350R93903
      \
      5    UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                       WASHINGTON. D.C. 20460
                                                         OFFICE OF
                                                     THE INSPECTOR GENERAL
                          March 31, 1993
MEMORANDUM
 SUBJECT:  Management of  Extramural Resources  at the Environmental
          Research Laboratory, Athens, Georgia
          Audit Report No. E1JBF2-04-0300- 3100156
FROM:    /JKenneth A. Konz
        /(Assistant Inspector General
        //   for Audit    '-J
        s
TO:       Gary J. Foley
          Acting Assistant Administrator
            for Research and Development

          Christian R. Holmes
          Assistant Administrator
            for Administration and Resources Management


     Attached is the final report entitled "Management of
Extramural Resources at the Environmental Research  Laboratory,
Athens, Georgia (ERL-A)."  Our overall audit objective was to
evaluate ERL-A's management and use of extramural resources  in
relation to applicable laws, regulations, and'policies.

     Over a period of up to 7 years, the audit concluded that
ERL-A management had avoided or circumvented laws,  regulations,
and Agency procedures in the award and funding of certain
contracts, cooperative (CAs) and interagency agreements  (lAGs).
ERL-A misused or abused the use of contracts, CAs,  and XAGs  for
the apparent purposes of supplementing inadequate intramural
resources and federal staff, retaining long-term on-site
contractors, and favoritism to former employees, employers, and
alma maters.  This misuse and abuse of extramural instruments was
promulgated under an ERL-A management culture that  apparently
encouraged research accomplishments at the expense  of statutory,
regulatory,  and sound procurement and management practices.

     Of equal concern,  however,  is the lack of proper review and
oversight of ERL-A extramural activities by the Office of
Research and Development (ORD),  the Contract Management Division
(CMD)  - Cincinnati,  and the Grants Administration Division (GAD).
Inadequate oversight by these Headquarters elements precluded
earlier detection and correction of resource management problems
at ERL-A.
                                                         Printed on Recycled Paper

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Action Required

     We have designated the Office  of Research and Development
 (ORD) as the action  official for  this audit.  In accordance with
EPA Order 2750, you  as  the action official, are required to
provide this office  a written response to the audit report within
90 days of the final audit report date.  We also request, that as
action official, you coordinate with and obtain a written
response from the Assistant Administrator for Administration and
Resources Management (OARM)  for planned corrective actions
related to recommendations for CMD  -Cincinnati and GAD.  Written
responses should indicate  milestone dates for any initiated or
planned corrective actions.

      ORD's response to recommendations in the draft report was
considered sufficient to resolve  most of the recommendations made
to ORD and ERL-A management;  however, ORD's planned actions on
several recommendations need revision or clarification before
resolution.  These recommendations  and our concerns are
identified in appropriate  sections  of Chapter 3 and Appendix I.

     This audit report  contains findings that describe problems
the Office of Inspector General (OIG) identified and the
corrective actions the  OIG recommends.  This report represents
the opinion of the OIG.  Final determinations on matters in this
report will be made  by  EPA managers in accordance with
established EPA audit resolution  procedures.  Accordingly, the
findings described in this report do not necessarily represent
the final EPA position.

      If your staff  has any questions or need additional
information regarding this report, please have them contact me at
260-1106.
Attachments

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                         EXECUTIVE SUMMARY
PURPOSE

Increasing workloads, without commensurate increases in federal
staff and intramural  funding, have contributed to a heavy
dependence by the Office of Research and Development (ORD) on
contractors and other extramural support for accomplishment of
its mission.  ORD's extramural funding substantially increased
between 1987 and 1992 while intramural funding only marginally
increased.  During the same period federal staff at ERL-A
actually decreased while the laboratory's workload more than
doubled.  Currently,  almost 70 percent of ORD's annual fund
allocations represent extramural resources.  ORD's Fiscal Year
(FY) 1990 Federal Managers' Financial Integrity Act (FMFIA)
report identified the management of extramural resources as a
material internal control weakness.  The Agency perceived this
program activity as a material weakness due to the substantial
lack of EPA staff to  properly manage and oversee extramural
operations.

EPA has been criticized in prior years by Congress and ,the public
for perceived over-reliance on contractor support to perform many
of its critical mission functions.  In 1992, OIG's identification
of significant contract management weaknesses, related to one,of
EPA's largest technical support contracts,1 substantially
increased congressional criticism and oversight of EPA's
extramural management processes.  Some of the serious contract
management weaknesses identified in this audit were related to
contractor activities at ORD laboratories.

As early as 1983, OIG reported deficiencies in ORD's extramural
procurement and management processes.  In 1992, following the
audit of the Computer Sciences Corporation (CSC) contract and
identification of serious contract management problems and
conflict of interest  situations (COIs)  at ORD's Duluth, Minnesota
laboratory, OIG initiated joint audit/investigative surveys at
several ORD laboratories to assess the full extent of extramural
management problems in ORD field units.  The OIG survey at the
Environmental Research Laboratory - Athens, Georgia (ERL-A)
identified problems with the laboratory's solicitation of
contracts and other extramural agreements and the overall
management and control of extramural resources.  As a result of
the survey, the OIG initiated an audit of ERL-A and related
activities at the Office of Administration and Resources
Management's (OARM's) Contract Management Division (CMD),
Cincinnati, Ohio, and Grants Administration Division (GAD),
Washington, D.C.  The primary objective of the review was to
     1  Audit Report No. E1NME1-04-0169-2100295,, "EPA's Management
of Computer Sciences Corporation Contract Activities," issued March
31, 1992.

                                i        Audit No. E1JBF2-04-0300

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Executive Summary
determine if ERL-A, in coordination with CMD and GAD,  properly
used, administered, and controlled extramural  funds  to obtain
services under contracts, cooperative agreements  (CAs),  or
interagency agreements (lAGs) in compliance with applicable laws,
regulations, and Agency directives.


BACKGROUND

With a current annual budget of about $450 million,  ORD's primary
mission is to provide quality, timely scientific and technical
information, products and assistance in support of Agency
programs and goals through twelve environmental laboratories
which employ about 1,900 EPA staff.  ERL-A is  one of the 12 ORD
laboratories.  Although environmental laws, which ERL-A research
supports, increased from 2 in the early 1980's to 14 in 1992,
ERL-A's EPA staff actually decreased during this same  period.

To accomplish the mission with strictly imposed federal
employment ceilings, ERL-A and other ORD laboratories  have
increased their dependency on extramural level-of-effort (LOE)
contracts, CAs, and lAGs to conduct or supplement much of their
research.  Between FYs 1986 and 1991 contractor staff  at ERL-A
increased from 38 (30 percent of total ERL-A staff)  to 70 (44
percent of total staff).

The following chart illustrates ERL-A's tremendous growth in
extramural support in relation to EPA staff between  1986 and
1991.

         ERL-A Staff Versus Contractor/Cooperator On-Site Support
                          FYs 1986-1991                     .
                    % Change From Base Year
                     1986 1987 1988 1989  1990  1991
Contractors Q
Cooperators I
ERL-A Staff H
0
0
0
15.8
6.5
-2.8
47.4
-25.8
-7
50
35.5
-4.6
84.2
29
-3.2
84.2
29
-4.6
                               Fiscal Years
                                ii
Audit No. E1JBF2-04-0300

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Executive Summary
ERL-A's FY 1991 budget totaled $14.05 million.  Of that, $7.7 .
million (54.'8 percent) was appropriated for extramural research
under contracts ($4.11 million), CAs ($2.91 million), and lAGs
($640,000).  This included agreements with 5 contractors valued
at approximately $4 million which .provided 70 full-time
contractor employees for laboratory support.  Twenty other on-
site personnel were provided under CAs and the Senior
Environmental Employee (SEE) Program.  Contractors, cooperators,
and SEE personnel represented about 57 percent of ERL-A's     '
available human resources, providing -technical, scientific, and
administrative support. In 1992, ERL-A's extramural funding
increased to 58.5 percent of its total budget  ($9.3 million of
$15.9 million).  Of this increase, 52 percent was for CAs and
lAGs ($3.55 million, in 1991 to $5.4 million in 1992).  However,
lAGs increased over 228 percent between 1991 and 1992 ($640,000
to $2.1 million).

With this level of dependency on extramural -support, strong
management controls were necessary to offset inherent contracting
risks and the potential for fraud,, waste, and abuse of federal
resources.  However, Agency managers either did not establish or
properly implement the control systems needed to adequately
protect against such risks.  At ERL-A the priority of good
contract management and control was lost among the high-priority
scientific endeavors emphasized by research-oriented personnel;


RESULTS IN BRIEF                        •

ERL-A's apparent lack of intramural funding, coupled with a
management emphasis on mission accomplishment by any available
means, encouraged ERL-A's circumvention, avoidance,, and
noncompliance with laws, regulations, and Agency policies, related
to the use and funding of extramural contracts and agreements.
The circumvention and avoidance of competitive awards and
apparent favoritism toward certain contractors and institutions
appeared to be accepted practices at ERL-A.  Questionable uses of
extramural resources, combined with heavy dependence on
extramural support for critical functions and weak management
controls, elevated ERL-A's vulnerability to wasteful, abusive,
and potentially illegal practices.  In addition, ERL-A's lack of
control over extramural support agreements provided inadequate
assurance as to the quality of the oversight of related research
and the effective use of scarce Agency resources.  Of equal
concern, however,  was the obvious lack of controls, oversight,
and review of ERL-A extramural activities by ORD, CMD-Cincihnati,
and GAD.

Misuse and/or abuse of contracts, CAs,  and lAGs by ERL-A occurred
over extended periods of up to 7 years.  Questionable use or
abuse of extramural resources was identified in all 5 contracts,

                               iii       Audit Mo. E1JBP2-04-0300

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Executive Summary
11 CAs, and 6 lAGs  (maximum potential value of $44 million)
reviewed during the audit.  ERL-A improperly used extramural
resources in: (1) awarding repetitive sole-source 8(a) contracts
and related contract modifications to avoid competition and
retain long-term on-site contractors and contractor staff, (2)
splitting and underestimating contract requirements to avoid 8(a)
dollar limit for sole source contracts and to avoid competitive
award, (3) supplementing inadequate intramural funding and
federal staff, (4) awarding an IAG to a foreign government
without authority,  (5) using lAGs to exchange extramural research
funds with another Agency principally for federal employee
travel, (6) awarding, primarily noncoropetitively, assistance
agreements for the direct benefit of ERL-A research projects.
When competitive procedures were used, ERL-A biased the
competition or compromised the award procedures through potential
COIs of those who evaluated proposals.

In addition, improper uses of about $210,000 in Salary and
Expense (S&E) funds and Superfund monies for acquisition and
erection of an office building and excessive travel costs were
also disclosed during our review of ERL-A's extramural resource
activities (see Chapter 5).
PRINCIPAL FINDINGS

EPA'S MANAGEMENT CONTROL SYSTEMS DID NOT DETECT ORPRECLUDE ERL-
A'S CONSISTENT ABUSES AND MISMANAGEMENT OF EXTRAMURAL RESOURCES

Our review of ERL-A's use and management of extramural resources
involving the award of $44 million in contracts, CAs, and lAGs
revealed frequent avoidance or noncompliance with statutes,
regulations, policies and guidance that governed the acquisition,
use, and management of contracts and assistance agreements (see
Chapters 3 and 4).  Questionable award and/or use of extramural
resources were found in all 5 contracts, 11 CAs, and 6 lAGs
reviewed.  ERL-A's questionable actions were initially encouraged
by the lack of intramural resources, including the FTEs  (federal
staff) needed to accomplish the laboratory's increasing research
missions.  Over a long period of growing extramural support but
limited intramural funding and decreased EPA staff, ERL-A's
activities evolved into a sequence of questionable awards and
uses of extramural funds.  Inadequate oversight by CMD-
Cincinnati, GAD, and ORD, all contributed to ERL-A's misuse and
abuse of extramural resources.  A lack of written guidance and
conflicting, incorrect guidance from these same three
headquarters' elements, contributed to ERL-A's confusion as to
the proper use of extramural support and assistance mechanisms.
Overall, the management control systems needed to provide
reasonable assurance that ERL-A's use and management of
extramural resources was carried out in accordance with


                               iv        Audit NO. E1JBF2-04-0300

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Executive Summary
applicable statute, regulation, and EPA policy were either not
established or not working.  As a result, procurement and
assistance laws were abused and the overall,use and management of
extramural resources was not adequately managed and controlled.

