations of
State employees and contractors. Thus, the U.S. must meet and
achieve federal standards; the State was engaged only as a vendor
of information.
2. The cooperative agreement under which Colorado has received
reimbursement was executed after incurrence of costs for costs
incurred prior to the award ofthe agreement. In their review,
the auditors emphasised the procurement, accounting and
management practices and requirements under the federal program
and concluded that $1.1 million expended for consultation
services (of the total $1.3 million claimed under the Cooperative
Agreement) was "questioned" or "unresolved." Clearly, the
parties did not intend nor anticipate such an extreme result when
they materially altered their positions by execution of, "and
rendered performance pursuant to, the cooperative agreement. The
auditors' exclusive reliance upon federal regulation without
regard to the circumstances is misplaced. Under the
circumstances, the procurement, accounting and management
procedures were adequate.
The relevant circumstances are chronicled as follows:
December 9*. 1983
July 31, 1984
October, 1984
Colorado filed its natural resource damage
lawsuit regarding the subject site, Colorado
v. ASARCO, Inc. (D. Colo.}, No. 83-C-2388.
By order of Court, this matter was scheduled
for trial on August 5, 1985.
Discussions between the Colorado Department
of Health, the Colorado Department of Natural
Resources, the Colorado Attorney General, and
the Colorado Division of Purchasing were
conducted regarding contractual assistance
for necessary data review, supplementary
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October 18, 1984
November 6, 1984
November 19, 1984
February 22, 1985
February ,26, 1986
September 18, 1986
November 25, 1986
field evidence, economic evaluation of the
natural resource damages, and litigation
support.
Request For Proposal Issuance relating to six
mining and mill sites. RFPs solicited
technical consultation for the sites. Firms
were required to eliminate themselves for
conflict of interest if they had previously
contracted with the federal government or any
of the potentially responsible parties.
Department of Health responded in writing to
sixteen questions from interested firms.
Bids were received, in response to Colorado's
Request for Proposal, from Engineering
Science Corporation, GeoTrans, Inc. and Rocky
Mountain Consultants, Inc., the latter two
corporations joining for this proposal only
as a Joint Venture.
A contract was entered between the State of
Colorado for the use and benefit of the
Department of Law and Engineering Science, a
California corporation, in accordance with
State procurement practices, whereby a
contract for consultant services, regarding
the Yak Tunnel/California Gulch site and the
Eagle Mine site, was awarded by Colorado to
Engineering Science Corporation. The term of
the Contract was from February 22, 1985 until
conclusion of the lawsuit.
Remedial Investigation was finished.
Feasibility Study was finished.
An agreement in principle was reached between
the United States and Colorado wherebv the
U.S.
"purchased ... (from the State) all data,
analyses, and other experts' work generated
by contractors or employees of the State of
Colorado with regard to the California Gulch
site in determining the nature and scope of
the release of hazardous substances;
pollutants and or contaminants at the site.
To the extent data relates only to
assessments of natural resources damages the
United States is not purchasing that data.
.This purchase shall conform with applicable
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November 28, 1986
December 4, 1986
December 5, 1986
federal rules and regulations regarding
contracts to purchase services and expert
work product.
The United States and the State of Colorado
were ordered by the U.S. District Court to
confer and reach agreement concerning their
respective roles and responsibilities in the
prosecution of all claims asserted in United
States v. Apache Energy and Minerals Co. (D.
Colo.), No. 86-C-1675, and Colorado v.
ASARCO, Inc., supra.
Transmittal of invoices from Engineering
Science Corporation to Elizabeth Mullin, EPA
by Colorado Department of Law for the period
October 12, 1985 thru October 10, 1986
(together with an adjustment invoice dated
September 23, 1985).
The United States and Colorado entered an
Agreement whereby the parties agreed that:
1. The two federal actions would be
consolidated;
2. Liability of defendants would be
litigated jointly fay EPA and the State;
3. EPA would litigate the remedy with
substantial and meaningful participation by
the State;
4. Colorado would dismiss its action for
injunctive relief under State law in the
District Court cf Lake County, Colorado,
Colorado v. ASARCO, Inc., No. 86-CV-48.
5. Colorado would prosecute its claim for
damages for injury to its natural resources
separately;
6. The parties would prosecute their
respective claims for recovery of response
costs separately;
7. The United States would compensate the
State for:
"certain response costs incurred by the
State in connection with the California Gulch
site. For the purposes of this Agreement,
these response costs include only those costs
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December 5, 1986
•"*
December 9^-' 1986
incurred by the State pursuant to 40 C.F.R.
pt. 300, subpart F on or before the date of
submission of the cooperative agreement,
application. These costs do 'not include
costs incurred by the State solely to assess
the extent of injury to the State's natural
resources, nor litigation or enforcement
expenses."
8. The State would submit an application for
a cooperative agreement award in an amount
not to exceed $1,400,000 to compensate the
State for response costs as defined by this
agreement. (The cpoperative agreement would
be governed by all EPA grant and procurement
regulations including those procedures
necessary to approve and implement the
cooperative agreement.)
9. The State would make available to EPA
all information and data pertaining to the
California Gulch site in the State's
possession.
10, The Stata would not undertake future
activities or response action in connection
with the California Gulch site without prior
approval from EPA pursuant to a cooperative
agreement or other contractual arrangement
between EPA and the State.
NOTE: The State has discharged each of its
obligations under this Agreement.
U.S. and Colorado filed with the U.S.
District Court for the District of Colorado
the Joint Agreement of the United States and
State of Colorado Concerning Their Respective
Roles in the Prosecution of This Action and
Civil Action No. 83-C-2388.
A stop-work order was issued to Engineering
Science Corporation by Colorado because
"the agreement with the United States
Government has significantly changed our
responsibilities and role on this case, and
until we have had an opportunity to evaluate
the actual impact of this agreement, we feel
it most prudent not to incur any further
costs of any kind on this matter through your
firm."
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June 2, 1987
June 17, 1987
June 29, 1987
EPA Region VIII requested a deviation from
grant regulations (40 C.F.R. 30.308} to
permit an award for costs incurred prior to
the award of the agreement. The request
recited:
"Under the circumstances, the only
viable means of preserving EPA's claims
was to incorporate the State's
investigation into the RI/FS and to
proceed against the PRPs to recover the
combined costs. The State agreed to
such a strategy and to assist EPA with
its case, but only if it were
reimbursed. An enforcement decision was
made that preventing EPA's claim
justified reimbursement".
The deviation would permit award of a
cooperative agreement to the State of"
Colorado Department of Health in the
amount of $1,336,179 million for costs
incurred prior to the award of the
agreement ...
The request for deviation was approved by '
Director, EPA Grants Administration Division.
EPA Assistance Agreement (also known as the
Cooperative Agreement) was entered between
•the EPA and Colorado, specifically reciting
the above-named deviation. The Narrative for
Statement of Work, California Gulch/Yak
Tunnel, Remedial Investigation/Feasibility
Study. Attachment B to the Cooperative
Agreement recited:
"The purpose of this Cooperative
Agreement application is to allow the
State of Colorado to complete
evaluations of the extent and degree of
contamination, to prepare a risk
assessment and to evaluate the remedial
alternatives."
Attachment 3 also recited that contractor
procurement was to be accomplished in
accordance with federal guidance and State
procurement requirements.
The original term of the Cooperative
Agreement was from February 1, 1985 through
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December 31, 1987. (Subsequent, extensions
through March 31, 1988 were granted by
Amendments 1 and 2.)
3. The audit was conducted in such a manner as to disallow
broad categories of claimed costs without, consideration for the
unique factual circumstances presented by the after-the-fact
Cooperative Agreement:. For instance, all time reported by the
contractors which was allocated to the "litigation" category was
disallowed, in spite of the specific language of Attachment C to
the Cooperative Agreement defining the "Yak/Colorado CERCLA
Litigation Support'1 category. Another example is the
disallowance of the Yak/Plug Evaluation because that activity was
not cataloged at the time of invoicing to the specific categories
the auditors sought. The Yak/Plug Evaluation was a project
directly related to the evaluation of remedial alternatives, one
of the purposes specifically recited in Attachment 3 tc the
Cooperative Agreement.
In essence, the auditors have elevated form over substance. The
basis of the EPA-State agreement was tc transfer the State's
information and data tc EPA and recognize the EPA's lead
authority, in exchange for payment to Colorado to reimburse the
State for costs incurred. The Department'of Justice and EPA were
well acquainted with the status of Colorado's contract and
subcontracts, and received copies of invoices from Engineering
Science, and knew that the State's Remedial Investigation and
Feasibility Study efforts were complete prior to the time of the
Cooperative Agreement. Indeed, Table 1 of the Cooperative
Agreement specifically recognizes that $1,336,179 had already
been incurred by the State as response costs. Table 2 recites an
obligation to provide SPA with copies of completed reports within
30 days following execution of the Cooperative Agreement. It
must be noted that EPA received the benefit of its bargain.
