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 ------- 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 ------- 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. ------- 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". ------- 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. ------- £ 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 ------- 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 ------- 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. ------- 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 ------- 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. ------- 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". ------- 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 ------- 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 ------- 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 ------- 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." ------- 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 ------- 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. 10 ------- 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. 11 ------- 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 ------- 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 ------- 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 ------- 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 ------- 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 16 ------- 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. 17 ------- 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. 18 ------- 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 19 ------- 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 ------- (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 21 ------- 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. 22 ------- 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 23 ------- 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 24 ------- to (2) are included in the notes to Exhibit A and Schedule A. Leonard G. Birnbaum & Company 25 ------- 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 ------- 0! 3 T3 (U r* "u cn o "* i o £"•"• CO ^C CO 0) p s 8 ^D 0= pH .« (0 J-> c 0) B i G> V CO JJ to o In b 5 >» -O "8 s CO ^J 40 Jj CO 5 •c CO _J c 3 ;s re (-. o jj c 1 CD a o iZZl ,w_l ro .^ CO o rH O • •? CO ^ A 5 CD * c j^ o ^ 4.) O f* "• OOvO LTi CTi in ,— [^~ ^" 4^ O CO B r-H O £c CM CM — ^™ OM3D cos- «• no to* > i 3" m S a <- 00 T3 •H in oo f»^ 3 4ft 5 0) ^ O 0) o (M !_ O g "? in t>- <^ KJ in S^ -t& jj 01 i f*m4 LU « jo 1 CO 32 O t— in •> r-" f"* S •» o ro \b n jj C a> c I 0) £) • P4 iZ in \o ro a> ^ ^™ AT •^ CM 5 ^f pMrf 1. o £ ar c o o £ sr 0 o to a> m CO C\J CO c * ^mm O o o 0 oo OJ •> oo ^^ c ^ CO o n 13 c ^8 ai3 t^ & trn ro f>j in m ru Rj m II tl It II II II II II rn ii m n -: it <- n •** S r— c m. » a Q\ vO CJv •6* 27 tc\l sr CO in « •^ i— 00 OJ ^" •"• (M CO m 0 ffL WT O C\J O * CO ^2 p» » J^ to 0} cS Jj- o 0) ~ ^ •#H Cu "2 *" i_ i ^- II II tl II II II tl II II II II tl II II II II II II II II II II tl II II II II II II II II It II II II II II II 11 II ------- 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 ------- 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 ------- ($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 ------- 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 ------- 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 ------- 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 ------- 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. ------- (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 ------- .5: :r*.-i r.-s cV": -i=t I _ er i -. • u,-. , is _ - ^ s in c '"ner ~ '••~~--r~ ~iC'-.r~~e"! " and Cbr, trac~= ?1anac3.T.=n ' c . ------- |