MISUSE AND MISMANAGEMENT OF COOPERATIVE AND INTERAGENCY
AGREEMENTS

Our review of 11 CAs ($11.15 million maximum value) and 6 lAGs
($1.3 million maximum value)2 disclosed that in all 17  extramural
agreements, ERL-A managers:  (1) improperly used less restrictive
CAs and lAGs to procure goods and services in lieu of the more
controlled contracting process, (2) did not encourage the
competitive award of CAs,  (3)  exhibited apparent favoritism in
noncompetitive CA awards, and (4)  did not effectively manage CAs
to assure compliance with terms of extramural agreements or that
government assets were safeguarded against waste or abuse.  ERL-A
staff apparently sacrificed adherence to statutory requirements.
and ORD policies and procedures to supplement inadequate
intramural resources.  In addition, ERL-A seemed unaware of the
proper criteria for determining the use of CAs versus contracts.
As discussed in Chapter 2, inadequate and inconsistent guidance
from GAD and ORD Headquarters contributed to ERL-A's confusion
over the proper use and selection of extramural agreements.
Further, ORD and GAD oversight of ERL-A operations was
insufficient to prevent misuse and mismanagement of extramural
resources by ERL-A.  ERL-A's misuse and mismanagement of
extramural agreements resulted in a lack of assurance that the
research performed under these agreements was properly overseen
and that government resources were adequately controlled and
effectively utilized.

Several deficiencies related to ORD's CA award and management
processes had been previously identified by a 1983 OIG audit of
ORD's CA program.3  Nine  years  later these problems remained
uncorrected at ERL-A.  Based on our review at ERL-A, corrective
action taken on the prior audit was both inadequate and
ineffective because ORD issued faulty guidance, ERL-A ignored
some of the controls instituted by ORD and ORD failed to oversee
and ensure proper implementation by its laboratories.
     2 ERL-A CAs and lAGs included in our sample, along with award
dates and potential values, are shown in Appendix III.

     3 Audit Report No. ElgB2-ll-0019-30828,  "Review of the Office
of  Research and  Development's  Extramural Research Activities",
issued March 31, 1983.

                                V        Audit No. B1JBP2-04-0300

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Executive Summary
ERL-A ABUSED CONTRACTING PROCESS TO RETAIN LONG-TERM CONTRACTORS
AND AVOID FULL AND OPEN COMPETITION

In all five on-site support contracts reviewed (maximum value of
$31.6 million), ERL-A abused the procurement process to retain
favored contractors and their employees and then utilized these
same contracts to perform prohibited contracting activities.  To
obtain desired contracts and related services, ERL-A either
avoided or biased the competitive procurement process for all
five contracts4.   Over  the  last  six  to  seven years,  ERL-A avoided
competition by using the 8(a) set-aside program to obtain
repeated sole-source acquisitions with current contractors.  By
using the 8(a) non-competitive process, ERL-A prevented:   (l) the
interruption of on-site contractor services and the loss of
contractor staff providing long-term technical/administrative
support, and  (2) the additional administrative burden required
under a competitive procurement.  After one incumbent contractor
at ERL-A no longer qualified for small business 8(a) status and
related sole-source awards, the contract was removed from the
8(a) set-aside program, without adequate justification, to allow
the incumbent an opportunity to compete.  Then, during the
follow-on "full and open" competition,  ERL-A biased the
procurement in favor of the incumbent.   In another 8(a) set-aside
procurement, ERL-A split and underestimated procurement
requirements and costs to avoid the 8(a) competitive threshold
and justify sole-source awards.   Further, ERL-A improperly used
these on-site contractors to supplement its in-house human
resource needs.  ERL-A's substantial dependency on on-site
contractors, especially long-term contractor employees, to
accomplish its mission resulted in less than arms-length
relationships between ERL-A and contractor staff, including
prohibited personal services and favored treatment toward
incumbent contractors,  and ERL-A ignoring the benefits that full
and open competition brings to the procurement process.

CIRCUMVENTION OF STATUTORY AND REGULATORY REQUIREMENTS EXTENDED
INTO OSES OF INTRAMURAL RESOURCES

Our review of extramural resource management at ERL-A also
disclosed questionable uses of intramural resources and a
potential violation of appropriation law restrictions.  These
questionable actions related to the improper acquisition and
construction of an office building with S&E appropriated funds
and Superfund monies and the payment of excessive travel costs.
The building was obtained through a fiscal year-end contract
award.  These questionable uses of intramural resources indicated
      4 Contracts  include the three contracts in our sample which
were subjected  to  indepth review and  the limited review  of two
related predecessor contracts.

                               vi        Audit NO. E1JBF2-04-0300

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Executive Summary
that the circumvention of laws and regulations and misuse of
resources was not restricted' to extramural funds.

ERL-A'S FMFIA PROCESS DID NOT ENSURE PROPER CONTROL OVER
EXTRAMURAL RESOURCE MANAGEMENT

ERL-A's FMFIA process did not adequately identify internal
control weaknesses or ensure proper implementation of FMFIA
control objectives and techniques relative to the management of
contracts, CAs, lAGs and other support/administrative activities
that came to our attention during the audit.  Many material
control weaknesses in ERL-A's extramural resource and
administrative activities were not previously identified in
ERL-A's FMFIA risk assessments.  In addition, ERL-A had not
adequately assessed control techniques to ensure proper
implementation by-management staff.  Critical control techniques
identified in ERL-A's FMFIA documentation were either not
implemented or improperly implemented by ERL-A management.  As a
result, there was insufficient- assurance that Agency resources
were safeguarded against waste, fraud, abuse, and conflicts of
interest.  Because many of ERL-A's extramural activities were of
a mission-critical nature, proper control of the extramural and
administrative operations were essential to the integrity of the
Agency's programs.               •                 "       '     "

MISSING RECORDS AND INCONSISTENT STATEMENTS BY- ERL-A. CONTRACTOR.
AND COOPERATOR STAFFS DELAYED AND POTENTIALLY LIMITED AUDIT
DISCLOSURE

During our audit, several impediments were encountered at ERL-A
that hampered the accomplishment of audit fieldwork and may Have
limited our assessment of laboratory operations.  Impediments
included: (1) inconsistent (often contradictory) statements by
ERL-A staff, contractors, and cooperators and (2) missing
documentation in ERL-A's contract/cooperator and/or laboratory
correspondence files.  In some cases, the inaccurate statements
made by ERL-A employees, contractors, and cooperators appeared to
be "textbook" answers to our questions rather than answers that
accurately reflected ERL-A day-to-day operations.  Evidence
obtained indicated that ERL-A staff had been briefed prior to
start of audit fieldwork as to our audit objectives and the
"correct" answers to our questions.  Also, some of the missing
records could be attributed to ERL-A's improper record retention
procedures.   However, according to certain ERL-A managers, the
laboratory was seriously concerned about the negative impact of
our audit on ERL-A's operations and, in particular, about the
effect on contractors that worked at the laboratory.  This
concern was based on the impact of the recent O'lG audit of Duluth
ERL on that laboratory's operations. . The missing records and
conflicting statements necessitated alternative record reviews
and additional interviews which would not have been, necessary if

                               vii       Audit Ho. E1JBF2-04-0300

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Executive Summary
full disclosure had been made when questions were first asked.
These impediments significantly delayed completion of audit
fieldwork and left us unsure that all pertinent information and
conditions had been disclosed.
RECOMMENDATIONS

ORD, as well as CMD and GAD need to substantially strengthen
their oversight and control over the procurement, award, and use
of extramural resources at ERL-A to decrease the Agency's
vulnerability to abusive, and wasteful practices, ensure
compliance with applicable laws, regulations and policies, and
establish effective use of Agency resources.  In addition, ERL-
A's vulnerability from over-reliance on contractor and
cooperators for performance of mission critical functions needs
to be reduced.  Risk reduction can be achieved through increased
use of EPA staff to perform critical laboratory technical
operations and to retain Agency expertise and control over these
vital research activities.  ERL-A staff's awareness' of the proper
ethical conduct of government business needs to be increased.
ERL-A management should also be advised that laws, regulations,
and policies governing the use and management of extramural
resources were established to protect the government's interests
and to safeguard government resources.  Circumvention or
noncompliance with these requirements cannot be tolerated.


AGENCY COMMENTS

ORD generally agreed with the findings and those recommendations
made to ORD management.  OARM did not agree with many of the
findings related to CMD - Cincinnati contract oversight and 8(a)
noncompetitive and subsequent competitive awards to one on-site
ERL-A contractor.  Also, OARM expressed some disagreement with
certain statements and conclusions related to GAD oversight and
approval of certain lAGs and CAs at ERL-A.  However, OARM did
agree with most of the recommendations related to CMD -
Cincinnati and GAD operations.  Both ORD and OARM responses
included substantive planned or initiated corrective actions to
correct the deficiencies identified.  Because ORD included
milestone dates for completion of initiated or planned actions,
most of the recommendations to ORD will be resolved upon issuance
of this report.

ORD and OARM responses to the report's findings and
recommendations have been summarized at the end of each
appropriate report chapter along with OIG's evaluation of these
responses.  Agency responses to each individual recommendation
and any planned and initiated corrective actions or additional
Agency actions needed for resolution of each recommendation are


                              viii       Audit No. E1JBF2-04-0300

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Executive Summary
presented in Appendix I.  ORD and OARM's complete responses to
the draft report's findings and recommendations are available
upon request from the Office of Inspector General.
                                         Audit No. B1JBP2-04-0300

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Executive summary
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                        TABLE OF CONTENTS


                                                             Page

EXECUTIVE SUMMARY	'	    1

  1    INTRODUCTION	/	. . .	    1

          PURPOSE		    1

          BACKGROUND	    2

          SCOPE AND METHODOLOGY	    4

          SCOPE LIMITATIONS AND IMPEDIMENTS	    9

          PRIOR AUDIT COVERAGE	   10

  2    EPA'S MANAGEMENT CONTROL SYSTEMS DID NOT DETECT OR
       PRECLUDE ERL-A'S CONSISTENT ABUSES AND MISMANAGEMENT
       OF EXTERNAL RESOURCES	   13

          BACKGROUND	   13

          INSUFFICIENT INTRAMURAL FUNDING AND EPA STAFF..'..   14

          GAD DID NOT PREVENT OR DETECT IMPROPER USE OF
         . COOPERATIVE AND INTERAGENCY AGREEMENTS	   15

          LACK OF COMPETITION IN EXTRAMURAL AWARDS NOT
          ADDRESSED BY GAD, CMD, OR ORD	   17

          LACK OF ORD OVERSIGHT AND CONFLICTING GUIDANCE
          SENT MIXED MESSAGES TO ERL-A ON PROPER USES OF
          EXTRAMURAL RESOURCES	   21

          MISMANAGEMENT, OF EXTRAMURAL RESOURCES NOT
          PRECLUDED BY GAD, CMD, OR ORD	   28

          CONCLUSION	   31

          RECOMMENDATIONS	 .   32

          AGENCY RESPONSE AND OIG EVALUATION. OF AGENCY
          COMMENTS	   36

  3    MISUSE AND MISMANAGEMENT OF COOPERATIVE AND
       INTERAGENCY AGREEMENTS 	   39

          MISUSE OF COOPERATIVE AGREEMENTS		   39



                                         Audit No. E1JBF2-04-0300

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Table of Contents
                INAPPROPRIATE USES OF IAGS	   61

                RECOMMENDATIONS - USE OF EXTRAMURAL AGREEMENTS	   70

                ERL-A'S COOPERATIVE AGREEMENT AWARDS LACKED
                COMPETITION	   74

                RECOMMENDATIONS - COMPETITION IN CA AWARDS	   85

                MISMANAGEMENT OF COOPERATIVE AGREEMENTS.	   87

                RECOMMENDATIONS - MISMANAGEMENT OF CAs	   94

                AGENCY RESPONSE AND OIG EVALUATION OF AGENCY
                COMMENTS	   95

        4    ERL-A ABUSED CONTRACTING PROCESS TO RETAIN LONG-TERM
             CONTRACTORS AND AVOID FULL AND OPEN COMPETITION	   99