Auditor Comments. Except for references to Exhibits, the CDH
comments are included in total in order to provide their opinion
as to the purpose and type of contract involved between the CDK
and the EPA regarding the Yak tunnel effort. The CDH contends
that the •^feCfort had been completed, the costs of the effort had
been inctHHCed and the CA involved was intended tc be the
contractual: vehicle whereby the EPA could pay CBK for the
services rendered. As auditors, we cannot speculate on what type
of contract was intended; we can only audit to the terms,
conditions and requirements of the contractual document
(Cooperative Agreement) that was signed by both parties. CDH's
comments relating to specific matters such as "litigation
category and Yak/Colorado C2RCLA Litigation Support1' are
addressed when those items are specifically 'discussed below.
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Findings and Recommendations
1. Superfund Procurement System
and Subagreement Administration
Neither the procedure used by the Colorado State Purchasing
Department to procure contract services nor the procedure used by
the AGO to administer the services under the Superfund
Cooperative Agreement (CA) for the YAK tunnel/California Gulch
site were in full compliance with the requirements of 40 CFR Part
33. As a result, the only contract entered into under this CA .
(amounting to $1.1 million of the CA claim of $1.3 million) did
not (i) incorporate cost or price analysis as required or (ii)
ensure that the contractor invoiced in accordance with contract
terms. These conditions were primarily attributable to the lack
of complete implementation of the Federal procurement
requirements referenced in the Colorado State's procurement
system self-certification. It is noted that Colorado State first
certified its procurement system on February 6, 1987. This was
prior to the effective date {June 29, 1987) of CA No. V008496-01Q
but subsequent to the award of the contract to Engineering
Science Corporation.
Background
EPA Regulation 40 CPR, Part 33.110 entitled Applicaticn and
Recipient Certification stipulates that it is the state's
responsibility to evaluate its own procurement system and to
determine whether its system meets the requirements of 40 CFR,
Part 33. The EPA implementing guidance for the above regulation
is found in its manual, entitled State Participation in the
Superfund Remedial Program. Chapter 111-12 of the manual
requires that each application for a CERCLA CA must be
accompanied by a completed Procurement JSystem Certification Form
for Applicants for EPA Assistance (EPA Form 5700-48). Part B of
the EPA Form 5700-48 provides for the following certification
language: "Based upon my evaluation of the applicant's
procurement system, I as authorized representative of the
applicant, certify that the applicant's procurement system will
meet all-the requirements of 40 CFR, Part 33 including the
attachedFBubparts before undertaking any procurement action with
EPA assistance."
The subparts referenced in the EPA Form 5700-48 included, in
part, the following:
40 CFR Part
Reference Section Title and Summary cf Requirements
33.210 SUBAGREEMENT ADMINISTRATION. System must ensure
that contractors perform in accordance with all
applicable contract requirements.
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33.230 ' COMPETITION. System must have procurement
transaction procedures that provide maximum open
and free competition.
33.235 PROFITS. System procedures must allow only fair
and reasonable profits to contractors.
33.290 COST AND PRICE CONSIDERATIONS. System procedures
must allow for consideration of cost and price
as required in this section.
In addition, an applicant may elect to not certify its
procurement system. Under this situation, the applicant must
allow EPA to review and approve proposed procurements before they
are awarded in order to assure that the provisions of 40 CFR Part
33 are being followed.
As noted above the State of Colorado self-certified its
procurement system February 6, 1987.
Review of Procurement
Only one contract was issued under the subject CA. That
contract was awarded by the State of Colorado for the use and
benefit of the Department of Law (Attorney General Office). The
procedures used by the Colorado State Purchasing Department to
procure these contract services were not in full compliance with
the requirements of 40 CFR Part 33 or its procurement system
certification. Although Request For Proposal's (RFP's) were
mailed to 29 companies, only two companies submitted proposals.
The RFP requested companies to bid for the services required at
six separate sites. During interviews with the two companies
which submitted proposals, information was elicited which
indicated that neither company had sufficient personnel to
complete the required services at all six sites within the time
period required. Using evaluation criteria included in the RFP,
the evaluation committee evaluated the proposals from the two
companies and awarded a contract to cover two sites (one of which
was the YAKttunnel/California Gulch site) to Engineering Science
Corporation|*uid a contract to cover 4 sites to Geo-trans, Inc.,
Rocky Mountain Consultants, Inc.
The cost or price analysis considerations included in 40 CFR
Part 33.290 requires that cost or price analysis be performed as
required. We found that the Colorado State Purchasing Department
did not fulfill this requirement as illustrated by the following:
The procedures followed by the state in requesting
proposals, evaluating the proposals and awarding the contracts
included some consideration of price. In our opinion, the
circumstances indicated a need for a cost analysis of the
responding companies' .proposals. Our opinion is based on the
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fact that only two companies responded to the RFP's and neither
company had sufficient personnel to complete the required effort
within the required timerrames. Therefore, we believe that a
c.ost analysis should have been performed of the contractors'
proposals prior to negotiation or award of the contracts.
Recommendations:
We recommend that prior to the award of future CA'S to CDH,
the Regional Administrator require CDH to initiate improvements
to its procurement and contract administration system to assure
that all the requirements of 40CFR Parr 33 are met or
demonstrate that the appropriate improvements have been made.
These improvements should include/ as a minimum, the following:
(1) the dissemination of standard written procurement procedures
and contract administration, (2) the responsible employees should
be familiar with Federal procurement requirements.
CDH Comments;
. Colorado disagrees with the auditors' characterization of
the Colorado Procurement System. The procurement of contract
services was instituted in October 1984 by a group effort of
state officials and employees. The group included
representatives of the AGO, CDH and Division of Purchasing after
consultation with Governor Richard Lamm, the Attorney General and
David Getches (Colorado Department of Natural Resources). On
October 18, 1984, CDH and the Division of Purchasing of the
Department of Administration issued a Request for Proposal to 29
known companies and to any other requesting company. Proposals
were received one month later from Engineering Science and
GeoTrans/Rocky Mountain Consultants. Engineering Science scored
high in relation to mining sites; GeoTrans/Rocky Mountain
Consultants scored high in relation to milling sites. The
evaluation criteria included technical merit, ability to respond,
cost and technical expertise.
The subject contract with Engineering Science was awarded for the
Yak Tunnel/California Gulch site near Leadville, Colorado and the
Eagle Mine.=,site near Eagle, Colorado. The same RFP process
resulted {in* a second contract award to two companies, who formed
a joint venture for these purposes only, GeoTrans, Inc. and Rocky
Mountain Consultants, Inc. The joint venture was awarded a
contract for services to be performed in relation to the Idarado,
Uravan, Globe and Cotter sites.
It must be recalled that the subject contract with ES was
finalized February 22, 1985. -The subject Cooperative Agreement
was not finalized until more than 2 years later, on June 29,
1987. However, at the time the Cooperative Agreement was
negotiated and executed, EPA was aware of the state's contractual
circumstances and the status of the State's investigations. The
13
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subject Cooperative Agreement was based upon the November 1986
agreement "To purchase ....data, analyses, and other experts'
work generated by contractors or employees of the State...." and
the December 1986 undertaking to "compensate the State for
certain response costs." EPA strongly desired to assert lead
agency authority and, accordingly, requested a deviation allowing
it to sign an after-the-fact Cooperative Agreement.
On June 2, 1987, Kerry Clough, Assistant Regional Administrator,
EPA Region VIII, wrote:
Under the circumstances, the only viable means of preserving
(EPA's) claims was to incorporate the State's investigation
into the RI/FS and to proceed against the PRPs to recover
the combined costs. The State agreed to such a strategy and
to assist EPA with its case, but only if it were reimbursed.
An enforcement decision was made that preserving EPA's
claims justified reimbursement, (emphasis added).
EPA received the benefits of the Agreements by Colorado's -
performance of all prospective obligations under the Agreements:
EPA received the State's "data, analyses, and other experts' work
generated by contractors (and) employees of the State"; EPA's
lead agency authority was specifically acknowledged by Colorado
in relation to the Yak Tunnel/California Gulch site.
Under these circumstances, Colorado should not be held strictly
accountable to federal procurement requirements that could not
have been anticipated at the time of making the original ES
contract. Thus, a price analysis should not be required
retroactively. Moreover, to attribute the contract costs to an
"unresolved" or "questioned" category and to ultimately disallow
these costs would deprive Colorado of the benefit of the bargain
stricken.
Awarding the ES contract was not a result of inadequate
management consideration of the circumstances. The ES contract
was awarded in full consideration of the circumstances which, at
the time of the award, did not include Colorado as a federal
grant recipient. Thus, there was no requirement for compliance
with fedWTill procurement regulations. The auditors have failed
to appreciate the necessary implications of an after-the-fact
Cooperative Agreement.
