350R90033 1 Office of Inspector General Report of Review * Final Report on Special Review of Cooperative Agreement CR-817670-01 Awarded to Center for Hazardous Materials Research (CHMR), Pittsburgh, PA E3FBG4-03-0132-4400102 August 29, 1994 ------- Inspector General Division Conducting the Special Review Mid-Atlantic Audit Division Philadelphia, Pennsylvania Program Offices Involved: Office of Small and Disadvantaged Business Utilization (OSDBU) Office of Research and Development (ORD) ------- UNITED STATES ENVIRONMENTAL PROTECTION AGENCY OFFICE OF THE INSPECTOR GENERAL MID-ATLANTIC DIVISION 841 CHESTNUT BUILDING PHILADELPHIA, PENNSYLVANIA 19107-4431 (215)5974)497 Washington Branch Office 2800 Crystal Dnve Arlington VA 22202 (703)308-8242 August 29, 1994 MEMORANDUM SUBJECT: for FROM: TO: Final Report on Special Review of Cooperative Agreement Number CR-817670-01 Awarded to the Center Hazardous Materials Research (CHMR) Pittsburgh, PA Report Number: E3FPG4-03-0132-4400102 P. Ronald Gando Divisional Inspector General Mid-Atlantic Division Leon H. Hampton, Directo: Office of Small and Disa Business Utilization Audit antaged PURPOSE. SCOPE. AND METHODOLOGY We performed this review in response to a request dated October 5, 1992, from the Director, Office of Small and Disadvantaged Business Utilization (OSDBU). The Director requested a financial and programmatic review of the P2 Pollution Prevention By and For Small Business cooperative agreement that was awarded to the Center for Hazardous Materials Research (CHMR). Our fieldwork which began on April 5, 1993, was suspended on June 7, 1993. We resumed our review on November 17, 1993, and completed our fieldwork on April 1, 1994. Based on our initial fieldwork and discussions with the Director of OSDBU, we limited the scope of our review to EPA's award process of the cooperative agreement. We conducted fieldwork, interviewed employees, and evaluated records from OSDBU, Risk Reduction Engineering Laboratory (RREL), Grants Administration Division (GAD), and CHMR. In addition, we reviewed applicable portions of Title 40 of the Code of Federal Regulations; the Federal Grant and Cooperative Agreement Act (FGCAA) of 1977, Public Law 95-224; OMB Circular A-76: Performance of Commercial Activities; and other related criteria. Printed on Recycled Paper Federal Recycling Program ------- Review of Cooperative Agreement to CHMR Special reviews are short-term studies of EPA activities. They are not designed to be statistical research studies or detailed audits. Rather, they are information-gathering studies that seek to identify issue areas for top management attention. The goal of a special review is to produce timely, constructive change while minimizing the resources invested in studying and documenting the issue areas. This work was not conducted as part of an audit, and accordingly was not done in accordance with Government Auditing Standards. Instead, the work represented a>special review which was conducted in accordance with the provisions of EPA's Office of Inspector General Manual, Chapter 150. ACTION REQUIRED Our report identifies several issues that we believe require management attention by OSDBU. In accordance with EPA Order 2750, the action official is required to provide this office a written response to the report within 90 days of the final report date. For corrective actions planned but not completed by your response date, reference to specific milestone dates will assist this office in deciding whether to close this report. We have no objections to the further release of this report to the public. BACKGROUND The former EPA Administrator, William Reilly, announced in a March 27, 1989, memorandum that one of his top priorities during his administration, was to stimulate pollution prevention efforts. These efforts were to be funded by requiring each of the agency program offices, with some exceptions, to set aside two percent of their extramural resources. Each contributing program office could compete for these funds by submitting proposals for pollution prevention projects to the Pollution Prevention Office (PPO). The P2 proposal was developed by a RREL employee and submitted to the Office of Research and Development (ORD) for funding. ORD did not choose to fund the P2 proposal because of other higher priority work. The RREL employee then decided to submit the P2 proposal to OSDBU and suggested that OSDBU submit the proposal under the two percent set-aside program. OSDBU, in cooperation with RREL, prepared and Report No. E3PBG4-03-0132-4400102 ------- Review of cooperative Agreement to CHMR