                BACKGROUND	   99

                ERL-A UTILIZED PROCUREMENTS TO RETAIN FAVORED
                CONTRACTORS	.*.	  104

                CONCLUSION	  135

                RECOMMENDATIONS	;  136

                ERL-A MISUSE OF CONTRACTOR ACTIVITIES HAS
                SUBSTANTIALLY INCREASED	  140

                CONCLUSION	  148

                RECOMMENDATIONS	  149

                AGENCY RESPONSE AND OIG EVALUATION OF AGENCY
                COMMENTS	  150

        5    CIRCUMVENTION OF STATUTORY AND REGULATORY
             REQUIREMENTS EXTENDED INTO USES OF INTRAMURAL
             FUNDS 	  155

                THE ACQUISITION AND CONSTRUCTION OF AN ERL-A
                OFFICE BUILDING WITH S&E FUNDS AND SUPERFUND
                MONIES VIOLATED AGENCY PROCEDURES AND
                APPROPRIATIONS LAW	  155

                ERL-A USED PURCHASE ORDERS TO CIRCUMVENT FEDERAL
                TRAVEL REGULATIONS AND MAXIMUM PER DIEM RATES	  159

                                               Audit NO. E1JBF2-04-Q300

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Table of Contents
                RECOMMENDATIONS	   162

                AGENCY RESPONSE AND OIG EVALUATION OF AGENCY
                COMMENTS	•'. .   163

        6    ERL-A'S FMFIA PROCESS DID NOT ENSURE PROPER CONTROL
             OVER EXTRAMURAL RESOURCE MANAGEMENT	   165

                BACKGROUND	:	   165

                ERL-A'S REVIEWS OF EXTRAMURAL RESOURCE MANAGEMENT
                WERE INSUFFICIENT TO ENSURE ATTAINMENT OF FMFIA
                CONTROL OBJECTIVES	   166

                INTERNAL CONTROLS OVER EXTRAMURAL MANAGEMENT
                INEFFECTIVE	   169

                CONCLUSION	-. .'	.		   180

                RECOMMENDATIONS	.*; .'	   181

                AGENCY RESPONSE AND OIG EVALUATION OF AGENCY
                COMMENTS		   182

        7    MISSING RECORDS AND INCONSISTENT/INACCURATE
             STATEMENTS BY ERL-A, CONTRACTOR, AND COOPERATOR
             STAFFS DELAYED AND POTENTIALLY LIMITED AUDIT
             DISCLOSURE	   183

                BACKGROUND	   183

                INACCURATE,  INCONSISTENT STATEMENTS BY ERL-A,
                CONTRACTOR,  AND COOPERATOR STAFFS	   184

                MISSING/INCOMPLETE FILE DOCUMENTATION AND
                IMPROPER RECORD RETENTION PROCEDURES.	   185,

                CONCLUSION	   186

               . RECOMMENDATIONS	   187

                AGENCY RESPONSE AND OIG EVALUATION OF AGENCY
                COMMENTS	.-	   188
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Table of Contents
      APPENDIXES

             APPENDIX I:     AGENCY COMMENTS ON DRAFT REPORT
                             AND OIG EVALUATION	  189

             APPENDIX II:    GLOSSARY OF ACRONYMS AND
                             ABBREVIATIONS	  237

             APPENDIX III:   SAMPLE OF CONTRACTS, COOPERATIVE
                             AGREEMENTS, AND INTERAGENCY
                             AGREEMENTS AUDITED	  239

             APPENDIX IV:    PRIOR AUDITS OF EXTRAMURAL
                             MANAGEMENT	  241

             APPENDIX V:     SUMMARY OF DEFICIENCIES FOR
                             COOPERATIVE AGREEMENTS REVIEWED	  243

             APPENDIX VI:    SUMMARY OF DEFICIENCIES RELATED
                             TO INTERAGENCY AGREEMENTS REVIEWED..  247

             APPENDIX VII:   SUMMARY OF DEFICIENCIES RELATED
                             TO SAMPLE CONTRACTS REVIEWED	   249

             APPENDIX VIII:  REPORT DISTRIBUTION	   251
                                               Audit NO. E1JBF2-04-0300

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                            CHAPTER 1


                           INTRODUCTION
PURPOSE

Due to increasing workloads and limited federal staffs, the
Office of Research and Development  (ORD) has become highly
dependent on extramural support to accomplish its mission.
Almost 70 percent' or $342 million of ORD's total 1992 allocation.
of about $490 million was used for on-site and off-site
extramural support obtained through contracts, cooperative
agreements (CAs), grants, and interagency agreements (IAGs).  OIG
audits and surveys at ORD laboratories in 1992 and prior years
disclosed serious management problems related to contracts and
CAS.

In FY 1990, ORD recognized its management of extramural resources
as a material internal control weakness in the Agency's annual
FMFIA report to the President.  However, the OIG had already
reported1 major  deficiencies  in  ORD's  procurement process  and
management of extramural resources in.1983, seven years earlier.
In 1986, the OIG further reported contracting deficiencies at the
Environmental Monitoring Systems Laboratory (EMSL)  in Las Vegas.

In 1992, following the Agency's identification of extramural
resource management as a material weakness, the OIG reported
serious management problems related to the CSC contract
activities2 at ORD  Laboratories  in Research Triangle  Park,  North
Carolina; Gulf Breeze, Florida; and Corvallis, Oregon.  Contract
management problems were also reported by OIG at ORD's Duluth,
Minnesota laboratory. Because of the severity of the deficiencies
identified in the management and use of certain ORD contracts,
contract activities, and other extramural agreements, the OIG in
1992 initiated joint audit/investigative surveys at several ORD
laboratories to assess the full extent of these problems.

A subsequent OIG survey at the Environmental Research Laboratory
- Athens,  Georgia (ERL-A) identified problems with the
laboratory's solicitation of contracts and other extramural
     1  Audit Report No.  ElgB2-ll-0019-30828,  "Review of the
Office of Research and Development's Extramural Research
Activities," issued March 31, 1983.

     2  OIG  Report  "EPA Management of computer Sciences
Corporation Contract Activities, " Audit Report No. E1NME1-04-
0169-2100295,  issued March 31, 1992.

                                         Audit No. E1JBF2-04-0300

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Chapter 1
introduction
      agreements and its overall management and control of  extramural
      resources.  As a result of the survey, the OIG  initiated an audit
      of ERL-A and related activities at the Office of Administration
      and Resources Management's (OARM's) Contract Management Division
      (CMD), Cincinnati, Ohio, and Grants Administration  Division
      (GAD), Washington, D.C.  The primary objective  of the review was
      to determine if ERL-A, in coordination with CMD and GAD,  properly
      used, administered, and controlled extramural funds to obtain
      services under contracts, CAs, or lAGs in compliance  with
      applicable laws, regulations, and Agency directives.
      BACKGROUND

      ORD's mission is to provide high quality, timely  scientific and
      technical information, products and assistance  in support of
      Agency programs and goals.  The Agency's research program is
      conducted through twelve environmental  laboratories  across the
      country employing about 1,900 scientific and administrative
      staff, with an annual operating budget  of about $450 million,
      ORD's overall, planning process engenders an applied  research and
      development program focused on answering key scientific and
      technical questions as a basis for EPA's programmatic  and
      regulatory decision-making.  Short-term scientific and technical
      studies support immediate regulatory and enforcement decisions
      while a longer-term core research program extends the  knowledge
      base of environmental science and anticipates environmental
      problems.

      To accomplish the mission
      with strictly imposed
      federal employment ceilings,
      ERL~A and. other QRD
      laboratories have had to
      increase their dependency on
      extramural level-of-effort
      (LOE) contracts, grants,
      CAs, and lAGs to conduct or
      supplement much of their
      research.  ERL-A's increased
      reliance on extramural
      support is illustrated by .
      the pie charts.  Between FYs
      1986 and 1991 contractor
      staff at ERL-A increased
      from 38 (30 percent of total
Changes In ERL-A On-Site Staffing
                       Contractor*
                        70 44X
  1986
                  1991
                                     FY1986 -125 Funded Human Resources
                                     FY1991 - 158 Funded Human Resources •
                                               Audit No.  E1JBF2-04-0300

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Chapter 1
Introduction
      ERL-A staff) to .70 (44 percent of total staff) .

      In a memorandum, dated November 9, 1990, the Director of the
      Office of Environmental Processes and Effects Research (OEPER)
      explained:

           The use of on-site contractors has become a major
           expense item throughout ORD.  In certain instances,
           expenditures for on-site services  (using contracts,
           cooperative agreements, or interagency agreements)
           exceeds sixty percent of a laboratory's R&D budget.
           On-site non-federal personnel have become a valuable
           and necessary adjunct to our research program .^

      ERL-A's FY 1991 budget totaled $14.05'million.  Of that, $7.7
      million (54.8 percent) was appropriated for extramural research
      under contracts ($4.11 million), CAs  ($2.91 million), and
      JAGs/other ($640,000).  This included agreements with 5
      contractors valued at approximately $4 million which provided 70
      full-time contractor employees for laboratory support. .Twenty
      .other on-site personnel were provided under CAs and the Senior
      Environmental Employee (SEE) Program.  Contractors, cooperators,
      and SEE personnel represented about 57 percent -of ERL-A's
      available human resources, providing technical, scientific, and
      administrative support.  In 1992, ERL-A's extramural resources
      increased to 58.5 percent of its total budget ($9.3 million of
      $15.9 million total)  with a 52 percent increase in funding for
      CAs and lAGs ($3.55 million to $5.4 million).  This increase in
      extramural agreements occurred primarily in funding for
      lAGs/other which increased 228 percent, from $640,000 in 1991 to
      $2.1 million in 1992.

      The following chart illustrates increases in contract, as well as
      total funding between 1986 and 1992. ,
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Chapter 1
Introduction
                             ERL-A Historical Funding
                          Million
                           1986 1987 1988 1989 1990 1991 1992
lAGs/Other E!
CAs/Grants •
Contracts H
Intramural •
$0.29
$2.77
$2.83
$4.4
$0.49
$1.48
$3.06
$4.91
$0.28
$1.5
$2.47
$4.97
$0.51
$1.75
$2.67
$5.69
$0.47
$2.34
$3.15
$6.28
$0.64
$2.91
$4.11
$6.39
$2.1
$3.3
$3.9
$6.6
                                    Fiscal Years
      With this level of dependency on extramural  support, strong
      management controls were necessary to offset inherent contracting
      risks and the potential for fraud, waste, and abuse of federal
      resources.  However, Agency managers either  did not establish or
      properly implement the control systems needed to adequately
      protect against such risks.  At ERL-A the priority of good
      contract management and control was lost among the high-priority
      scientific endeavors emphasized by research-oriented personnel.


      SCOPE AND METHODOLOGY

      The audit primarily focused on the procurement, use, and
      management of laboratory support services through contracts and
      CAs.  We also reviewed ERL-A's use of lAGs.  During the audit, we
      judgmentally selected and performed detailed reviews of three on-
      site support contracts and their predecessor contracts, eleven
      active CAs, and six lAGs (chart below shows  audit universes and
      samples).3 Predecessor  contracts  and other extramural agreements
      were also selectively reviewed when considered necessary to fully
      develop conditions identified during our audit and to establish a
            3  See Appendix III for contracts,  CAs, and lAGs reviewed.

                                               Audit No. E1JBF2-04-0300

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Chapter 1
Introduction
      historical perspective regarding the award of current contracts
      and other extramural agreements.


                   AUDIT UNIVERSES AND RELATED  SAMPLES
Audit
Area
Contracts*
CAs
lAGs
	 — —
Universe
(08/92)
4
27
17
Max. Value
(Millions)
$30.8
$14.2
$3 . 09
-
Sample
3
11
6
Max. Value
(Millions)
$22.9
$11.15
$1.3
      The audit fieldwork was performed from May 1992 through December .
      1992 .primarily at ERL-A,  CMD,  and GAD.