In addition the RFP process did include the following cost
criteria as identified in October and December 1984 memoranda.
"1) Costs to perform each task should be reasonable and
reflect commonly employed cost approaches.
2) Evaluation will be dene in recognition of the cost-
effectiveness of proposals to the state".
14
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Even if 40 C.F.R. 33.290 is applicable, which the State does not
concede, the foregoing consideration for cost was sufficient to
satisfy the regulatory requirements.
Auditors Comments;
The CDH comments are acknowledged. However, because there
was only one responsive bidder, in our opinion, inadequate
consideration was given to the evaluation of the cost/price
aspects before awarding the contract to Engineering Science. We
agree with the CDH that a price analysis should not be required
retroactively. The procurement system weakness is identified
only for consideration by the Regional Administrator before
awarding future CA's to the CDH.
Review of Contract Administration
40 CFR Part 33.210 requires that the contract administration
system must ensure that contractors perform in accordance with
all applicable contract requirements. The AGO was responsible.-
for managing the contract services with the Engineering Sciences
(ES) Corporation under this CA. Our review indicated that the
contract was inadequately managed by the AGO. This conclusion is
based in part on the following (additional Management
deficiencies listed in Note 3 to Exhibit A):
1) Site visits were not made or other controls established
for the purpose of insuring that contract services billed were
performed and/or met the technical requirements specified in the
contract.
2} An adequate review of ES vouchers was not made '(one
instance was noted of a 2nd tier invoice billed twice by ES and
paid twice by the State).
3) An audit of the ES costs has not been performed by the
State. As a result of the lack of effective subcontract
management (see Finding in the report narrative), $967,468 has
been questioned as unresolved.
Recommendation;
Is-
We recommend that the Regional Administrator require that
the contractor (Engineering Science) costs included in the claim
be audited to assure their allowability under the CA. We also
questioned $967,468 as unsupported until the CDH submits evidence
that the costs have been audited and are acceptable.
CDH Response;
1). The lead attorney and deputy attorney general have
monitored contractor services for the Yak case by telephone
15
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communication, site visits, meetings, review of reports from the
field, review of data and written reports. AGO lead attorneys
performed day to day oversight of contractor assignments and
tasks performed.
In addition, CDH employee Russell was frequently in the
field with Engineering Science contractors and subcontractors.
Moreover, EPA's consultants and employees, and Colorado's
consultants, conducted all groundwater sampling events together
so as tc provide split samples to Colorado. The AGO was
satisfied that the contract services billed were performed, based
upon the above-named factors, all of which provide sufficient
evidence of credibility and reliability to support the
Engineering Science invoices.
For your information, on March 27, 1987, the subject ES
Contract was amended (Amendment No. 1) to encompass a "Task
Order" process. This process formalized the monitoring system
for contractor activity and established a "not to exceed"
budgetary constraint per task. Although Amendment No. 1 occurred
near the close of the time frame of the Cooperative Agreement, it
is notable because it demonstrates that the auditors'
recommendation for system improvements has been previously
implemented.
2). There was one instance where the State paid ES
$19,672.79 twice for subcontractor Parsons Co. on two separate
invoices, 2 months apart. The AGO will concede that $19,672.79
must be disallowed under this circumstance.
3). It is not the normal State practice to conduct an audit
of independent contractors. An audit does not appear to be
justified nor cost-effective, given the very limited nature and
extent of apparent discrepancies.
The AGO provided effective contract management. Please
see the AGO response to subparagraph (1), infra.
Auditors Comments;
, .;.-" r'
The jjjpiunples above provided by the AGO to demonstrate that
the Contractors activities were adequately monitored appears to
reflect occasions of normal coordination controls in lieu of a
planned visit for the purpose of verifying the accuracy of time
expended by ES employees on the contract effort. However, even
if adequate controls were used by the AGO, it is our opinion that
because of the numerous questions noted when reviewing the ES
invoices, effective contract administration does require a final
audit of the ES contract.
The contract with ES is a time and material type contract.
As such, the rates and factors included in the contract are fixed
X
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and are not subject to audit. All other costs including labor
hours, subcontract costs and other direct costs are auditable.
Based on the various noted deficiencies in the ES invoices we
recommend that the audit review include the following:
1) Trace a selected sample of employee time sheets to the
payroll, labor distribution and general ledger. Assure the hours
charged to Yak/Tunnel effort were properly recorded in the ES
accounting records.
2) Review ES policy for accounting for overtime labor
costs related to salaried personnel. If policy is not
consistently followed overtime hours charged to CA and credited
to overhead should be questioned.
3} Select a sample of ES employee travel costs charged to
the Yak/Tunnel contract. Compare costs claimed to costs paid -
also compare to employee labor charges for the period claimed.
.4) Review sample of subcontractor invoices for
applicability and allocability to Yak/Tunnel effort - also review
to determine if effort is related to the performance of natural
resource damage assessments and/or litigation support effort.
5) Review questions regarding ES "subcontract management
fee" to extent necessary to determine allocability of fee to the
CA.
6) The scope of tests for the above tests should be
expanded as necessary based on the results of the sampled items.
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2. Superfund Accounting System
The various Colorado State Departments involved with the
subject CA do not fully comply with the requirements of 40
CFR.30.510. Specifically, our audit disclosed that the labor and
other direct costs (travel, supplies, etc.) were not being
accurately recorded and accumulated tc this CA. As such, we were
unable to verify claimed costs to the accounting records. In
addition, it was necessary for each of the Colorado State
Departments involved (CDH, CAGO, CDW, CDGS and CDMLR) to totally
reconstruct support for the costs claimed in order to satisfy the
requirements of 40 CFR 30.510.
Background
The State of Colorado has a centralized accounting system
which requires all State Departments to report at the same
general level (salaries and wages, travel, capital, etc.). The
system does not require accounting by job or by task. Each
department is free to upgrade its own system to meet its needs'
provided that it can report at the level required by the State.
40 CFR 30.510 states, in part, that an awardee must maintain
a financial management system that consistently applies accepted
accounting principles and practices and at least includes:
"An accurate, current, and complete accounting of all
financial transactions for your project."
"Records, together with supporting documents showing the
source and application of all project funds including assistance
awards and authorizations, obligations, unobligated balances,
assets, liabilities, outlays and income."
As noted above, none of the accounting systems used during
the performance of the CA effort by the various Colorado
Departments were considered to be adequate for CA purposes. A
brief description of the accounting system deficiencies, by
Department, follows:
(a) .^-Colorado Department of Health - the accounting system
did not accumulate costs incurred by project or contract. Thus,
costs related to this CA had to be reconstructed from source data
information (employee time sheets). Also travel and related
costs claimed to be applicable to the CA did not contain the
required information; e.g., job number/ contract number or
purpose, of trip.
The CDH representative stated that recent changes tc the CDH
accounting system provides the current system the capability of
accounting for and accumulating costs by project or contract.
The scope of this audit did net include a verification of the
adequacy of the current CDH accounting system.
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State Response: When the costs were being accumulated
(prior to the Cooperative Agreement) there was nc need to
identify site costs beyond what was being done. Costs of
personnel were identified by site and activity, and other costs
claimed have a written record to identify which site the costs is
associated with. At the time, monies expended were state funds
and were segregated from federal funds. The Department of Health
has initiated many changes since the time of the claims (1985).
All sites have exclusive accounts, all employees complete time
and effort reports identifying the activities performed by site,
and all contracted services are accounted for by site.
Additional changes are being implemented as a result of internal
and external requirements.
Auditors Comments.
No additional comments necessary.
(b) Colorado Department of Wildlife and Colorado Department
of Mined Land Reclamation - neither of these departments required
that employees prepare timesheets, nor did they identify costs by
projects or contract. Consequently, the financial management
systems for these Departments did not comply with 40 CFR 30.510
since these departments could not readily support costs related
to the subject CA.
Mined Land Reclamation Response; The auditors are correct
that Mined Land Reclamation did not require timesheets at
the time (1984-1985) of the Yak Tunnel activities. The
individuals involved, however, kept track of time on their
personal calendars. The individuals involved estimate the
costs claimed present only a fraction of the actual time
spent. The auditors do not suggest additional documentation
but the state is willing to produce affidavits for time
submitted by the former Mine Land Reclamation employees.
Division of Wildlife Response; The Division does not
require the employees to complete timesheets. The time
sheets did not specify the CERCLA site by name. However the
auditors did not consider documents which would indicate
performance of activities in the site's immediate vicinity
which could only relate to the Yak Tunnel/California Gulch
site. There was no requirement at the time to use a common
set of site names or project titles. The staff completed
timesheets in the normal manner. The state could, for
additional administrative dollars, provide affidavits for
the time spent by regional staff member. This decision has
not been made due to budget ccnstraints found by the agency.