submitted a revised P2 OSDBU proposal entitled "Pollution Prevention By and For the Small Business Community." The PPO notified OSDBU on October 16, 1989, that their proposal was one of the 25 pollution prevention proposals chosen for funding. The RREL employee was designated as the official EPA project officer for the cooperative agreement. The goal of the P2 OSDBU proposal was to enhance pollution prevention research in the small business environment by: 1) supporting the implementation and demonstration of promising pollution prevention technologies; and 2) transmitting the results of the demonstration to those who would benefit. This goal was to be accomplished by competitively awarding up to $750,000 to various small businesses, with maximum awards of $25,000 each. On June 15, 1990, eight months after OSDBU' s P2 proposal was selected, CHMR submitted an application to EPA to serve as program manager for the OSDBU P2 project. EPA non- competitively awarded cooperative agreement number CR-817670- 01 to CHMR on September 5, 1990, with potential maximum funding of $900,000. CHMR received approximately $150,000, of the $900,000, for program management. CHMR awarded the remaining $750,000 to the small businesses. In addition, CHMR received an $85,000 amendment on May 8, 1992, for several small studies designed to enhance the project. RESULTS OF IMPROVEMENTS NEEDED IN EPA* 8 DECISION PROCESS IN PROCURING SERVICES EPA inappropriately procured $150,000 of program management services under the cooperative agreement awarded to CHMR. The work performed by CHMR was for the direct benefit of the government and should have been procured under a competitively bid contract rather than a sole source cooperative agreement. In addition, some of the services performed by CHMR, specifically awarding grants and approving the grantees' payments, should have been performed exclusively by government employees. EPA rationalized the approval of these actions because the OSDBU Small Business Ombudsman 1) believed EPA employees were not available to monitor the P2 cooperative agreement, 2) was familiar with CHMR and their work, and 3) thought CHMR was the only qualified non-profit institution. In our opinion, these 3 Report NO. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR reasons do not justify EPA violating FGCAA and OMB Circular A-76. CHMR'B Role Dictated Use of a Contract CHMR's services were for the direct benefit of the government and, by law, should have been awarded under a contract, not an assistance agreement. According to CHMR's application, its role as program manager was to effectively and efficiently manage the project. Some of the services CHMR planned to perform under the project, included: 1) maintaining the schedule and budget, 2) keeping the small businesses informed, 3) establishing selection criteria, 4) developing the standardized solicitation document, and 5) distributing copies of the small businesses' project reports within EPA. Other services performed by CHMR that were for the direct benefit of EPA are discussed below under "CHMR Performed Inherently Governmental Functions." The FGCAA of 1977 established government-wide criteria for determining the appropriate legal instrument (contract, grant, or cooperative agreement) to use for funding extramural activity. Section 4 of the FGCAA states an agency must use a procurement contract if the principal purpose of an agreement is to acquire property or services for the direct benefit or use of the Federal government. In addition, EPA Order 5700.1 was issued on March 22, 1994, to clarify the FGCAA criteria and to achieve consistency throughout the Agency in the selection and use of contracts, grants, and cooperative agreements. A RREL memorandum dated September 7, 1989, referred to having an independent Professional or Trade Association who could be EPA's "legs and hands" in awarding twenty competitive sub- contracts nationally. In our opinion, if EPA is hiring an organization to be their "legs and hands", the organization's work would be unquestionably for the direct benefit of the government and is required by FGCAA to be awarded under a contract. The principal purpose of the cooperative agreement was to provide funds to small businesses for several individual pollution prevention projects. We believe the funding to the small businesses was correctly awarded as grants. However, 4 Report NO. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR we believe the $150,000 provided to CHMR was for the management of these grants and should have been funded under a contract in accordance with FGCAA. CHMR Performed inherently Governmental Functions Some of the program management services CHMR performed included making judgmental decisions on behalf of the government which we believe to be inherently governmental functions. Specifically, these services included: 1) awarding subgrants to small businesses, and 2) approving small businesses' vouchers for payment. In addition, at three incremental stages, CHMR solely determined if each small business had satisfactorily completed a sufficient amount of work to warrant approval of their voucher for payment. In our opinion, these services included making judgmental decisions that clearly violated OMB Circular A-76. section 5(b) of this Circular states it is the policy of the United States Government to retain governmental functions in- house. Certain functions are so intimately related to the public interest as to mandate performance only by Federal employees. Inherently governmental functions are not in competition with the commercial sector; therefore, these functions shall be performed by government employees. The Circular defines inherently governmental functions as activities which require either the exercise of discretion in applying government authority or the use of value judgment in making decisions for the government. We believe EPA defined CHMR's functions as inherently governmental when they described CHMR as being the government's "legs and hands". In addition, we believe, CHMR's review of the small businesses' progress reports resulted in EPA transferring its oversight authority to CHMR. Title 40 CFR 40.150 revised as of July 1, 1990, stipulates that every application for a research or demonstration grant will be evaluated by appropriate EPA staff in items of relevancy and the applicable criteria set forth in 40 CFR 40.140. Further, 40 CFR 40.150 states that new applications considered relevant to EPA research and demonstration objectives will be reviewed for technical merit by at least one reviewer within EPA and at least two reviewers outside EPA. EPA obtained comments from three outside reviewers and one reviewer within EPA for CHMR's proposal. The RREL 5 Report NO. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR Project Officer's review fulfilled the requirement for an inside reviewer, and he recommended funding the proposal. Our analysis of the outside reviewers' comments, disclosed that all three outside reviewers questioned funding CHMR's proposal. Two of the three reviewers questioned the use of CHMR instead of EPA staff to manage the project. The third reviewer questioned CHMR's technical expertise. In the RREL 'Project Officer's response to the first two reviewers, he defended the use of CHMR because the Administrator's two percent set-aside program did not provide for additional in- house staff. In our opinion, this is not a valid reason for using non-federal personnel to perform inherently governmental work. We agree that the two percent program did not provide for additional EPA staff. However, that was evident in the initial announcement for the set-aside program. The former Administrator's guidance specifically required offices submitting proposals to include workyear allocations in their own budgets. The OSDBU proposal, as submitted to the PPO for funding, did not mention using CHMR or any outside organization to manage the project. The proposal stated that EPA employees would be used to manage the project. We believe OSDBU's reason for awarding the P2 cooperative agreement to CHMR, because there was no EPA personnel available, was unjustified. We believe OSDBU or RREL should have budgeted for the staff as required by the guidance for the two percent program and as stated in the proposal. The third outside reviewer questioned CHMR's technical ability to select the best proposals and mentioned alternative organizations that he thought were better qualified. The RREL Project Officer responded that RREL's role was that of the "technical program authority" and that CHMR's role was that of "administrative program manager." Although RREL initially planned to be the technical program authority, the scope of work in CHMR's proposal for the cooperative agreement stated that CHMR will receive quarterly and final reports from the small businesses and draft a final report on the demonstration. During our review, we found that CHMR received and performed the technical reviews of the small business' progress reports as described in their proposal. In addition, CHMR determined if the small businesses satisfactorily completed a sufficient amount of work to approve payment. We believe, EPA relinquished their authority to CHMR because CHMR performed both the technical 6 Report No. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR and administrative support under the P2 cooperative agreement. EPA Selected CHMR Without Considering Alternative Sources We found that EPA selected CHMR to manage the P2 project on a non-competitive basis. RREL addressed this issue in their July 31, 1990 decision memorandum. RREL stated CHMR had submitted a proposal informally through discussions with OSDBU and RREL, offering a unique approach, and it would have been unethical to advertise for applicants to use this approach. However, we believe that OSDBU solicited this proposal from CHMR by involving them in the planning phase of the project. During an interview, the OSDBU Small Business Ombudsman stated that: 1} she was satisfied with the performance of CHMR's president as a previous contractor to OSDBU; and 2) CHMR had received the P2 award because they were the best organization to do the job. In our opinion, these reasons are not sufficient to solicit and award a non- competitive assistance agreement. In addition, the Small Business Ombudsman admitted that alternative organizations were not even considered. This issue of awarding assistance agreements sole source was also disclosed in a previous Office of the Inspector General report addressed to OSDBU (No. E3FMF2-03-0364-3400017), issued January 25, 1993. The report disclosed that OSDBU awarded FY 1991 grants sole source to the National Association of Minority Contractors without considering alternative organizations. Non-competitive awards may represent a systemic problem in OSDBU. OSDBU's response to this previous report mentioned developing a joint review team to prevent future unjustifiable sole source awards. Discussions with the Director of OSDBU on April 13, 1994, revealed that this review team had not yet been established. In our opinion, the establishment of a joint review team could prevent future occurrences of unjustified non- competitive awards. CONCLUSION We found that EPA allowed a non-profit institution to perform inherently governmental functions and inappropriately procured program management services under a cooperative agreement. We believe some of the services provided by CHMR were clearly for the direct benefit of the government and 7 Report No. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR should have been procured competitively under a contract. In addition, the guidance describing the Administrator's two percent set-aside program clearly stated that workyears would not (emphasis added) be provided for any of the pollution prevention projects and any office submitting a proposal should budget the available personnel for their projects. We believe OSDBU and RREL should not have indicated in their proposal that EPA employees would manage the project if they lacked the necessary resources and knew that non-EPA personnel were to be used. RECOMMENDATIONS We recommend the Director of OSDBU: 1. Ensure that all future contracts and assistance agreements involving your office: a. Are awarded under the appropriate instrument in compliance with FGCAA and EPA Order 5700.1 issued March 22, 1994; b. Do not include the performance of inherently governmental functions by non-EPA personnel in accordance with OMB A-76; and c. Are closely evaluated and adequately justified if awarded non-competitively; 2. Ensure that his staff is adequately trained in IPA Order 5700.1, OMB Circular A-76, and any new policies issued by GAD for improving grant practices; and 3. Continue to progress towards the establishment of the joint review team to ensure the prevention of unjustified non-competitive awards. OSDBU'S RESPONSE OSDBU's primary concern is and continues to be the "appearance" of impropriety in the use of CHMR in inherently governmental functions. To my knowledge, only within the last calendar year has the grants administration division clarified the appropriate use of grants in deference to 8 Report NO. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR contract. For that reason I specifically concur with the recommendations of the Office of the Inspector General. PIG EVALUATION We concur with OSDBU's response. EPA Order 5700.2 was issued to clarify the criteria for and to achieve consistency in the selection and use of contracts, cooperative agreements and grants by all EPA offices and laboratories. Federal Grant and Cooperative Act of 1977, upon which the EPA order is based, should have been used to determine the appropriate instrument to fund a project. ORD RESPONSE ORD concurs with the report and the recommendations as addressed to the Director of OSDBU. My office would, however, like to bring an issue to your attention. The report is unclear as to which office (ORD or OSDBU) has the responsibility for the Cooperative Agreement. It appears that the Project Officer is an ORD employee, but that OSDBU also has some responsibilities. PIG EVALUATION We concur with ORD's response and have made some editorial changes in order to clarify that the RREL employee was the official project officer as listed on the P2 cooperative agreement. In addition, according to the RREL project officer and the OSDBU Ombudsman, OSDBU involved CHMR in the project because of OSDBU's past experience with CHMR. Should you have any questions or need additional information, contact Martin Pinto or myself at (215) 597-0497. 9 Report NO. E3FBG4-03-0132-4400102 ------- Review of Cooperative Agreement to CHMR [This Page Intentionally Left Blank] 10 Report Mo. E3FBG4-03-0132-4400102 ------- ATTACHMENT A PAGE 1 of I UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, O.C 20460 July 1, 1994 owce OF THE ADMINISTRATOR MBMORANDVM SUBJECT: Draft Report on Special Review of Cooperative Agreement Number _ CR-817670-01 Awarded to the Center for Hazardous Materials Research (CHMR) Pittsburgh, PA. Report Number E3FBG4-03-0132 FROM: Leon H. Hampton, Jr., Office of Small and Disadvantaged Business Utilization TO: P. Ronald Gandolfo Divisional Inspector General for Audit Mid-Atlantic Division I have reviewed the findings and recommendations of the Office of Inspector General regarding the draft report requested by this Office. 1 have also reviewed the draft response of the Office of Environmental Engineering and Technology Demonstration in addition to comments furnished me by the Small Business Ombudsman, My primary concern is and continues to be the "appearance* of impropriety in the use of CHMR in inherently governmental functions. To my knowledge, only within the last calendar year has the grants administration division clarified the appropriate use of grants in deference to contracts For that reason I specifically concur with the recommendations of the Office of the Inspector General a ------- *«t0 S*!&. ATTACHMENT B PAGE 1 of 1 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D C 20460 AUG MEMORANDUM OFFICE OF RESEARCH AND DEVELOPMENT SUBJECT: Draft Report on Special Review of Cooperative Agreement Number -CR-817670-01 Awarded to the Center for Hazardous Materials Research (CHMR) Pittsburgh, PA. Report Number. E3FBG4-03-0132 FROM- TO: Assistant Administrator Research and Development (8101) P. Ronald Gandolfo Divisional Inspector General for Audit Mid-Atlantic Division Thank you for the opportunity to review and comment on the above mentioned Report. ORD concurs with the report and the recommendations as addressed to the Director of OSDBU. My office would, however, like to bring an issue to your attention. The report is unclear as to which office (ORD or OSDBU) has the responsibility for the Cooperative Agreement. It appears that the Project Officer is an ORD employee, but that OSDBU also has some responsibilities. I am attaching comments received from the Risk Reduction Engineering Laboratory concerning this report for your information. These comments are not official ORD comments and should only be considered for information. If you need any additional information please do not hesitate to contact me or Clarence Mahan at 202/260-7500. Attachment cc Lisa Karpf Timothy Oppelt Alfred Lindsey Clarence Mahan ORD Audit Follow-up Coordinator 12 /X> Racycled/Becyclabla J~\ <~\ Pricnad with Soy*C*nol« Ink on X3<7 cor>t*ln» ml tea»t 7SV. ncycM « ------- Review of Cooperative Agreement to CHMR ATTACHMENT C REPORT DISTRIBUTION Office of Inspector General Inspector General (A-109) EPA Headquarters Offices Office of Small and Disadvantaged Business Utilization (A-149C) Office of Research and Development (RD-672) Agency Follow-up Official (PM-208), Attention: Assistant Administrator for Administration and Resources Management Agency Follow-up Coordinator (H-3304), Attention: Director, Resource Management Division Director, Office of Research Program Management (RD-674) Director, Grants Administration Division (PM-216F) Associate Administrator for Congressional and Legislative Affairs (A-103) Associate Administrator for Communication, Education, and Public Affairs (A-107) Headquarters Library (PM-211A) EPA Field Offices Risk Reduction Engineering Laboratory (W913) Cincinnati, Ohio 13 Report NO. 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