      As previously stated,  the overall audit objective was to
      determine if ERL-A,  in coordination with CMD and GAD, properly
      administered and controlled extramural funds appropriated to
      obtain services under  contracts,  CAs, or lAGs in compliance with
      applicable laws,  regulations,  and Agency directives.   Specific
      objectives were to:

           - Evaluate management controls over contracts,  CAs, and lAGs
             to assess their adequacy in:

                1)  protecting the Agency from fraud,  waste, and abuse;

                2}  ensuring  compliance with 'applicable laws,
                   regulations,  and  Agency directives related to
                   management of extramural contracts and
                   agreements;  and

                3)  ensuring  compliance with contract terms and the
                   quality of contractor performance.
           4  Contract universe limited to on-site/near-site technical
      support contracts.   Predecessor contracts totalling $8.7 million
      were subjected to a limited review but are not reflected in these
      contract totals.   Sample  included all ERL-A technical support
      contracts not previously  audited (Computer Sciences Corporation
      Contract).
                                               Audit NO.  E1JBF2-04-0300

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Chapter 1
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           - Assess whether management had complied with applicable
             laws, regulations, and directives when soliciting and
             procuring contracts and other extramural services.

           - Determine if ERL-A used its contracts and other extramural
             agreements as Congress, OMB, and EPA intended to support
             the Agency's research mission.

      Audit Survey and Identification of Previously Reported Issues

      During December 1991 and January 1992, CMD and ORD performed a
      joint review of ERL-A contract management.  Their review
      consisted of file reviews at CMD and a subsequent site visit to
      ERL-A in January 1992 to review site records and discuss contract
      related issues.  The ensuing report, issued July 14, 1992, cited
      contract management deficiencies related to conflicts of
      interest, contractor performance of inherently governmental
      functions, personal services indicators, and inadequate contract
      statements of work (SOWs) and related work assignments (WAs).
      Our survey of ERL-A also revealed strong indications of potential
      abuse in contracting for services and in contract administration
      and oversight.

      Because of on-going or proposed Agency actions in response to
      recent OIG audits-, as well  as actions proposed by EPA's  Standing
      Committee on Contracts Management,6 we concluded that  issues
      identified during the ERL-A survey such as prohibited personal
      services indicators,  contractor performance of inherently
      governmental functions,  conflicts of interest, inadequate invoice
      review, inadequate SOWs/WAs, and other previously reported
      contract management problems did not warrant further audit
      effort.  These issues were included in a Special Review report,7
      issued November 30, 1992, to the Assistant Administrator for
      Research and Development.  This report was issued under
           5  These  reports include EPA * s Management^of^Computer
      Sciences Corporation Contract Activities. Audit No. EINME1-04-
      0169-21000295 (issued March 31,  1992)  and Contracting Activities ,
      at ^Environmental Research Laboratory - Duluthf  Audit No. E1JBF1-
      05-0175-2100443 (issued July 7,  1992).

           6 CONTRACTS MANAGEMENT AT EPA; Managing Our Mission. Staff
      Report of the Standing Committee on Contracts Management, June
      1992.

           7  Survey Report - ORD Environmental Research  Laboratory,
      Athens,  GA,  Report No.  E1XMG2-04-0102-3400007,  November 30, 1992.

                                               Audit NO.  E1JBP2-04-0300

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Chapter 1
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      provisions of OIG Manual 150 for limited scope reviews.   Since
      these issues were not fully developed through a detailed audit,
      the work was not performed in accordance with governmental
      auditing standards.  Our intent was to identify and report the
      existence of these problems to top ORD management for immediate
      action or for inclusion in on-going Agency corrective actions in
      these areas.

      Audit of Procurement, Use, and Management of Contracts

      To assess ERL-A's overall use of contracts; the contract award
      process; and general contract management and oversight,  we
      limited our review to two contractors8 that provided on-site
      services to ERL-A under three separate contracts. - This  included
      two American Scientific International (AScI)  contracts [68-CO-
      0054 and 68-04-0012] and one Technology Applications,  Inc.  (TAI)
      contract [68-C1-0024].   Also, where considered necessary,  we
      reviewed predecessor contracts and related transactions  to assess
      long-term ERL-A operations and to fully develop the deficiencies
      noted.  We also visited CMD to review related contract files and
      determine CMD's role in ERL-A's-contracting decisions.

      The contract audit fieldwork involved both interviews with key
      Lab personnel and file reviews.  We interviewed laboratory
      management, project officers (POs), work assignment managers
      (WAMs), and contractor\cooperator employees,  including site
      managers.  We also reviewed official records in the possession of
      POs and WAMs, and additional documentation provided by ERL-A
      management, contractors, and cooperators.   At CMD, we talked with
      the contracting officers (COs)  and contract specialists  involved
      in the contracts sampled.  The audit fieldwork performed allowed
      us sufficient insight into ERL-A operations,  as related  to
      extramural contracts, for us to identify and substantively
      document specific problems as related to the lab's solicitation,
      award, use, management, and oversight of the contracts sampled.

      Audit of Procurement. Use, and Management of CAs and lAGs

      To assess the solicitation, award process, and ERL-A?s overall
      use, management, and oversight of CAs and lAGs,  we limited our
      review to 11 CAs and 6 lAGs.  The sample was selected
      judgmentally based on information obtained during an initial file
           8  We reviewed AScI  (formally American Scientific
      International,  Inc.),  and Technology Applications,  Inc.   Computer
      Sciences Corporation also provided on-site support  to ERL-A but
      was not included because of recent OIG audit  coverage.

                                               Audit NO.  E1JBF2-04-0300

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Chapter l
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      review of all current CAs and lAGs.  We primarily selected those
      agreements which:  (1) provided ERL-A on-site services; (2) were
      awarded to institutions where key laboratory management had close
      relationships; (3)  purchased large amounts of equipment;  (4)
      provided for an inordinate amount of travel; (5) had large
      amounts budgeted for subcontracts or consultants; or (6)
      authorized other costs which appeared questionable.

      Our general methodology for reviewing each CA and IAG in our
      sample was to: (1)  conduct an initial interview with each PO and
      obtain files; (2)  perform in-depth reviews- of ERL-A and PO files;
      and (3) conduct follow-up interviews with POs,  where necessary.
      If co-POs or sub-POs were assigned by the PO to oversee  .
      individual subprejects/tasks under the agreement (i.e., the UGA
      agreement) , we also interviewed a'-sample of those individuals and
      reviewed any applicable files in their possession.   The purpose
      of this intensive review was to gain an overall understanding of
      the solicitation,  award, use, and management of each agreement
      including an evaluation of related internal controls.  Since UGA
      was co-located with ERL-A, additional audit fieldwork was
      performed at the University.  We conducted interviews with
      university Principal Investigators (PI) and reviewed the PI and
      university records/files provided.  Because of the distant
      locations of other universities and government agencies with CAs
      or lAGs in our sample, we did not conduct in-depth interviews
      with their Pis or review related files.

      After our initial review of the sampled ERL-A CAs and lAGs, we
      visited GAD to review related files and determine its role in
      ERL-A's assistance decisions.  At GAD, we interviewed award
      officials and grants specialists involved in the CAs and lAGs
      reviewed.  The audit fieldwork performed allowed us sufficient
      insight into ERL-A operations, as related to CAs, for us to
      identify and substantively document specific problems as related
      to the lab's solicitation, award, use, management,  and oversight
      of the various agreements.  Our review of the six lAGs was
      primarily limited to their use by ERL-A.

      The audit was conducted in accordance with Government Auditing
      Standards (1988 revision)  issued by the Comptroller General of
      the United States.   Our audit included tests of management and
      related FMFIA controls, policies, and procedures specifically
      related to the audit objectives.  The findings in the report
      include material control weaknesses identified during the audit
      and our recommendations to correct the weaknesses,  where
      appropriate.
                                               Audit MO. E1JBF2-04-0300
                                      8

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Chapter l
Introduction
      Certain data used in this report was extracted from EPA's
      Contract Information System "(CIS) .   No audit tests were performed
      to evaluate the adequacy of manual  or automated controls for CIS
      or the validity of the data maintained by this system.
      Therefore,  we cannot and do not attest to the. accuracy or
      integrity of the CIS data used in this report.

      During the audit,  two other issues  were identified outside the
      scope of extramural resources which, in our opinion, warranted
      further audit effort.  These issues related to (1) the potential
      misuse of Salary ;and Expense (S&E)  and Superfund appropriated
      monies to acquire an office building and (2) improper travel
      expenditures.   No other issues came to our attention, as a result
      of specified audit procedures which we believed were sufficiently
      material to warrant further audit effort.

      Our findings were discussed with personnel during audit fieldwork
      and comments were obtained from the Environmental Research
      Laboratory at Athens.  We also briefed officials from the Office
      of Research and Development and the Office of Acquisition
      Management on our findings.   The draft report was provided to the
      Acting Assistant Administrator for  Research and Development and
      the Assistant Administrator for Administration and Resources
      Management for comment.   Major comments to the draft report from
      the Office of Acquisition Management, the Grants Administration
      Division,  and the Office of Research and Development have been
      incorporated into the appropriate report chapters.  Agency
      comments on recommendations and the OIG's evaluation are detailed
      in Appendix I.

      SCOPE LIMITATIONS AND IMPEDIMENTS

      During the audit,  we encountered several impediments to the  •
      accomplishment of our audit objectives.  These impediments are
      detailed in Chapter 7 of this report and summarized below.

      ERL-A file documentation for the existing contracts and related
      PO files appeared "sanitized" (i.e., cleared of all but official
      finalized documents).•  Documents such as correspondence,
      telephone memos,  and other routine  records of'day-to-day
      management were missing.   ERL-A managers and staff provided
      contradictory and often incorrect information.   As the audit
      progressed,  it became evident that  managers and staff had been
      previously briefed as to the issues under audit and they,  in
      turn,  provided "textbook" answers to our questions. In many
      instances,  this information conflicted with file evidence
      obtained and with other interviews.   In addition,  ERL-A staff did
      not fully disclose all of the information available to them.   We

                                               Audit  NO. E1JBF2-04-0300

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Chapter 1
Introduction
      were provided only documentation that we specifically requested
      and answers to questions as specifically asked.  More than once,
      we became aware of an existing condition or documentation through
      interviews with cooperator or contractor personnel that had not
      been disclosed by Agency personnel but whose existence was later
      confirmed by EPA staff.

      These impediments necessitated additional record reviews and
      interviews by assigned auditors which would not have been
      necessary if full and truthful disclosure had been made when
      questions were first asked.  As a result of this situation, audit
      fieldwork was significantly delayed.  Because of the impediments
      encountered during this review, either inadvertently or
      intentionally, we are not confident that we have received all
      information pertinent to our audit objectives.


      PRIOR AUDIT COVERAGE

      Because of the substantial increase in the use of service
      contracts Government-wide, primarily due to increasing agency
      workloads and limited federal staffs, Congress and the Office of
      Management and Budget (OMB) have expressed concern over the use
      and control of extramural resources.  Strong management controls
      are required to ensure that government resources are properly
      used and adequately protected against fraud, waste, and abuse.

      In response to the concerns of Congress and OMB, the EPA Office
      of Inspector General (OIG) and the General Accounting Office
      (GAO)  have compiled a long list of audits and special reviews
      which have repeatedly demonstrated problems in the way EPA
      Offices manage and control contracts and other extramural
      agreements.  A 1983 OIG audit (Audit No. ElgB2-ll-0019-30828) of
      ORD extramural activities under contracts, cooperative
      agreements, and interagency agreements identified some of the
      same problems discussed in this report.  In addition to OIG
      audits of Agency contracting issues, the General Accounting
      Office (GAO) has issued several audit reports and given
      Congressional testimony concerning problems with EPA's management
      of consulting and management support service contracts.  Although
      none of these reports specifically involved ORD contract
      activities, many of the conditions reported were similar or
      relevant to those OIG has identified in this and previous OIG
      special reviews and audits.  Specifically:

      - EPA's extensive use of support service contracts to perform
        critical agency functions and augment insufficient EPA staff.
                                               Audit NO.  E1JBF2-04-0300
                                     10

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Chapter 1
Introduction
      - Potential performance of inherently governmental functions by
        contractors.

      - Excessive, improper use of contract consolidations and
        modifications in lieu of open solicitation and competition for
        services.

      - Inadequate contract SOWs, monitoring,, and quality assurance
        criteria to evaluate contractor performance.