Audit Comments: We have no argument other than whether the
labor costs claimed were adequately documented so as to be
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eligible for funding by SPA. Salaries and wages of
employees chargeable to more than one cost objective must
be supported by time distribution records under Office of
Management and Budget Circular A-87. Mere documentation
of attendance at work is not sufficient, the intent of time
distribution records is to make, verify and, edit records
contemporaneously with the transactions. Human memory is
net sufficiently reliable to accurately recall the numerous
tasks ar. individual may have performed several years ago.
Swearing -3 recalled events won'.t make it accurate,
necassary, complete, or beneficial to EPA. It should be
nctsd that we do net question that the employees worked on
the effort or that they were paid as claimed but, without
further documentation of the precise nature and extent of
those costs EPA cannot pay for them.
(c; Colorado Attorney General's Office - the source
documents maintained by the CAGO identifies costs to individual
contracts. However, the accounting system does not accumulate
the costs by contract. In order to determine total cumulative
costs related to this CA, the data had to be reconstructed from
the source documents.
AGO Response; The State agrees. AGO response costs are
identified by alpha codes for each CSRCLA case.• These costs
are taken from State Accounting System documents, which
reflect expenditures. The State's Central Accounting System
does not have the capability to accumulate costs by contract
or by case. The only recourse available to the AGO is to
accumulate costs manually using source documents, and a
reconciliation procedure tying these manually computed
accumulations to Central Accounting System reports.
Nevertheless, the AGO system is sufficient to satisfy 40
C.F.R. 30.510 because it does includes
An accurate, current, and complete accounting
of all financial transactions for your project.
Records, together with supporting documents
shewing the source and application of all
project funds including assistance awards and
•: authorizations, obligations, unobligated
balances, assets, liabilities, outlays and
income.
It is, perhaps, unfortunate that the State's system is not
fully computerized and easily accessible. Nevertheless,
ail items of information are available and were provided
to the auditors.
Auditors Comments;
No comments ara necessary since the costs claimed by the AGO
:o
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(Except for subcontract coses} wera not questioned.
(d) Colorado Department of Geological Survey - the
accounting system used by the CDGS is considered capable of
identifying and accumulating costs by project or contract.
However, the CDGS accounting system reflects total billings
related tc a project or contract instead of costs. The billings
include labor plus a 33% factor for fringes plus a 25% mark-up
from costs. Based on the above, we are of the opinion that the
CDGS accounting system is capable of providing necessary
accounting data but the use of the billing fee approach is
unacceptable for accumulating cost data for CA purposes.
CGS Response:
The Colorado Geological Survey is a cash-funded agency by
statute. The statute requires the agency to bill for all
direct costs. As a result, the agency has developed a fee
schedule that includes an overhead rate to pay for such
costs which normally would be included in an indirect rate.
The billings, if done on an actual cost basis, won't reflect
any reduction in costs. The state does not agree the costs
should be disallowed strictly because a billing method was
used which conforms to the State's other statutory require-
ments.
Auditors Comments:
We disagree with the CGS response.
included in Note Ic to Schedule A.
Specific comments are
During this audit we attempted to trace the labor and other
direct charges claimed by the various State Departments involved
tc>-documentation provided by the departments. We accepted the
costs whenever the documentation provided (timesheet, travel
reports, invoices, etc.) indicated that the cost incurred was in
the performance of effort under the subject Cooperative
Agreement. In many instances the documentation was inadequate
and the costs claimed were questioned (Labor $61,599, Travel
$10,425 and Supplies $2,400). See Notes 1, 2 and 4 to Schedule A
for more detail.
Colorado Response;
Response is deferred to the Schedule A portion of this
response document.
Recommendation
We recommend that the Regional Administrator
1). Require that the CDH and any State' Agency involved in
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active or future Cooperative Agreements implement and maintain an
accounting system and related accounting procedures which will
identify and accumulate direct costs incurred by project and/or
contract and which will meet the requirements of 40 CFR 30.510.
2). Advise the CDH that $221,969 of claimed Cooperative
Agreement Costs are unallowable for reimbursement under the CA.
Colorado Response;
For the detailed reasons presented below, Colorado
disagrees.
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3 •" Compliance with Superfund Cooperative
Agreement Special Conditions
The CDH needs to improve its management procedures to assure
compliance with all special conditions included in its
cooperative agreements. While CDH complied with most of the
special conditions included in the Yak/tunnel cooperative
agreement, it did not meet the requirements to (i) fully comply
with Federal Procurement standards and (ii) assure than no funds
were spent under the CA solely to assess the extent of injury to
the State's natural resources, nor for litigation and/or
enforcement expenses.
Background
Cooperative Agreements generally include a narrative
statement explaining the hazardous waste problems, a history of
the site, and a statement of work. The work statement describes
the purpose and scope of the activities and tasks to be carried
out under the proposed project. A project budget provides the
financial information relating to the cooperative agreement. In
addition, the Cooperative Agreement provides for certain
assurances on the recipient's part, and for the inclusion of any
applicable special conditions.
Special condition number 4 under Attachment A to the CA
required that "This award is subject to the procurement standards
of 40 CFR Part 30 and Part 33." As discussed in finding No. 1
entitled "Superfund Procurement System, the CDH (Colorado State
Purchasing Department) did not fully comply with these standards.
A cost analysis was not performed even though one was required
based on the circumstances.
In addition, special condition number 4 under b. Special
Conditions states that, "no funds shall be spent under this
Cooperative Agreement solely to assess the extent of injury to .
the State's natural resources, nor for litigation and/or
enforcement expenses". Our review indicated that the costs
claimed by the CAGO included costs of effort which was
specifica-^f^unallowable per the Special Condition described
above. vS|f~
AGO Response;
In addition, it should be noted that Cooperative Agreements
are generally prospective in nature, as required by 40
C.F.R. 30.308, which requirement was waived in this
instance. Hence, standard routine language, such as that
included under Attachment A to the Cooperative Agreement
about procurement standards is routinely recited in cooper-
ative agreements. As discussed above, the recitation of
special condition No.4 is not dispositive. The totality
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of the circumstances must be examined to ascertain
Colorado's obligation with regard to procurement and
accounting responsibilities.
It is conceded that the Cooperative Agreement, Part
IIl(b)(4) excludes the expenditures of Cooperative Agreement
funds.
To assess the extent of injury to the State's
natural resources, (or) for litigation and/or
enforcement expenses.
Some natural resource damage assessment costs were identi-
f.. ed by the auditors. These are excludable under Special
Condition III(b)(4). Colorado agrees that this amount is
unallowable.
Recommendations
(1) We recommend that the Regional Administrator emphasise,
to the various CDH, the importance of complying with all of the
special conditions in the Superfund cooperative agreement. In
this regard, attention should be given to the special conditions
applicable to the Federal Procurement Regulation.
(2) Also we recommend that the Regional Administrator
notify the CDH that Contract costs of ?90,608 ($25,613 labor
costs and $64,995 subcontract costs) incurred for unallowable
functions under Special Condition P.4 and questioned in Exhibit A
of this report are unallowable costs under this Cooperative
Agreement.
(3) We also recommend that the Regional Administrator
require the CAGO to identify and remove costs for all unallowable
activities from the CA costs claimed.
Colorado Response;
Response to Recommendation (1): The importance of comply
ing with all of the previsions of the subject Cooperative
Agre^aent is acknowledged. However, the realities of the
after—the-fact execution of the Cooperative Agreement must
also be acknowledged.
Response to Recommendation (2): Colorado disagrees.
Response to Recommendation (3): The AGO does not object.
Auditors Comments;
No additional comments are applicable to (1) and (33.
Additional Colorado responses and auditor comments related
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to (2) are included in the notes to Exhibit A and Schedule
A.
Leonard G. Birnbaum & Company
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EXHIBIT A
Colorado Department of Health
Final Audit Cooperative Agreement No. ¥008496-010
Schedule of Costs Claimed and Results of Audit
For the Pericd February 1, 1985 through March 31, 1988
Cost Cateaorv
Per Audit
Costs
Reviewed
INotes 1&2)
Cost Questioned Cost
Accepted Ineligible unsupported* Referenc
Labor
Fr. nge Benefits
Travel
Supplies
Subcontracts
$171,517
22,988
14,566
4,800
1,098,268
$109,918
11,927
4,141
2,400
-0-
$ 61,599
11,061
10,425
2,400
130,800
23,153
17,469
5,684
Indirect Costs
Total $1,335,292 $145,855 $221,969
: - Schedule £
Schedule f-
Schedule f-
Schedule f-
967,468 Note 3 anc
.-. Schedule f
Schedule f-
$967,468
* Cur draft report identified the questioned - unsupported costs as
unresolved. Thus the Colorado response referred to these costs as
unresolved. The unresolved classification was changed in the final
report to comply with a change in the EPA-DIG report terminology
requirements. Also, based on certain additional information provided
by Colorado, we have changed the amount questioned ineligible and
questioned unsupported from the amounts included in the draft report.
