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
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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)
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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
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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
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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
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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,
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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
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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
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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
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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
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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.
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Review of Cooperative Agreement to CHMR
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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
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*«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
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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
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Report NO. E3FBG4-03-0132-4400102
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