      - Contractor conflicts of interest (COIs).
                                               Audit NO.  E1JBF2-04-0300
                                     11

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chapter l
Introduction
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                                               Audit No. E1JBF2-04-0300
                                      12

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                            CHAPTER 2
         EPA'S MANAGEMENT CONTROL SYSTEMS DID NOT DETECT
     OR PRECLUDE ERL-ft'S CONSISTENT ABUSES AND MISMANAGEMENT
                     OF EXTRAMURAL RESOURCES
Our review of ERL-A's use and management of extramural resources
involving the award of $44. million in contracts, CAs, and lAGs
revealed frequent avoidance or noncompliance with statutes,
regulations, policies and guidance that governed the acquisition,
use, and management of contracts and assistance agreements  (see
Chapters 3 and 4).  Questionable award and/or use of extramural
resources were found in all 5 contracts, 11 CAs, and 6 JAGs
reviewed.  ERL-A's questionable actions were initially encouraged
by the lack of intramural resources, including the FTEs  (federal
staff) needed to accomplish the laboratory's increasing research .
missions.  Over a long period of growing extramural support but
limited intramural funding and decreased EPA staff, ERL-A's
activities evolved into a sequence of questionable awards, and
uses of extramural funds.  Inadequate oversight by CMD-
Cincinnati, GAD, and ORD, all contributed to ERL-A's misuse and
abuse of extramural resources.  A lack of written guidance and
conflicting, .incorrect guidance from these same three
headquarters' elements, contributed to ERL-A's confusion as to
the proper use of extramural support and. assistance mechanisms.
Overall, the management control systems needed to provide
reasonable assurance that ERL-A's use and management of
extramural resources was carried out in accordance with.
applicable statute, regulation, and EPA policy were either not
established or not working.  As a result, procurement and
assistance laws were abused and the overall use and management of
extramural resources was not adequately managed and controlled.


BACKGROUND

                  Extramural Management Systems

Management oversight and controls over extramural activities at
ORD laboratories is vested in three primary EPA Headquarters
components: ORD, CMD, and GAD.1  ORD has direct  management
responsibility for all of. ERL-A's operations while CMD and GAD
share responsibility with ORD for oversight of contracts and
assistance agreements, respectively.  Under Section 2560 of EPA's
     1   internal Control Guidance  for  Managers and Coordinators,
1988, Addendum 3 - Assessment Unit Listing for EPA.

                                         Audit No. E1JBF2-04-0300
                                13

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Chapter 2
Management Controls Did Not Detect Or Preclude ERL-A's Abuse and
Mismanagement Of Extramural Resources
      Resource Management Directive - Internal Control, primary
      organizations (i.e., ORD,  CMD, GAD)  have the responsibility to
      develop and maintain effective systems of internal control over
      their program operations and administrative functions.   In
      addition, these organizations have the responsibility to convey,
      in writing, to employees at each level of management their
      internal control responsibilities and expected performance.
      Primary organizations are also required to evaluate internal
      control systems on a continuing basis and ensure that those
      systems are adequately documented and followed.

           Management Accountability  for ERL-A's Pattern of Abuse

      ORD, CMD, and GAD management and control systems were
      substantially deficient and failed to provide reasonable
      assurance that ERL-A complied with the requirements and intent of
      applicable statutes, regulations, and EPA policies in its
      acquisition/award, use, and management of contracts and other
      extramural agreements.  Since ORD, CMD, and GAD had oversight
      responsibilities for ERL-A's extramural activities, these primary
      organizations must share accountability for the deficiencies
      presented in this report.   While we did not conduct detailed
      reviews of ORD,  GAD, or CMD organizational internal control
      processes and operations,  we did identify specific management
      control weaknesses in their respective operations.  As evidenced
      below and in the following chapters of this report, existing
      management/internal control systems of ORD,  CMD, and GAD either
      did not identify or, if identified,  did not prevent ERL-A's abuse
      of extramural resources.
      INSUFFICIENT INTRAMURAL FUNDING AND EPA STAFF

      From 1986 to 1991,  EPA staff at ERL-A decreased 4.6 percent while
      the laboratory's research responsibilities more than doubled.
      During this same period, on-site contractor and cooperator staff
      at ERL-A increased over 113 percent.   With decreasing staff and
      increasing workload,  ERL-A began a pattern of avoidance and
      noncompliance with statutory and regulatory requirements and the
      apparent misuse of extramural resources to supplement its under-
      staffed and under-funded intramural operations.  Identified
      abuses ranged from improper use of contractors and cooperators as
      substitute federal staff to perform critical laboratory
      functions, to the use of a CA funded with R&D monies for the
      development of an ERL-A on-site day-care center, to the apparent
      exchange of extramural funds through lAGs with another federal
      agency to supplement  FTE intramural travel funds.  Constraints on

                                               Audit NO. E1JBF2-04-0300
                                     14

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Chapter 2
Management Controls Did Not Detect Or Preclude ERL-A's Abuse and
Mismanagement Of Extramural Resources
      intramural funding thus led to innovative, albeit questionable,
      use of extramural resources.
      GAD DIP HOT PREVENT OR DETECT IMPROPER USE OF COOPERATIVE AND
      INTERAGENCY AGREEMENTS

      Our review of 11 CAs and 6 lAGs awarded and/or managed by ERL-A
      disclosed that ERL-A managers and scientists circumvented
      statutory requirements, regulations and Agency procedures and
      improperly used less restrictive CAs and lAGs in lieu of more
      controlled contracts to obtain goods and services.  The misuse of
      CAs was prompted by:  (1)  lack of federal employees (FTEs) and
      related "intramural funding available to ERL-A; (2) ERL-A1s
      determination to complete assigned tasks by any means available;
      and (3) a management culture which encouraged the questionable
      use of extramural funds.  ERL-A's misuse of CAs -resulted from a
      lack of controls at all management levels over the resources used
      to fund extramural research; however, GAD is principally
      responsible for oversight of assistance agreements.  Therefore,
      inadequate GAD guidance and oversight contributed substantially
      to the improper award of CAs and lAGs.

      According to the Assistance Administration Manual, Chapter 15,
      GAD's pre-award responsibilities for assistance agreements
      included the pre-award'administrative and legal review which
      involved reviews of the scope of work,  statutory authority,
      budget items, and the quality assurance (QA) narrative statement.
      However, our limited review of GAD operations disclosed a
      relatively superficial review was performed of assistance
      agreement awards.  In addition,  GAD had not established adequate
      policies and procedures to guide the assistance award and
      management processes and did not provide sufficient pre-award
      review to preclude ERL-A's abuses of CAs and lAGs.  Details of
      ERL-A' s misuse of CAs and lAGs are included in Chapter 3 of this
      report and are briefly discussed below.

      Examples of ERL-A's misuse of CAs included: (1) use of a near- .
      site university to provide on-site laboratory personnel for
      direct support of ERL-A scientists and their research projects,
      (2)  CA supplement which allowed a cooperator staff to modify a
      model for the direct benefit of ERL-A and use by one of ERL-A's
      off-site contractors, (3)  funding PhD attainment for an ERL-A
      employee, (4) a CA sub-project to develop an operating plan for
      the ERL-A's on-site child-care center,  (5)  the payment of a UGA
      cooperator "in absentia",  and (6)  extensive foreign travel for
      academics which directly benefitted ERL-A initiatives.  lAGs were


                                               Audit No. E1JBF2-04-0300
                                     15  ;  •

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      used inappropriately to; (1) exchange extramural funds with
      another federal agency to supplement EPA travel, and (2)  fund a
      research project with a foreign government without statutory
      authority.

      If GAD had properly fulfilled its basic oversight and management
      responsibilities to delineate the acceptable use of CAs,  guide
      the competitive CA process, and properly ensure effective CA
      management, the problems identified above and discussed in
      Chapter 3 may have been precluded.

      Inadequate GAD Pre-Award Oversight and Guidance Perpetuated
      Confusion Over Use of Extramural Assistance Agreements Versus
      Contracts and Contributed to ERL-A's Noncompliance With
      Applicable Statutes

      GAD had not issued effective guidance on the criteria for
      selecting and using extramural assistance agreements.  The only
      written guidance issued by OAEM/GAD was merely a restatement of
      statutory provisions in EPA Order 1000.19 and in the Agency's
      Assistance Administration Manual.  However, this guidance did not
      adequately address the appropriate use of assistance agreements
      under provisions of the 1977 FGCA Act versus procurement through
      contracts (see Chapter 3 and later sections of this Chapter).
      This determination was left to individual program offices.  ORD,
      in turn, left the decision to contract or award a CA to each
      individual laboratory.

      Once a laboratory selected the extramural assistance mechanism,
      there was virtually no review of that decision by ORD or GAD.
      ORD had reviewed only 2 of the 27 active CAs awarded and/or
      managed by ERL-A.  Our review of GAD files and discussions with
      GAD managers and staff disclosed that its pre-award
      administrative review of proposed CAs was little more than a
      checklist of required documents.  GAD files contained very few
      contacts with ERL-A POs or managers.  There was no evidence of
      any discussions or independent review surrounding the purpose or
      propriety of specific proposed assistance agreements.  In fact,
      GAD officials exhibited a "hands-off" approach toward its
      management and oversight responsibilities and compliance with its
      few control requirements. . This approach is discussed further in
      the section on mismanagement of CAs below.

      As a result of this deficient oversight and guidance, contracts,
      CAs, and lAGs were used by ERL-A without consideration of which
      mechanism was most appropriate.  In making their decision about
      what extramural instrument to use, ERL-A managers did not use the

                                               Audit NO. E1JBF2-04-0300
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      criteria of the law, established regulations,  or Agency or QRD
      guidance.  Instead the decision to use a contract,  CA,  or IAG was
      guided by time considerations, the preferences of the ERL-A or,
      university principal investigators and/or other ERL-A managers,
      headquarters allocations, and administrative convenience.

      It also became evident that without proper guidance ERL-A
      managers did not understand the distinction between using
      contracts, CAs, and grants.  Twice during interviews, the ERL-A ,
      director explained the difference between contracts and
      cooperative agreements as the type and level of anticipated
      interaction between contractors/cooperators and federal
      employees.  The amount of collaboration between federal employees
      and cooperators is the actual criteria that should be used to
      determine whether an assistance agreement is awarded as a CA or
      grant.  The anticipated federal participation does not enter into
      the decision to contract or award an assistance (cooperative
      agreement or grant) agreement.  When ERL-A POs were asked why
      they used CAs instead of contracts in obvious cases of direct
      benefit; the POs defended the use of CAs by citing mutual benefit
      to the laboratory and the university as the justification.
      However, Senate Report 97-180, dated August 13,  1981, rejected
      relative benefit as a factor in determining whether to contract
      or award an assistance agreement.  The Senate Report stated that
      the principal purpose of the transaction (procurement or
      assistance) was the only legitimate decision criteria.


      LACK OF COMPETITION IK EXTRAMURAL AWARDS NOT ADDRESSED BY GAD,
      CMP. OR PRO

      In order to obtain favored contractors and cooperators, ERL-A did
      not competitively award most of its contracts or CAs.  For those
      few contracts and CAs awarded competitively,  there were no
      controls in place to assure that the proposal review process was
      fair and equitable.  The noncompetitive environment at the
      laboratory existed, in part, because of the failure of ORD, GAD,
      and CMD to effectively promote and encourage competition at ERL-
      A.  GAD did not develop policies to encourage' the competition of
      CAs and CMD did not insist that ERL-A comply with competitive
      requirements for contracting.  Although ORD policy stated that
      competitive award of extramural instruments helped assure the
      best research, ORD delegated broad discretionary authority to its
      laboratory directors to decide whether or not to compete
      extramural awards and relied on GAD .and CMD to provide oversight
      for the award and management of extramural contracts and
      agreements.  Further, ORD did not take corrective action to end

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      the pervasive influence of the prospective PO over the evaluation
      of CA proposals and did not provide effective oversight of the
      proposal review process.   These last deficiencies were previously
      reported in DIG Audit Report No.  ElgB2-ll-0019-30828,  entitled
      "Review of the Office of Research and Development's Extramural
      Research Activities," issued March 28,  1983.

      GAD Did NotDevelop Policies To Encourage Competitive Award of
      CAs and lAGs

      GAD is responsible for Agency-wide guidance on competition in
      extramural agreements.  However,  none has been established.  GAD
      managers stated that the FGCA Act encourages competition,  but
      does not require it.  GAD managers further stated that
      competition was a programmatic decision and ORD had established
      some competition guidelines.  However,  ORD officials denied any
      responsibility for guidance on extramural competitive awards.  An
      ORD official stated that GAD was the office charged with this
      responsibility and ORD only began promulgating such guidance
      because GAD had failed to do so.