The Colorado response includes amounts shown in the draft report.
Note 1. The amounts claimed represent expenditures for the
period February 1, 1985 through March 31, 1988 as reported on the
Financial Status Report attached to a August 31, 1988 memorandum.
Note 2. The costs claimed under CA V008496-010 include costs
claimed by five different Colorado State Departments: Department
of Health', State Attorney General's Office, Departments cf
Wildlife,^"Geological Survey and Mined Land Reclamation. The
costs claimed and questioned as a result of cur audit are
detailed and explained in Schedule A and the notes thereto.
Note 3. Based on the problems noted (See Finding i in the report
narrative), we have questioned $967,468 of subcontract costs as
unsupported pending submission of evidence from the CAGO that the
costs have been audited and found to be acceptable. The
unsupported amount represents the difference between the
subcontract costs claimed, $1,098,268, and the subcontract costs
of $130,800 questioned as ineligible. The following comments
explain the basis for cur position relating to the lack of
effective contract management and the necessity for the CAGO or
26
-------
CDH to audit the subcontract costs before they can be accepted.
a. Special Condition No. 4 to the subject CA states that
"No funds shall be spent under this Cooperative Agreement solely
to assess the extent of injury to the State's natural resources,
nor for litigation and/or enforcement purposes". However, the
work description in the contract with Engineering Sciences
contains the following requirements: (Underlining added for
emphasis)
Phase I consists of history, literature and current
data, review; preliminary field investigations; preliminary
site analyses; preliminary valuation of damages; case pre-
paration ; and litigation consultation.
Phase II consists of field investigation; site
analyses; final valuation of natural resource damages;
case preparation; and litigation consultation.
Phase III consists of final trial preparation and ;
trial testimony.
Colorado Response:
The ES contract was effectively managed. The circumstances
do net warrant setting aside $926,983 as unresolved cr
$264,795 as questioned. The circumstances dc not warrant
an audit. Certain modifications to the claimed amounts
have been made, however. These modifications are described
below.
Again, it must be recalled that the ES contract was written
2 years before the Cooperative Agreement. It is notable
that the scope of the ES contract was broader than the
Cooperative Agreement. The operative consideration is that
Cooperative Agreement funds not be expended solely to
assess the extent of injury to the State's natural
resources, nor for litigation and/or enforcement purposes.
As noted ai>ove, seme natural resource damage assessment
cost||||{:$34f488) were identified by the auditors. These
shottestnot have been included in the State's claim. The
totaf^claim of $1,335,292 million is, accordingly diminished
by $34,488.
The auditors have taken a very simplistic approach tc
"litigation" activities based upon billing cedes and
timesheet notations. Again, the 2 year time differential
must be recalled in this regard. Because there was no
"billable" vs. "ncn-billable" import to activities at the
time of their occurrence or recording, the term "litigation"
was used loosely. An examination of the underlying activity
is therefore necessary. Only those items which were truly
-------
litigation in the classic sense are properly excluded.
Auditors Comments;
Account titles provided by the Contractor were used as a
basis for identifying costs of the unallowable activity
under the ES contract. It is doubtful that this approach
would result in complete identification.of all of the
unallowable activities performed under the Contract. As
such we recommend that the Regional Administrator require
the AGO to identify the costs of all unallowable activities
performed on the contract and exclude them from the CA
costs claimed.
b. The subcontract work description appears to indicate
that a substantial part of the required contractual services were
related to effort specifically unallowable per terms of the
Cooperative Agreement. Some of this effort was identified and
questioned during our review (See Note 5 to Schedule A). The
Colorado Department responsible for managing this contract (State
Attorney General's Office) did not attempt to review, identify
and delete the unallowable costs from the contract costs claimed.
Colorado Response;
A MINOR part of the required contractual services were
related to effort unallowable per terms of the Cooperative
Agreement. (See the AGO Response to Schedule 5A, Note 5.)
The AGO has subtracted costs pertaining to an assessment of
natural resource damages ($34,488) from its claim.
The other costs questioned by the auditors are related to
performance of activity properly reimbursable under the
Cooperative Agreement. Attachment F to the Cooperative
Agreement was Engineering Sciences' proposed Scope of Work
relating to the Yak Tunnel/California Gulch which was origi-
nally submitted in 1984 with their bid. The Scope of Work
included ES1 preliminary proposal for phased investigations.
SubI|Kfliently, that proposal became a part of the
Fefa|^|ry 22, 1985, Contract with the State. At the time of
finati£zation of the Cooperative Agreement two years later,
it was recognized that a substantial amount of technical
work had been performed previously pursuant to the ES
contract. Moreover, it was recognized that invoices had
been submitted to the State (which, in turn, were provided
to EPA on December 4, 1986, and subsequently) labelled by
the contractor as follows:
i
Yak Tunnel Phase I
Yak Tunnel Phase II \ •
Yak/Colorado CERCLA Feasibility Study
Yak/CSRCLA Litigation Support. j
i
28
-------
The first two labels (excluding the assessment of natural
resource damages) clearly fall within the ambit of the
Cooperative Agreement, as does the third. As to the fourth
label, please note that Attachment C to tine Cooperative
Agreement recites that:
The invoices under Yak/Colorado C2RCLA
Litigation Support cover the costs fpr
preparing the draft Record of Decision,
the Draft Remedial Action Plan and the
soil survey. i
Thus, although the term "litigation support" is sometimes
used by the contractor in its invoices, the type of effort
encompassed by this category should be apparent. Litiga-
tion support, as the term was used by Engineering Science,
referred to the generic category of costs pertaining to the
draft Record of Decision, the draft Remedial Action Plan
and the soils survey. As such, "litigation" costs are
properly reimbursed under the Cooperative
Auditors Comments:
Agreement.
Comments to Colorado response to Note 3a above also apply
to the above Colorado response tc Note 3b'.
" i
c. An audit of the Engineering Science {ES) costs has net
been performed by the State.
Colorado Response;
The auditor's comment is accurate. However, as noted above,
the situation dees not appear to warrant an audit.
Auditors Comments;
Based on the numerous questions related to a review of the
ES invoices (Notes 3a through 3f) an audit of the ES costs
are considered necessary before acceptance of the costs
claliia. 1
W !
d. An adequate review of ES vouchers was not made (one
instance was noted of a 2nd tier invoice for 519,673 billed twice
by ES and paid twice bv the State). Also see note 5b to Schedule
A.
e. Supporting invoices were missing for
2nd tier
subcontractor costs totaling 56,497. These costs were incurred
for unallowable services and included in the 535,807 questioned
for that reason. See Note 5b to Schedule A..
29
-------
Colorado Resconse:
David A. Savitz, M.D.
Energy Resource Consultants
? 500.00
5,996.55
David A. Savitz, M.D., is a physician wh'o was engaged for
consultation about the health effects ofj lead in soils and
blood-lead studies. His services are properly reimbursable
under the Cooperative Agreement. A copy, of his invoice is
not currently available but, undoubtedly, can be obtained.
The subcontractor Energy Resource Consultants conducted
work concerning natural resource damages. Accordingly, no
effort was made to obtain a copy of the missing invoice and
$5,997 will be deducted from the state's) claim.
Auditor Response;
Based on the additional information provided by the AGO the
$500 related to David A. Savitz, M.D. isj considered
acceptable. j
f. We were provided no evidence to show that the CAGO was
reviewing ES employee timesheets. Our review! of ES employee
timesheets disclosed the following areas of concern:
(1) Time sheets indicate that on several occasions
hours were split between jobs.
(2) Some timesheets contained whiteouts or changes not
initialed by the employee.
(3) Hours were charged to this program with comments
in description column indicating effort applicable to another
program and vice-versa. I
(4) Overtime hours charged to this! Cooperative
Agreement with a credit to an overhead account.
i
•fcJS) Travel and/or other expenses charged to Coopera-
tive Agrfifijanent does not agree with hours charged per time sheet.
I
Colorado Response:
The effect of the above-quoted observations of the auditors
upon allocation of costs to the "accepted, "questioned" or
"unresolved" categories is unclear, it appears that the
observations lead to an allocation of $967,468 contract
costs to the "unresolved" category for the supposed lack of
effective subcontract management.
The conclusion of the auditors is extremely disproportionate
30
-------
to the scope of the situation observed. Specific responses
to the auditors' observations are as follows:
i
(1) During the start up phase, the contractor began the
site investigation for the Yak Tunnel and Eagle Mine sites.
Split hours between the Yak case and the Eagle mine site
were not problematic to the AGO because both sites were in
a similar litigation time frame and were similar ir. nature
scope and location. It was expected that the contractor
devote equal time to both cases.
(2) This procedure was not required byjthe State at the
time of submission of timesheets. It is not a uniform
requirement of contract management.
(3) The State is without sufficient knowledge to respond
to this comment.
unintelligible.