      In the absence of specific requirements for competition, ERL-A  -
      did not encourage the competitive award of CAs as emphasized by
      the FGCA Act.  Of the 27 active ERL-A CAs having a maximum
      potential value of $14.2 million, 17 CAs totalling $10 million
      were awarded noncompetitively despite the FGCA Act provision
      encouraging competition and ORD Headquarters policies that
      competing CAs helps assure the best research available.  ERL-A
      used its discretionary authority to award noncompetitive
      agreements to individuals/institutions that its scientists
      believed to be the best qualified to perform the research needed.
      Several of the noncompetitive awards were to current employers of
      former ERL employees and on-site cooperators and to alma maters
      or former employers of laboratory management.  These
      noncompetitive awards created the appearance of favoritism in the
      award process.  Details of problems with ERL-A's noncompetitive
      awards are included in Chapter 3 of this report.

      CMP Permitted ERL-A To Manipulate Procurements to Retain Favored
      Contractors

      ERL-A was able to abuse the contracting process to retain favored
      contractors and their employees and then utilized these same
      contracts to perform prohibited contracting activities.
      Although CMD identified questionable contracting practices at
      ERL-A (i.e., AScI contract splitting, personal services, directed
      subcontracting, etc.), CMD staff still permitted ERL-A contract

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      managers to circumvent contract regulations to retain incumbent
      contractors without going through the competitive process.  CMD
      staff stated that due to limited staff they were not able to
      closely scrutinize contract activities at ERL-A and that they
      primarily acted as a service provider to the EPA program offices.
      However, CMD,  through its contracting officers; is responsible
      under FAR 1.602-2 for ensuring performance of all necessary
      actions for effective contracting, ensuring compliance with the
      terms of the contract, and safeguarding the interests of the
      United States in its contractual relationships.  However, over a
      period of nine years and with the apparent awareness of CMD, ERL-
      A managers manipulated 8(a)  contracting requirements to avoid
      competition and retain the incumbent laboratory support
      contractors.  ERL-A abuses of the 8 (a)  set-aside program are
      presented in Chapter 4 and some examples are presented below.

      For example, ERL-A requested a large modification' (a--$2.4
      million/200 percent increase over original contract value and
      20-month contract extension) to the TAX on-site contract just
      before the 8 (a)  firm graduated from the program.  A CMD legal
      review questioned 'the propriety of extending a contract when a
      firm was about to graduate from the 8 (a)  program.  However,
      according to 0AM,  OGC signed .the file to affirm legal sufficiency
      of the contract and made the comment for CMD's consideration
      only.  Despite this concern, CMD forwarded the request to the
      Small Business Administration (SBA).  SBA approved the extension
      of the TAI contract from a three to a five-year contract one day
      before the firm graduated 'from the 8 (a)  program.  CMD
      subsequently approved this large contract modification, which
      significantly changed the scope of work of an on~site 8 (a)
      contract, without requiring competition.   ERL-A subsequently
      removed this same contract from the 8 (a)  program when the
      incumbent contractor graduated and was no longer eligible for an
      8(a)  set-aside.

      Similarly, another 8(a)  on-site support contract with AScI was
      split into two sole-source 8 (a)  contracts,  one with obviously
      underestimated costs,  to avoid the $3 million 8(a)  competitive
      threshold which would require a competitive procurement.  ERL-A
      split its on-site support contract into an off-site and on-site
      8 (a)  sole-source procurement with AScI.   However, the off-site
      contract was actually near site with the same contractor site
      manager and SOW as the on-site contract.   Both contracts were
      being processed simultaneously within CMD and awarded by the same
      CO.  CMD knew that ERL-A had initially submitted a $4.9 million
      request which was later reduced below $3  million because ERL-A    ,
      indicated a reduction in anticipated work.   CMD staff were also  . -

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      aware that ERL-A subsequently certified that it had sufficient
      work to support two contracts with a total estimated potential
      value of $5.9 million.  Although the contract files and
      interviews showed that CMD staff questioned the appropriateness
      of two sole-source procurements with the same contractor and
      showed concern over the off-site proposal and the potential for a
      split procurement, the CO awarded the on-site contract on
      September 25, 1990.  The off-site contract was awarded in March
      1991 even though CMD knew that the site manager was the same, the
      SOW was the same as the on-site contract, and the off-site work
      would actually be performed near site.

      Our review showed that CMD did review and sometimes question ERL-
      A's contract actions; however, ERL-A's requested contracts and
      modifications were always approved by CMD with only minor
      changes.  While CMD's actions in these cases may have been in
      keeping with its perceived role as a service organization to ERL-
      A, CMD was not fulfilling its primary obligation and
      responsibility to ensure compliance with federal contracting laws
      and regulations and to safeguard the interests and contract
      resources of the federal government.

      ORD Did Not Provide Oversight To Ensure Fair and Equitable Awards
      of CAs

      Although the purpose of the CA proposal review process was to
      ensure the quality of research proposals, ORD did not have
      sufficient controls over this process to ensure that the goal of
      awarding CAs to the best institutions to support the most
      productive research was obtained.  Even in competitive CA awards,
      the proposal review process and ultimately the fairness and
      openness of the competition was also questionable.  We identified
      potential review panel COIs for almost every CA award in our
      sample, both competitive and noncompetitive.  Noncompetitive CA
      awards were made to employers of former ERL-A employees and on-
      site coordinators or to former alma maters or employers of
      laboratory management, which created the appearance of favoritism.
      In addition, none of the review panels for competitive CAs
      included ORD Headquarters staff as required by ORD procedures and
      ORD Headquarters never questioned its exclusion from the review
      panels.  Further, ORD did not take corrective action to eliminate
      the previously reported2 pervasive  influence of  the prospective
           2     OIG  audit  "Review  of  the  Office  of  Research  and
      Development's Extramural Research Activities," Audit No.
      ElgB2-ll-0019-30828, issued March 31, 1983.

                                               Audit NO. E1JBP2-04-0300
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Chapter 2
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      PO over the review process.  Prospective POs were permitted to
      select review panel members and often chaired the panel which
      recommended proposals for CA award.  This problem is similar to
      problems identified in prior OIG audits relative to contract POs,
      who participated and/or led technical evaluation and source
      selection panels for contracts they currently managed.  This
      continuing deficiency in the proposal review process also
      represented a significant control weakness.

      Although an ORD manager told us that ORD did not want proposal
      review panels to be a "good old boy network," the organization
      did nothing to prevent this from happening.  ORD did not even
      enforce its own procedures when they obviously were disregarded
      by laboratory management (i.e., exclusion of ORD staff-from
      review panels).  While we did not identify any specific conflicts
      of interest, just the appearance of conflict can be damaging.
      Potential COIs can lead to a situation where CA funds are not
      effectively utilized to obtain the best research at the least
      cost to the government.  In addition, lack of competition and
      potential favoritism in the CA award process could subject EPA to
      criticism and protests, and erode public trust in EPA research.


      LACK OF ORD OVERSIGHT AND CONFLICTING GUIDANCE SENT MIXED
      MESSAGES TO ERL-A ON PROPER USE OF EXTRAMURAL RESOURCES

      Prior to 1992, ORD3 performed very  limited  oversight of  ERL-A
      extramural activities, delegated broad discretionary authority to
      its laboratory.directors, and relied on GAD and CMD for primary
      oversight and guidance for ERL-A extramural activities.  In 1992
      ORD began to strengthen its oversight and control of extramural
      resources and issued guidance,  albeit conflicting guidance, on
      the award and use of CAs.  ORD's failure to timely implement
      strong extramural resource management controls is especially
      significant, considering the high degree of reliance that ERL-A
      and other ORD laboratories have placed on extramural resources to
      accomplish their mission since the early 1980's and the high
      degree of vulnerability of extramural resources to fraud, waste
      and mismanagement.
           3  ORD' s Office of Environmental Processes and Effects Research
      (OEPER) has direct oversight responsibility for ERL-A operations;
      however, most of  the  guidance cited was issued by  the Assistant
      Administrator for Research and Development.

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      QRD Needed to Strengthen Its Oversight Role

      ORD has taken recent actions to identify extramural management
      weaknesses, issue guidance,  and strengthen controls over
      laboratory use of extramural resources.  In the 1990 FMFIA
      report, ORD documented extramural management as a material
      weakness.  However, at the time of our review in early 1992,
      internal controls had not been effectively established to
      identify or prevent ERL-A's misuse and abuse of extramural
      resources.  Prior to 1990, when most of the questionable actions
      cited in this report occurred, few, if any, controls were
      documented or established by ORD for extramural resource
      management.  Although GAD is primarily responsible (in
      coordination with ORD) for guidance and oversight of assistance
      agreements, definitive guidance from GAD on the use of assistance
      agreements was practically nonexistent" before ORD took the
      initiative and issued interim guidance in October 1992.   Also,
      documents in ERL-A files indicated that ORD Headquarters during
      this earlier period failed,  on occasion,  to comply with its own
      extramural policies.  ERL-A staff perceived tremendous pressure
      from ORD to complete many time critical research projects with
      inadequate in-house resources.  Such perceived pressure,  coupled
      with inadequate ORD controls and oversight, may have fostered a
      laboratory environment which encouraged the misuse of extramural
      funding to supplement deficient federal staff and related
      administrative support.

      In January 1992, after the OIG's identification of serious
      contract management deficiencies at ORD's Duluth laboratory,5  ORD
      and CMD performed a review of ERL-A's on-site support contracts.
      This was the first ever systematic review conducted by ORD of
      ERL-A's management of extramural resources.  ERL-A managers told
      us that tremendous pressures existed at the laboratory to
      accomplish the numerous research projects assigned by ORD.  As
      discussed in Chapter 1, the lab's responsibilities have increased
      significantly while its EPA workforce has remained stable or
      decreased.  In the absence of ORD oversight of ERL-A's extramural
      activities, ERL-A managers,  under perceived pressure to complete
           4  EPA' s Assistance Administration Manual, which outlined broad
      policies and responsibilities, was the only guidance on assistance
      agreements prior to ORD's October 1992 policy  issuance.

           5   OIG Audit Report No. E1JBF1-05-0175-2100443,  Contracting
      Activities at Environmental Research Laboratory Duluth, issued July
      7, 1992.

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Chapter 2
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      critical research, chose expediency over propriety and improperly
      used extramural'resources in the form of contracts, CAs, and lAGs
      to supplement federal staff.

      Although, as previously stated,  GAD had weak controls and
      inadequate oversight over assistance agreements,, we also found
      that ORD had few controls over the laboratory utilization of CAs
      and lAGs.  At the time of our audit, ORD policies and procedures
      did not provide for ORD Headquarters oversight or review for most
      CAs awarded by laboratories because laboratory directors were the
      decision officials for all noncompetitive CAs under $250,000 and
      all competitive CAs under $1 million.6  At ERL-A, for  example, .
      the lab director was the decision official for all but 2 of the
      11 CAs in our sample and of ERL-A's total 27 active CAs, only 2
      met the requirements for an ORD review.  ERL-A management
      indicated that decision memorandums for all CAs were forwarded to
      ORD Headquarters.  However, ORD/OEPER staff informed us that
      occasionally ORD Headquarters did receive copies of decision
      memorandums from laboratories for noncompetitive CAs under the
      $250,000 threshold, but it was not required and they performed ho
      review or analysis of the CA proposals when the laboratory
      director was the decision official.  These decision memorandums
      were merely logged in and filed away.   As a result of the lack of
      Headquarters controls and/or guidance,  ERL-A managers often made
      what they referred to as "management calls."  These "calls"
      frequently resulted in inappropriate contract and assistance
      agreement activities.

      Our review of active CAs administered by ERL-A disclosed one case
      where ORD/OEPER failed to comply with its own policies and
      procedures in a 1989 CA award to the University of New Hampshire
      (UNH).  Despite total project costs of almost $1 million, the UNH
      CA was awarded by ORD noncompetitively with no justification in
      the decision memorandum as required by ORD's procedures.  This
      noncompetitive award also disregarded ORD's policy of encouraging
      competition and awarding CAs to the best institutions to support
      the most productive research.  In addition,  at least one
      contractor employee was permitted to review this CA proposal, an
      inappropriate action in this situation because there was
      potential for competition between the contractor and the
           6  ORD directive, entitled "COOPERATIVE RELATIONSHIPS. Interim
      Guidance,, issued  October 1,  1992, reduced  laboratory  director
      approval of  noncompetitive CA awards to $50,000 or less;  however.,
      required ORD approval for competitive CA awards was  raised to $5
      million.

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      cooperator (see Chapter 3).  Although originally awarded by ORD,
      responsibility for administering the UNH CA was subsequently
      transferred to ERL-A.

      Conflicts Between ORD Policy and Federal Statutes Demonstrated
      QRD-wide Confusion Over Proper Use of CAs and Contracts

      On at least one occasion ORD issued interim policy related to the
      use of CAs which contradicted provisions of the 1977 Federal
      Grants and Cooperative Agreements (FGCA) Act and the intent of
      Congress expressed in numerous congressional reports.   Although
      this guidance was issued subsequent to most of the abuses cited
      in this report, such incorrect, conflicting guidance from ORD's
      top management is indicative of the confusion found at ERL-A on
      the proper award and use of CAs (see Chapter 3).  This same
      incorrect guidance was used by ORD as a basis for shifting
      extramural resources from more controlled, restrictive (and
      recently criticized) on-site laboratory support contracts to less
      restrictive CAs.

      ORD Headquarters Mandated Increased use of CAs and issued
      Incorrect Guidance on the Use of CAs

      Recent guidance from ORD, partly in response to OIG audits of the
      CSC contract and ORD's Duluth laboratory, indicated that ORD's
      response to criticism of its contracts management was to transfer
      its extramural funding from contracts to other, less visible,
      less restrictive extramural instruments - CAs.  A March 16, 1992
      memorandum from the Assistant Administrator (AA) for Research and
      Development stated that he was planning to significantly increase.
      the total allocation of extramural resources to competitive, off-
      site cooperative research agreements.  The AA directed that by
      the end of FY 1993, 35.percent of the dollars currently devoted
      to LOE contracts and CAs, particularly those providing direct
      support to the in-house research program, be allocated,to
      increased awards of competitive CAs and competitive completion
      form (cost reimbursable) contracts.   This emphasis on increased
      extramural funding for agreements is reflected in ERL-A's 1992
      budget which included a 52 percent increase in funding for CAs
      and XAGs over their 1991 budget versus a 6 percent decrease in
      contract funding from 1991. levels.

      During the audit, several ERL-A staff told us that ORD
      Headquarters, in past years, had directed the laboratory to
      increase its use of contractors to accomplish laboratory tasks.
      ERL-A POs told us that they used available resources for on-site
      support contracts as ORD directed to accomplish the laboratories

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chapter 2
Management Controls Did Not Detect or Preclude ERL-A's Abuse and
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      tasks.  Now, they were being criticized for doing what they were
      directed to do and being pushed in a new direction.  One PO told
      us that ORD's immediate response to recent OIG audits of
      contracts, de-emphasizing contracts and emphasizing CAs, only
      served to "put a cosmetic patch over the top" of problems which
      have developed over the past ten years.  This PO believed that to
      arbitrarily cutoff contracts and increase CA support was not the
      best or proper solution.

      The AA, in his March 16, 1992 memorandum, justified the shift in
      extramural emphasis by stating that increased relationships with
      the academic community would accomplish the best science possible
      at a reasonable cost.  However, assistance agreements do not
      require bids or cost/price analysis as required for contracts;
      therefore, use of CAs would not necessarily ensure "a reasonable
      cost" in comparison to contracts.  In addition, the AA's
      memorandum did not address the very different uses of .contracts
      and CAs which are defined by the 1977 statute.  The ORD directive
      merely provided another arbitrary parameter within which ERL-A
      and the other ORD laboratories would be required to operate.

      A second ORD directive on the management of extramural resources,
      entitled "COOPERATIVE RELATIONSHIPS.  Interim Guidance," was
      issued on October 1, 1992, by the AA for Research and
      Development.  The directive used the premise that ORD research
      benefitted the general public as support for the use of CAs for
      research that also "incidentally" benefitted the Agency.  The
      directive stated:
                            V
           ORD is authorized under various statutes to conduct
           research and development in different areas of
           environmental science. . It is ORD's policy that the
           primary purpose of such research is to "carry out a
           public purpose of support or stimulation" as stated in
           31 U.S.C. 6305.  Such research is thus appropriate for
           assistance agreements, recognizing that the results of
           such research may incidentally be of direct benefit to
           the Government.

      In our opinion, ORD misinterpreted the FGCA Act.  This directive
      implies that all ORD research is for "a public purpose of
      stimulation and support" as required by the FGCA Act for use of
      assistance agreements and; therefore, CAs can be used in direct
      support of ORD research projects.  All funds expended by EPA,
      whether for CAs, contracts, or any other purpose, should serve "a
      public purpose" and benefit the general public.  Therefore,
      public benefit is not an acceptable distinction between use of

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      contracts and assistance agreements.  As discussed above,
      Congressional intent, as documented in Senate Report 97-180,
      dated August 13, 1981, was that the principal purpose of entering
      into a transaction was the only legitimate criterion in deciding
      whether to use a contract or an assistance agreement.  Congress
      specifically rejected the argument of relative benefit to justify
      transactions under a CA instead of a contract.  Our review of the
      RFPs and/or decision memorandums in our CA sample showed that the
      primary purpose of most CAs was not to provide assistance or
      stimulation to the recipients, but rather to provide direct
      support to ERL-A/ORD research and modeling projects.

      The October 1992 ORD directive further established several
      different categories of CAs.  According to the guidance, Research
      Program Support Agreements  (RPSA) were determined appropriate for
      the direct support of ORD's environmental research and
      development activities.  The scope of each RPSA would normally be
      focused on one or several closely related major activities to be
      accomplished in a defined time frame such as support of
      scientific symposia.  Laboratories would be authorized to spend
      up to 10 percent of their extramural budget for RPSAs.  The
      guidance counseled that RSPAs could not be used to 'acquire goods
      or services for the direct benefit of EPA.  However, it was
      unclear how this type of agreement would be providing assistance
      to recipients as required under FGCA Act and how an agreement to
      support ORD research activities could preclude the obtaining of
      services that directly benefitted EPA.  The RSPA appears to
      authorize misuse of CAs by ORD units.

      The AA for Administration and Resources Management (OARM) in a
      memorandum, dated December 2, 1992, entitled "When to Use
      Contracts and Cooperative Agreements and Grants," supports our
      conclusion that projects which provide property or services for
      the direct benefit or use of the Agency requires the contract
      mechanism.   The guidance specifically identified projects which
      produce specific information that will be directly incorporated
      into Agency technical, policy, or regulatory decisions as
      activities that cannot be funded through assistance agreements.
      The October 1992 ORD directive cited above does not appear to be
      in compliance with OARM's guidance.

      ERL-A Response to the Reduction of On-Site Technical support
      Contracts

      As discussed above, ORD Headquarters on March 16, 1992 directed a
      35 percent reallocation of extramural funds from on-site LOE
      contracts to off-site competitive contracts and CAs.  As a

                                               Audit No. E1JBF2-04-0300
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Chapter 2
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      result, ERL-A faced the eventual loss of long-term incumbent
      contractor employees.   The laboratory's initial response was to
      develop a contingency plan to move these employees -onto other,
      more acceptable contracts, or CAs with nearby universities.

      ERL-A files contained a March 1992 draft contingency plan that
      discussed strategies the laboratory could use to meet the
      anticipated 50 percent reduction (later reduced to 35 percent) in
      on-site LOE technical support dollars as proposed by ORD and
      still retain the incumbent'on-site contractor staff.  The plan
      contained lists of the "on-board" contractor employees along with
      notations as to how they could be retained.   The strategies
      included: moving the employees to superfund tasks or to a new
      "off-site" contract; transferring them to an on-site computer
      support contract; moving one employee to an IAG with USDA; and
      moving the "PhD, post-doc types" to CAs at the University of
      Georgia, Clemson University, National Research Council, and/or
      Clark-Atlanta University.  A note attached to the contingency
      plan from the laboratory director stated, "It seems to me that we
      may be able to absorb this cut with still having about the same
      technical support."  While the ORD policy of moving .contract
      dollars to competitive off-site CAs and competitive completion
      form contracts would be accomplished on paper, the status quo at
      ERL-A would be maintained.  As ERL-A's contingency plan
      demonstrates ORD's decision to make an arbitrary re-allocation of
      extramural resources to correct past contracting deficiencies
      produced arbitrary results.   As mandated by the 1977 FGCA Act,
      deciding between a contract and an assistance agreement should be
      based on the primary purpose of the transaction not an arbitrary
      decision on allocation of:funds.

      Poor Planning and Delays in Funding Sometimes Precluded the Use
      of the Proper Extramural Mechanism

      ORD's 1990 Resource Utilization Workgroup notes, previously
      cited, documented concerns with the ability of laboratories to
      responsibly plan in advance for the quantity, type and timing of
      resources. -  The consensus of the group was that delays of
      resources coming to the laboratories caused considerable problems
      and wasted administrative effort.  Also, the group concluded that
      year-end redistributions of funding usually came too late to
      responsibly and effectively spend the resource.  As a result, the
      appropriate extramural agreements could not always be used
      because CMD and GAD deadlines for submission of contract or
      assistance proposals were already passed.
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      The ERL-A director, as well as several ERL-A CA and IAG POs, and
      Pis at UGA and other universities specifically mentioned that
      funding delays had an adverse effect on managing extramural
      resources.  As an example, the laboratory director told us of a
      two year wait for SERDP (Strategic Environmental Research and
      Development Program) funds from the Department of Defense (DOD).
      The funds were finally received late in FY 1992.  Although the
      timeframe for submitting contract proposals to CMD had already
      expired, it was not too late to process a noncompetitive CA
      through GAD.  After our discussions with GAD officials concerning
      their oversight of assistance agreements, ERL-A submitted a $3
      million noncompetitive CA to GAD for SERDP, but it was not
      approved.  GAD determined that the scope of work was procurement
      not assistance and that a contract would be the appropriate
      mechanism.  Since it was too late to process a contract, the
      laboratory lost the SERDP funding.


      MISMANAGEMENT OP EXTRAMURAL RESOURCES NOT PRECLUDEDBY GAD, CMD,
      OR ORD

      GAD, CMD, and ORD did not have adequate controls to"ensure that
      ERL-A effectively managed contracts and other extramural
      agreements and ensured compliance with the terms of extramural
      agreements and proper expenditure of funds.  As a result, neither
      GAD, CMD, or ORD detected or prevented the major deficiencies in
      ERL-A's management of extramural resources reported in Chapters 3
      and 4.  GAD and CMD's inadequate review and approval of ERL-A's
      improper use of extramural resources in essence condoned ERL-A's
      mismanagement of extramural agreements.  Also, GAD's failure to
      implement or enforce its limited controls over CAs did not
      encourage proper management of assistance agreements by program
      managers.

      GAD Did Not to Provide Oversight and Guidance For. CA Management

      GAD did not provide oversight in compliance with its
      responsibilities as delineated in EPA's Assistance Administration
      Manual contributed to ERL-A's mismanagement of extramural
      agreements.  GAD is the Agency's expert on the award and
      administration of CAs, grants, and lAGs.  In addition, GAD is the
      "Award Official" or final approval authority for all ORD
      assistance agreements.  Without proper and definitive guidance
      and oversight by GAD, there can be no effective system of
      controls over Agency resources dedicated to assistance
      agreements.
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Management controls Did Not Detect Or Preclude  ERL-A?s Abuse and
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      According to the Assistance Administration Manual,  GAD's
      responsibilities for assistance awards included:   (1)  assurance
      that all technical,  legal,  and  administrative evaluations have
      been made and that the application is awardable,  and (2)
      assurance that the proposed agreements meet  the requirements of
      applicable legislation,  regulations,  and  program  guidance.  Also,
      according to the Manual, GAD's responsibilities for post-award
      administration of assistance agreements included:  (l)  evaluation
      of recipient management systems,  and  (2)  financial  review of
      recipient activities.   GAD's post-award oversight mechanisms
      included transmitting copies of Financial Status  Reports (FSRs)
      to POs for use in PO reviews of recipient activities and
      receiving trip reports for  PO site visits which may identify
      recipient problems or problems with PO management.   Finally, GAD
      is responsible for overall  Agency guidance on  administration of
      assistance agreements.