Auditors Comments:
The auditors' comment
is vague and
To clarify the CDH concern regarding Note f(4) above,
"Overtime hours charged to this Cooperative Agreement with
a credit to an overhead account." This practice is used by
certain contractors to bill overtime hours direct to a
contract for salaried employees who are not eligible for
overtime pay. The practice would be considered acceptable
provided that (1) it is the contractor's! normal policy,
(2) the policy is implemented on all contracts and
consistently followed, and (3) the reduced overhead rates
are used to develop bid rates used in the contractor's price
proposals. The acceptability of ES accounting practice
relating to this issue should be determined during the audit
of the subcontract costs. i
31
-------
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-------
Schedule A
Colorado Department of Health
Final Audit Cooperative Agreement No.
V008496-010
Note 1. (a) Costs Questioned 55,299 - Department of Health
i
The accounting records maintained by the CDH during
performance of the subject agreement did not accumulate costs
(including direct labor costs) by contract. As such the CDH
prepared a schedule showing hours by employee' charged to this
program. The schedules included costs charged directly to the
program and employee "General" hours allocated to the program.
The hours were extended by the employee's pay! rate plus a fringe
benefit factor. Based on our review of selected employee time
sheets and pay rates, we consider CDH labor costs of $70,090
acceptable and have questioned the differencej, $5,299, as
unsupported. The amount questioned represents the costs
identified as "General" and allocated to this] program. Since the
"General" labor hours were not actually distributed via an
accounting entry, we cannot be assured that the same "General"
hours could not or have not been used to support charges to other
programs. They would also be unallowable since they were not
identified specifically to a site on employee timesheets as
required by the State Superfund Financial Management and
Recordkeeping Guidance.
CDH Response:
I
Disagree. The practice at the time, prior to the issuance
of the State Superfund Financial Management and Record-
keeping Guidance, was to charge all salary.costs to the
identified CERCLA account. The account was established to
record the expenditure of state funds on ]CERCLA activities.
The expenses involved were incurred prior to the Cooperative
Agreement. i
Colorado filed seven CERCLA lawsuits in 1983. At that time
the practice was for the individuals who
were working on
the CERCLA sites to charge their time either to a. specific
sitejjlgfir- to a general activity, if the activity was general
to a||lpseven CERCLA sites. In preparation for the audit,
the tiiiiesheets were reviewed and those hours specific to
the Yak Tunnel were identified and applied to approximate
payroll costs. The general hours (non-si!te-specific, yet
CERCLA activities) were accumulated from [time sheets and
allocated to Yak Tunnel by applying a factor of seven
(seven activity sites), then calculating Ithe appropriate
payroll costs." The auditors are correct [that hours were
not distributed by an accounting entry because the cost
recovery was done after the fact. Cost recovery would have
been made directly against the PRPs if the Cooperative
Agreement had net been signed. Evidence of the allocation
32
-------
of general hours cannot be presented because all sites have
net been processed for cost recovery. The state could
produce a formal allocation at additional expense which
has not been approved as a recoverable cost under the
Cooperative Agreement.
Auditor Comments:
The CDH response did not include information or data that
would give us a basis for changing our po'sirion. As such
the labor costs of 55,299 are still considered questioned
for the reasons stated above. I
Wildlife
(b) Costs Questioned - $47,903 - Department of
The Colorado Department of Wildlife (DOW) does not account
for costs by program or by contract; hence, employees are not
required to maintain timesheets to identify time by contract.
The direct labor costs claimed by the DOW was ibased on an
analysis of timesheets, estimates based on employee travel
claims, and notes made on desk calendars. Based on our review,
we accepted $30,665 and questioned $47,903 of the DOW direct
labor costs because of lack of supporting documentation. The
accepted labor costs were based primarily on descriptions
included on employees "Daily Activity Report Narrative" supported
by employee timesheets and travel expense claims. The Daily
Activity Report Narrative was used to identify!the work
performed, the travel report data was used to confirm that the
employee was in the Yak/tunnel location during!the period and the
timesheet was used to identify the hours worked for the period.
DOW Response;
Disagree. Without specific information on which records
were accepted and rejected, a response cannot be formu-
lated. In general, the Division disagrees because'of the
nature of the costs claimed. The EPA, tojestablish primacy
oversale state, agreed to reimburse the state and requested
an i^iatification of costs for the activities involved at
YaJc iSlftnel. The Division of Wildlife identified the
associated costs from 1980 through 1987. JAll costs were
incurred prior to the signing of the Cooperative Agreement
on June 29, 1987. The Department of Wildlife is a cash
funded agency and it sought to replace expenditures taken
from those cash funds. The accounting system used
accumulated costs by line time or program,; not project.
i
The activities were recorded in a structure that accommo-
dates the many divisions, programs, and functions of DCW.
At the time, CERCLA activities were not identified
separately because no one foresaw the eventual agreement
34
-------
with EPA and cost recovery. The Division can reconstruct
personal services by team leaders for sampling activities,
habitat analysis, etc. The reconstruction will require
additional administrative expenses which have not been
approved as a recoverable cost under the Cooperative
Agreement. Such reconstruction should have been considered
in the agreement rather than a blanket application of
documentation requirements after the tacit. Another example
of the problem is the auditors' refusaljtc accept time
sheets or time cards that did not specifically identify Yak
Tunnel but rather identified a task of 'JRepcrt Preparation
for Work Done on the Arkansas River," when the only reason
for the use of manpower was to sample th'e aquatic life in
the river affected by the Yak Tunnel. The data was subse-
quently used by the United States Environmental Protection
Agency. The state requests that the entjire disallowance of
Wildlife's costs be revisited.
Auditors Comments:
Since no additional auditable information was provided our
audit position has not changed. The DCW is advised that
supporting documentation if available should be provided
to the Regional Administrator for their 'consideration.
(c) Costs Questioned - $4,998 - Geological Survey
j
The labor costs claimed by the Colorado Department of
Geological Survey {CGS) are for the services of a Supervisor
Geologist, Senior Geologist and the Director of the CGS. Except
for the Director, the claimed hours are supported by tirte sheets.
The hourly labor rates used in the claim were
based on a fee rate
the
schedule used by the CGS for billing purposes. The amount
claimed for the Director's services is questioned because (1)
EPA State Superfund Financial Management and Recordkeeping
Guidance pamphlet states that Department Heads time should be
charged indirect and (2) the Director's time was not supported by
timesheets. Mere notations on a desk calendar, provided as
support are not considered acceptable. The billing fees used by
the CGS to bill for the labor costs were based on the average
salary pSes-fringe benefits of the labor category, adjusted by an
estimated;fjutilization factor, increased by an additional 25% for
indirect expense and divided by the estimated[available working
hours. A review of the billing records revealed that the
calculated hourly fees were not used consistently by the CGS for
billing purposes. As such the fee rates used
are considered
unacceptable. Acceptable rates were calculated based on the
employee's salary plus fringe benefits at the
exoended on the CA.
time the effort was
CGS labor costs questioned reflect the difference between
the application of the proposed rates and accepted rates to1the
35 '
-------
acceptable labor hours for the Supervisor Geologist and Senior
Geologist plus the total labor costs claimed for the Director.
CGS Response:
Disagree. Again, the Cooperative Agreement was developed
after the costs were expended. The Geologic Surgey has two
billing methods: a prospective federal rate which includes
all .direct costs plus an indirect; and, a cash billing
method established by statute for those revenues which come
to the Division on a cash basis. The costs were identified
as a cash source because the monies did not come from US EPA
directly but through a third party, the Colorado Department
of Health. In estimating the costs to be recovered, the
agency relied upon the cash billing system. The billing
method includes a factor for support costs but does not
identify an indirect charge. The billing of the Director's
time was based on the fact that he worked specifically on
the site as a geologist not a supervisor!
The additional amounts" claimed were fringe benefit charges
and support charges. One could agree appropriately that
the second fee is a practice of industry] It is unfortu-
nate, but the CGS did not have a detailed time and effort
system in place at the time, and the reconstruction of past
expenses had to come from calendars or other documents.
The reconstruction is, nevertheless, reliable.
Auditors 'Comments;
As indicated above we take no exception tio the CGS time-
keeping system - except for the Director whose time
(according to the EPA State Superfund Financial Management
and Recordkeeping Guidance pamphlet) should be charged
indirect. During the exit conference additional support
was provided to document an acceptable indirect expense
rate of 4.92% for the Co lor adc^. Department of Natural
Resources (including the CGS). The acceptable direct labor
and fringe benefit costs were increased to reflect the
acceptable indirect expense rates. The questioned costs
are t&us reduced from $5,215 to $4,998.
(d) Costs Questioned - $3,399 - Mined Land
Reclamation Division
The Colorado Mined Land Reclamation Division (MLR)
accounting records did not identify costs by contract nor did
they maintain employee time sheets identifying time charged by-
program or contract. Therefore, the labor costs claimed by MLR
cannot be supported and have been questioned.
36
-------
MLR Response;
Disagree.
At the time of the activities being performed by the Mined
Land Reclamation staff, the funding sources were state funds
not federal funds. Time sheets were not kept yet. It is
apparent that work was performed as evidenced by the reports
generated. The staff involved kept track of time spent on
their daily log books. 'The practice has not been challenged
by the U.S. Bureau of Land Management in the various grants
they have awarded to Colorado. The time involved could be
reconstructed at an additional administrative expense but
such an expense has not been approved as a recoverable cost
under the Cooperative Agreement.
Auditors Comments:
No comments applicable based on the MLF response.
i
Note 2. Fringe Benefits - Costs Questioned
The fringe benefit costs questioned of $lll,061 represent the
difference between the amount claimed and the1 amount accepted
based on the application of the proposed and accepted fringe
benefit rates to the accepted direct labor costs.
Colorado Response; i
The finding is reliant upon the determination of any direct
salary cost disallowance. With the direct salary disagree-
ments, no response can be formulated.
Auditors Comments; No additional comments.
Note 3. Travel - Costs Questioned
i
Of the $11,913 travel costs claimed by CDW, $10,425 has been
questioned.. The amount questioned represented travel costs that
have beettflcJlaimed based on estimates and inadequate
document!
on.
State Resocnse:
;CDW)
Disagree.
The travel costs claimed represent those costs to transport
both full time and temporary employees to and from the site
(Denver to Leadville to Denver). The state agrees that the
records could be maintained in a better fashion but the
claims are nevertheless reasonable and appropriate. The
auditors could have recommended appropriately that unless
37
-------
additional documents or affidavits are produced the cost
should be challenged. The state objectsjto the disallow-
ance without additional effort tc reconstruct the costs.
Auditor Comments;
The CDW comments dc not provide a basis for a change in cur
audit position. We do not object to the state reconstruct-
ing the costs. Any additional data or supporting informa-
tion available may be provided to the Regional Administrator
during final negotiation of allowable costs under this CA.
Note 4. Supplies - Costs Questioned
i
Supply costs of $2,400 claimed by the CDW have been
questioned because the documentation provided did not identify
the costs as applicable to the subject Cooperative Agreement.
CDW Response;
Division of Wildlife disagrees with the questioned costs.
The supplies used were for laboratory sampling which was a
prorated estimate of expenses. The expenses could not be
allocated to a non-existent account. Aga'in, the Coopera-
tive Agreement was signed after the expenses were incurred
and the State believes a reasonable cost was assigned.
i
Auditors Comments:
The CDW comments dc not provide a basis for a change in our
audit position. [
Note 5. Contracts - Costs Questioned - $130,800
I
Contract costs of $1,098,268 were included in the costs
claimed under the subject Cooperative Agreement. These costs
were incurred under a contract awarded by the State of Colorado
to Engineering Sciences Corporation. For morejinformation
regarding^Jthis contract, please see Note 3 to Exhibit A.
The contract costs questioned in our draft report was
$171,285. The amount questioned was subsequently reduced to
$130,000 because Colorado as explained in note (b) below was able
to adequately support $40,485 that had been previously
questioned. (Please see Note 3 tc Exhibit A regarding the
remaining $926,983 of contract costs).
38
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Contract Costs Questioned
Direct Labor
Subcontracts (2nd tier)
Management Fee
Paid vs.'Claimed Costs
Total
$ 26,!666 (a)
64,|995 (b)
32,956 (c)
6,3.83 (d)
$130,800
(a) Direct labor costs questioned includes $25,613 incurred
by Engineering Sciences for purposes specifically unallowable per
terms of the Cooperative Agreement and SI,053-related tc
Engineering Science's use of a billing rate in excess cf the
contractually agreed to rate.
Special condition b.4 of tne subject Cooperative Agreement
states that "No funds shall be spent under this Cooperative
Agreement solely to assess the extent of injury to the State's
natural resources, nor for litigation and/or enforcement
purposes". The $25,613 questioned reflect charges to specific:
tasks established by Engineering Sciences to perform certain
unallowable functions or represents "litigation effort" incurred
by Engineering Science employees as noted on the employee's
timesheets. The schedule below lists Engineering Science task
numbers for apparent unallowable functions and related labor
costs questioned.
ES
Task No.
Task Descriotion
56094.03
56095.03
56095.04
56095.05
Total
Eng. Science Employees
time sheet charges to
Litigation effort
Litigation & Consultation
Subcontractor Phase 2
Subcontractor Phase 2
Litigation Consultation
Amount
Questioned
$14,223
165
696
5,081
$20,165
5,448
$25,613
*» J.
Coloijwo Response;
Attachment C to the Cooperative Agreement recites that The
invoices under Yak/Colorado CERCLA Litigation Support cover
the costs of preparing the draft Record cf Decision, the
Draft Remedial Action Plan and the soils"survey,
Thus, although the term "litigation support" is used by the
contractor in its invoices, the type of effort encompassed
by this category should be apparent:. Litigation support,
as the term was used by Engineering Science, referred to the
generic category cf costs pertaining to the draft Record of
39
-------
Decision, the draft Remedial Action Plan and the soils
survey. I
The following charges to the listed Task Nos. (Project Ncs.)
was questioned by the auditors. (See Exhibit 12 attached
hereto). The designated Task Nos., identifying labels, and
questioned amounts are listed below, together with an
annotation describing the AGO's position regarding each
entry. A discussion of each entry follows I the table.
2300.00
56094.03 Litigation Consultation
56095.03 Subcontractor Phase II
56095.04 Subcontractor Phase I
56095.05 Litigation Consultation
66352.00 Colorado Yak
CERCLA Litigation
66352.01 Project Management
66352.02 Response to
Interrogatories
66352.10 Leadville Soil
Sampling
66352.15 Support for RAP
and ROD
66353.00 Colorado Yak
C2RCLA Feas. Study
66353.05 Pro ject Management
66353.90 Combination of
Alternatives
TOTALS
Arr.-.unt
Questioned
by Auditors
S 135.00
14,223.50
165.00
696.00
5,081.00
1,011.50
2,910.50
42.00
1,035.00
225.00
30.00
37.50
21.00
$25,613.00
Questionable Acceptable
per AGO per AGO
$ 135.00
42.00
$14,223.50
165.00
•'• 696.00
5,081.00
1,011.50
2,910.50
1,035.00
225.00
30.00
37.50
21.00
$ 177.00 $25,436.00
Discussion;
•i..:.
The AQ/jfcis unable to identify project code 2300.00.
Accordingly, no objection to the auditors' allocation of
$135.00 to the "questionable" category is raised.
Although Codes 56094.03 ($14,223.50), 56095J.05 ($5,081.00),
and 66352.00 ($1,011.50) pertain to. "litigation consulta-
tion," the term was used broadly to refer to activities not
otherwise classified; use of the term does hot necessarily
support a litigation effort in the classic sense of the
word. See Attachment C to the Cooperative Agreement.
t
In addition, the auditors have also eliminated the costs
pertaining to Phase I and Phase II, work codes, 56095.04
40
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($696.00) and 56095.03 ($165.00). This set aside was
apparently made based upon the auditors' understanding that
the phases pertained to the assessment of natural resource
damages or litigation. There is nothingi upon which to base
such a conclusion. Those costs should be allowed.
j
The auditors disallowed costs for project management
($2,910.50 and $37.50), Leadville soil sampling ($1,035.00),
support for Remedial Action Plan and Record of Decision
($225.00), the Feasibility Study ($30.000, and a combination
of remedial alternatives ($21.00). These activities were'
clearly embraced by the Cooperative Agreement and should be
allowed.
Finally, the auditors have disallowed the contractors' costs
incurred in responding to interrogatories. While the AGO
believes that the very technical nature of the interroga-
tories would qualify the contractor's costs for payment
under the Cooperative Agreement, it is conceded that the '
effort could qualify as a litigation effort. Accordingly,
no objection.is raised as to the allocation of $42.00 (from
Code 66352.02) to the "questionable" category.
Auditors Comments:
As noted previously the $25,613.00 costs questioned
primarily reflect charges to specific tasks established by
Engineering Sciences to perform litigation consultation
functions - based on the task description the costs were
considered unallowable. Additional costs were questioned
related to litigation effort incurred byJES employees as
noted on the employees' timesheets. Based on the Colorado
Response only $177.00 of the $25,613.00 questioned pertain
to unallowable activities.
The Colorado response indicated that the "litigation
consultation term was used broadly to refer to activities not
otherwise classified; use of the term does nod. necessarily
support a:,,3.itigation effort in the classic sense of the word."
In our opjjoion, the Colorado response does not: provide specific
information' to change our audit position. Where the expense was
originally identified as litigation effort it is now up to the
State to provide "specific" information to assure that it is not
litigation efffort. i
Engineering Science's proposal, in response to the State cf
Colorado RF? quoted a rate of $72 per hour for the Principal
Investigator. The contract specified that Exh'ibit E of the
subcontract was the Project Rate Sheet. Exhib'it E shows the
Principal Investigator (PI) Rate to be $72 per hour. The $75 per
hour rate,used by Engineering Science for billing was included en
Exhibit F of the Subcontract.
41
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It appears that the $72 hourly rate had been the agreed to
rate and we have questioned the difference (5,1/053) in labor
costs claimed.
Colorado Response;
As stated in paragraph 10 of the ES contract dated
February 22, 1985, the S72/hr rate for the principal
investigator was effective until December 31, 1985. After
that time, the hourly rate was $75. Thus, 215 hours billed
to Voucher Ncs. 56094.01, .02, .03, .04 and 56095.01, .02,
.03 were overbilled by an hourly amount of $3. Therefore
$645 is "questionable" but the balance o'f $408 should be
returned to the acceptable category.
Auditors Comments; J
I
The Colorado response referred to on April 7, 1986 letter
to support their contention that the rate was increased
effective January 1, 1986. A review of the referenced
letter revealed that the rate change was]applicable to the
Eagle Mine segment of the CA and did not|mention the Yak.
Tunnel/California Gulch segment of the CA. As such our
position is unchanged on the $1,053 costs questioned due
to rate differential.
(fa) In our draft report: we questioned (subcontract - 2nd
tier) costs of $105,480 which included $85,807 charged to
specific tasks established by Engineering Sciences to perform
apparent unallowable functions identified in Special condition
b.4 of the subject Cooperative Agreement. (See comments above
related to this matter.) In addition $19,673[was questioned as
duplicated costs. The subcontract cost was billed twice by ES
and paid twice by the AGO. j
A list of unallowable subcontract costs questioned related
to Engineering Science task numbers follows:
ineering Science
er Task Descriction
Subcontract
Costs
Questioned
56095.03 Litigation Description
56095.04 Subcontractor Phase 2
66352.02 Response to Interrogations
66353.41 Yak/Plug Evaluation
66353.42 Water Treatability
56094.06 ECON. ERG
Total
42
$ 37,899
21,056
3,736
10,291
6,328
6,497
$ 85,807
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Auditors Comments:
i
Colorado agreed with the $19,673 questioned as duplicated
costs and with $45,322 of the $85,807 questioned as
applicable to apparent unallowable functions. They
provided additional documentation (copies of vendors'
invoices) to support the possible acceptability of the
remaining 540,485 ($85,807 - $45,322). I We have adjusted
the costs questioned to reflect $64 ,995 | ( $19 , 673 +
$45,322) in accordance with our revised position of
subcontract (2nd tier) costs questioned.; The difference
is j-.ncluded in the cost questioned - unsupported category
pending results of audit of the ES costs'.
(c) The Engineering Science costs claimed include $32,956
identified as a Management Fee. This amount represents
Engineering Science's application of a 10 percent factor to 2nd
tier Subcontract costs and certain ODC costs. We questioned
these costs as unallowable pending a review of Engineering
Science's records to assure that a separate pool has been
established to collect subcontract administration expenses and
that the accounting records support a 10 percent factor.
i
Colorado Response; i
Based on a letter from Mr. Udin (ES) thej 10 percent factor
is considered a standard practice for consultants in the
environmental engineering field. Also 40 C.F.R. 33.235(c)
states: where the recipient receives two or more bids,
profit included in a formally advertised; competitively bid,
fixed price sub-agreement shall be considered reasonable.
Auditor Comments;
Exhibits to the original contractual document between the
State of Colorado and ES refer to the 10% additive factor
as a "Management cost for prime contractor, Engineering
Science and as a Management Fee. In either case, it appears
to fei^a factor to recoup costs of managing subcontract
effSppL If this is the case, ES should be able to provide
cos<|fddcuinentation to support this factor. We have not
changed our position on this matter. Ifja further review
indicates the 10% factor is acceptable, it must be applied
to the total disallowed subcontract costs to calculate
management fee costs questioned.
(d) The $6,183 questioned represents the difference between
subcontract costs claimed of $1,098,263 and subcontract costs
paid, $1,092,085.
paid.
Acceptable costs are limited to the amount
43
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Colorado Re spon s e;
This assessment appears to be accurate.
accordingly, reduced by $6,183.00.
Note 6. IndirectCosts - Costs Questioned
The claim is,
The questioned indirect costs represent the difference
between the indirect costs proposed by the CDH, CDW and the MLR,
and the indirect costs considered acceptable for these
departments based on our review. The indirect costs considered
acceptable, by Department, were calculated by|applying the
acceptable indirect expense rate approved by the cognizant
Government Agency for that Department to the accepted base costs
State Response;
Disagree. Any indirect costs are of course subject to the
amount of disallowance of direct expenses. All indirects"
are in accordance with cognizant federal•agency approvals.
i
Auditors Comments;
The State response indicates agreement with the method used
to calculate questioned indirect costs -
the direct costs questioned.
but disagrees with
44
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SIGNIFICANT REPORT WRITE-UP
COSTS CLAIMED BY SUPERFUND COOPERATIVE AGREEMENT RECIPIENT
ARE QUESTIONABLE
Problem
$1,189,437 of the $1,335,292 claimed by the Colorado State
Department of Health (CDH) under a Superfund cooperative
agreement associated with the California Gulch site located near
Leadville, Colorado was ineligible or inadequately supported.
We Found That
EPA awarded a cooperative agreement to the CDH for the
preparation of a risk assessment and to evaluate remedial
alternatives relating to the California Gulcn Superfund site. We
questioned $1,189,437 of the $1,335,292 claimed by CDH for this
effort:
$221,969 was for ineligible labor, fringe benefits, overhead,
travel, and supplies claimed by various Colorado State
Departments which was not supported by adequate documentation and
subagreement costs for unallowable services, unallowable
surcharges, and amounts not actually paid to the subcontractor.
$967,468 was for subagreement costs that we considered
unsupported due to deficiencies in the manner in which the
subagreement services were procured and because the subagreement
costs had not been audited by CDH. i
We also reported deficiencies in the accounting and procurement
systems used by CDH and other Colorado State iDepartments in the
administration of the cooperative agreement, j Further, we noted
that CDH had not adhered to some special conditions of .the
cooperative agreement.
When we presented the results of our audit to CDH, they argued
that performance under the cooperative agreement was not subject
to audit. CDH's opinion is that the work performed was a
"purchase" of data, analyses, and work of experts that was
substantially complete before the cooperative agreement was
awarded.. I
The Regional Administrator, Region 8:
Disallow $221,969 of ineligible cooperative agreement costs.
Find $967,468 of subagreement costs claimed under the
cooperative agreement unallowable until CDH makes an audit of the
costs. Upon completion of the audit, a final
the allowability of the costs should be made.
determination on
-------
Require CDH and other Colorado State Departments to correct
deficiencies in their accounting and procurement systems before
additional cooperative agreements are awarded. CDH's self-
certification of its procurement system should also be revoked.
i
In resolving the issues presented in this audit, we also alerted
the Regional Administrator to the likelihood that he would have
to address CDH's arguments about their work being a "purchase"
and not subject to audit. I
What Action Was Taken
The audit report no. P5cG*8-08-0117-9100484 was issued to the
Regional Administrator, Region 8 on September 21, 1989. A
response to the audit report is due on December 20, 1989.
Congressional or Press Interest
We are not aware of any specific interest in
this report by
either Congress or the press. However, since the cooperative
agreement costs questioned may be subject to greater challenge in
any cost recovery effort, it is possible that the press may draw
attention to the impact of the audit issues reported on the
Superfund program.
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(i) Audit Report Tid.e
-(?) Audit Report Nunber
(4) AIC --'—... _
(6) Signatory Official
(7) Staff Days Used: ~
Less Trainee Time:
(3) Issue Dace
(5) Supervisor ;;t^)~
(8) Cost of Audit a z~, -, ~ •„
less GRID Computer -Credit:
Total Staff Days:
/ / INTERNAL
/ /
National
/~| Pilot
fj
/ /
Follow-on
Sinale Location
(9) Type of Audit:
P7 EXTERNAL
S
/// Request by SPA staff
/~7 Hotline complaint
/~7 Request by U.S. Attorney
/~ Conqressional request
fj Initiated by OIG
/~7 Interim audit
/~7 Followup work
/7 Other (identify)
(10) Other Audit Results:
fj Referrals to DIGI
/~7 Referrals for additional external audits
/~7 Suggestions for annual audit plan (internal)
Deficiencies in EPA performance/prograns also reported to orooran
officials (for external audits only) j
/~7 ReccranEndations to program staff for administrative actions and/or
actions against program participants
Other (identify)
LJ OHT( identify)
Reasons for Delay (Be as specific as possible as to reasons and period of time.)
Assigned
Started
Draft Report ^^
Final Report •-••
Elapsed Time 1
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