      Despite these numerous oversight responsibilities,  GAD grant
      specialists,  due to their heavy workloads, were unable to answer
      even our basic questions related to ERL-A CAs  we  reviewed.  GAD's
      review of-proposed CAs was  primarily  a "paper  process" to verify
      that all required documents had been  completed.   There was no
      evidence of any substantive review of the merits  or propriety of
      the proposed awards or their compliance with laws,  regulations,
      and Agency policies.   One specialist  explained that she was
      responsible for 150 CAs. with this workload,  we  calculated that
      she could only devote, approximately,  1.5 work days to each CA
      which offered little time for oversight.  As' a result, GAD
      specialists had virtually no contact  with POs  during the
      performance of CA projects.

      GAD managers stated that POs did not  need to contact GAD except
      at closeout of a CA or grant.   In addition,  GAD did not require
      trip reports from POs1 site visits and did not send copies of
      FSRs for POs to review even though these  control/oversight
      mechanisms are required in  their Assistance  Administration
      Manual.   In addition,  there was an overall lack of  documentation.
      of any management/oversight of the CAs by GAD.

      There were few written policies and procedures on the
      administration of CAs by POs other than the  Assistance
      Administration Manual which was provided  only  to  the ERL-A
      extramural coordinator,  not to the lab POs.  GAD  also did not
      make training mandatory for CA and IAG POs.  GAD  managers stated
      that CA POs were not required,  only encouraged, to  take project
      officer training.  , GAD managers indicated that almost three
      hundred POs had taken the assistance  PO training  in 1992 under a

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Chapter 2
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      voluntary system.  However, even with training,  inexperienced POs
      require close oversight and management which has not been
      provided by ERL-A or GAD.  GAD and ERL-A managers must remember
      that POs were trained as scientists not administrators and a two
      or three day training course will not make them effective, stand-
      alone managers of millions of dollars in assistance agreements.
      Under such inadequate oversight. and management by GAD, it is not
      surprising that ERL-A POs were not adequately and effectively
      overseeing their extramural agreements.

      Perhaps the most serious example of GADfs lack of controls over
      CAs was the disconnect between the technical monitoring that was
      done by ERL-A POs and the financial management responsibilities
      of GAD (see details in Chapter 3) .  Because of GADs disregard for
      its own financial management/control requirements, ERL-A POs
      could not oversee the financial status of CA research projects.
      Even though GAD's Assistance Administration Manual required that
      FSRs be provided to POs, GAD did not comply with this requirement
      and POs did not receive any cooperator financial reports,  since
      POs monitor the progress of CA projects and have direct contact
      with the cooperator, they are the only individuals who could
      effectively monitor cooperator use of federal funds:  Because GAD
      had not complied with its own requirements and.emphasized
      financial management, ERL-A POs told us they had no financial
      management responsibilities for their assigned CAs.  Without PO
      involvement in financial as well as technical oversight of CAs,
      EPA has no effective system for assuring that CA funds and other
      resources are appropriately used and safeguarded against waste
      and abuse.

      If GAD had fulfilled even its basic responsibilities and taken
      the initiative to better oversee CA administration, some of the
      problems described in this chapter and Chapter 3 may have been
      prevented.

      Lack of CMP Oversight Permitted ERL-A*s Post-Award Misuse cf
      Contracts

      Our audit disclosed that ERL-A improperly used contractor
      resources to supplement its own in-house resource needs while CMD
      performed minimal post-award oversight of ERL-A's contract
      operations.  At the time of our audit, CMD did not have adequate
      controls in place to prevent this misuse.  During 1992, CMD,
      joined with ORD to perform an on-site review of ERL-A's contract
      management activities.  CMD and ORD found many of the contract
      management problems we cited in our survey report (Report
      NO.E1XMG2-04-0102-3400007, issued November 30, 1992) and in this

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Chapter 2
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      audit report. However, this was CMD's first ever on-site review
      of ERL-A contract activities and such reviews have not been
      established as a continuing oversight/control technique by CMD.

      Examples of post-award contract management problems identified
      during our survey and audit are summarized below.  Details of
      these problems are included in Chapter 4.

      ERL-A's AScI and TAI contracts and related WAs contained, broad
      SOWs with undefined deliverables resulting in indefinite
      contractor operations.  ERL-A management misused these contracts
      by personally directing the activities of contract employees to
      enhance ERL-A research rather than adhere to a contractual
      relationship.  The lack of an arms-length contractual
      relationship resulted in: (1) directed subcontracting; (2)
      personal service relationships; (3)  contractors being involved in
      critical, if not inherently governmental functions;  (4)
      inadequate work assignments and statements of work (SOWs); and
      (5) inadequate review and acceptance of contract charges.   This
      increased ERL-A's vulnerability to fraud, waste, abuse, related
      conflict-of-interest situations, and a potential loss of the
      Agency expertise in critical functions.  In addition, ERL-A's
      close relationship with on-site contractors and their employees
      provided the incumbent contractor resident expertise in certain
      research projects which significantly increased their value to
      ERL-A.  This created a potential contractor monopoly which
      precluded or at a minimum inhibited future "open" competition for
      on-site contract support.


      CONCLUSION

      Over the past 7 years, an ERL-A culture was allowed to develop
      that encouraged the misuse and abuse of extramural resources.
      With limited intramural funding, the success and stature of the
      laboratory and individual scientists in the research community
      was directly proportional to your slice of the extramural pie.
      Extramural support provided great flexibility in the ability of
      ERL-A programs to directly hire specific individuals and experts.
      ERL-A could also obtain other FTE-type support from contracts and
      assistance agreements because extramural activities were not
      subject to the same level of scrutiny as intramural funding.
      ERL-A staff repeatedly argued that "quality science" was the
      primary motivation to ERL-A's actions, either within or around
      established systems, to accomplish its primary goal - the
      research mission.  However,  the mission was not sufficient
      justification for avoiding and circumventing statutes,

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Chapter 2
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      regulations, policies and guidance that governed the acquisition,
      use, and management of extramural contracts and agreements.
      Every EPA program has a mission and those missions must be
      accomplished within administrative procedures established to
      protect the government's interests and safeguard government
      resources.

      Effective management control systems must include adequate
      guidance in the form of policies and procedures to assure that
      internal control objectives are achieved.  The ERL-A director
      stated there was a definite lack of clear EPA guidance regarding
      extramural management.  She commented, "People like me are good
      rule followers, that is, if I know the rules."   However, without
      specific guidance from ORD, GAD, and CMD, many of ERL-A decisions
      became "discretionary" decisions of EKL-A managers to promote
      their own interests rather than the government's interests.

      The FAR provides that government business shall be conducted in a
      manner above reproach.  FAR 3.101-1 further states:

           Transactions relating to the expenditure of public
           funds require the highest degree of public trust and an
           impeccable standard of conduct...While many Federal
           laws and regulations place restrictions on the actions
           of Government personnel, their official conduct must,
           in addition, be such that they would have no reluctance
           to make a full public disclosure of their actions.

      ERL-A's extramural efforts fell far short of this standard.
      Aided by CMD, GAD, and ORD inaction, poor management, and weak
      controls, ERL-A was permitted to evade statutes, regulations,
      policies, and guidance in its use of extramural resources.


      RECOMMENDATIONS

      Recommendations Jbo the As3istg**fc ^«i™inistrator» Research and
      Development

      We recommend that the Assistant Administrator for Research and
      Development evaluate its management controls, CA guidance, and
      resource allocations related to ERL-A's use and management of
      extramural resources.  Specifically, the Assistant Administrator
      should:

      - Review all ORD guidance related to CAs, in coordination with
        OGC and GAD, to determine whether applicable guidance fully

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        complies with the intent and statutory provisions of the 1977
        FGCA Act, as amended.  Obtain a formal written OGC opinion as
        to compliance of current ORD policies with the intent and
        provisions of the 1977 FGCA Act.

      - Instruct ERL-A management to refrain from its pattern of
        circumvention and noncompliance with laws, regulations, and
        Agency policies related to extramural and intramural resources.

      - Continue to promulgate and refine CA guidance to laboratories
        which encourages or requires competitive awards and improves

        ORD oversight and control of laboratory management of
        assistance agreements.7

      - Evaluate and strengthen ORD's oversight and controls over ERL
        -A's contract management activities and encourage full and open

        competition in laboratory contacts as intended by the
        Competition In Contracting Act of 1984.
                                                         !*-*.
      In addition, the Assistant Administrator for Research and
      Development should require the:

      Director. Environmental Processes and Effects Research to;

      - Evaluate ERL-A's staffing needs and, if appropriate, request
        through the budget process additional FTE positions for ERL-A's
        resource/contract management functions, as well as mission
        critical research projects.  With the approval of EPA's
        Comptroller and OMB, this may be accomplished through
        conversion of extramural funds to intramural FTE support.  Such
        FTE increases could preclude continuing personal services
        relationships with contractor staff, prevent contractor
        performance of inherently governmental functions, and improve
        contractor and cooperator oversight.     , '

      - Establish periodic, recurring on-site 'reviews of laboratory
        management of contracts and assistance agreements to be
        performed jointly with CMD and GAD, respectively.
           7  ORD issued interim and draft guidance documents during our
      audit which encouraged  competitive CA awards,  elevated approval
      level for noncompetitive CA awards,  and strengthened some oversight
      and management controls for laboratory programs.

                                               Audit NO.  E1JBF2-04-0300
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Chapter 2
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      - Evaluate the planning, timing, and funding processes for
        research projects which may preclude laboratory selection
        of the best and appropriate extramural mechanism.

      - Eliminate arbitrary allocations of extramural resources which
        may preclude ERL-A from using the appropriate extramural
        mechanism.

      Recommendations to the Assistant Administrator, Administration
      and Resources Management

      We recommend that the Assistant Administrator for Administration
      and Resources Management establish proper management controls
      over ERL-A contracts, cooperative agreements, and interagency
      agreements.  Specifically, the Assistant Administrator should
      require the:

      Director.  Grants Administration Division to:

      - Update,  clarify, and communicate definitive written policies
        and procedures on the award and administration of  assistance
        agreements, to include the specific eligible purposes of
        assistance agreements under the 1977 FGCA Act, and provide this
        guidance to ERL-A managers and POs, as well as to  POs EPA-wide.

      - Establish Agency-wide policy on competition in award of
        assistance agreements that complies with the intent of the 1977
        FGCA Act.

      - Strengthen oversight and review of proposed CAs and lAGs to
        ensure their compliance with applicable laws, regulations, and
        Agency policies before official approval of these  assistance
        agreements.

      - Provide increased oversight of PO and recipient management,
        both technical and financial, to ensure proper PO  compliance
        with their oversight responsibilities and to ensure recipient
        compliance with terms of their agreements.  In addition, GAD
        should aggressively enforce its requirements on program
        operations and ensure that it is complying with its own
        requirements to include obtaining PO trip reports  and
        submitting FSRs to POs for review.

      - Review the adequacy and applicability of current PO training
        and require such training for all CA and IAG POs.
                                               Audit NO.  E1JBF2-04-0300
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      - Utilize the database of all current IAG and CA POs for
        consultation,  when needed, and to ensure they are provided
        written guidance and training materials, in a timely manner.

      - Evaluate the qualifications of all POs designated by program
        offices and ensure the individuals have the proper training and
        experience required.  A certification program for CA and IAG
        POs,  similar to the certification of contract POs is
        recommended.    :

      - Establish jointly with ORD, periodic/cyclical on-site reviews
        of laboratory management of assistance agreements.

      Director. Office of•Acquisition Management fOAMK and Director.
      Contract Management Division - Cincinnati to;

      - Strengthen CMD's contract review process to ensure that
        contract proposals are thoroughly reviewed and that all
        questionable actions are quickly resolved.  Any procurement
        requests for sole-source contracts, including noncompetitive-
        8 (a)  contract proposals, should be closely scrutinized as to
        need  for sole-source contracts and contract cost estimation to
        avoid competitivekthresholds.

      - Instruct cos to immediately notify CMD's director of any
        potential violation of contract laws and regulations or any
        unsound contract management practices identified.  Also, ensure
        that  the director of CMD expeditiously resolves any potential
        violations or unsound practices.

      - Emphasize to CDs that their primary obligation is to ensure
        compliance with contract laws arid regulations and to protect
        the interests of the government while at the same time
        providing timely service to programs.  Establish controls to
        ensure that CDs consistently comply with contract laws,
        regulations, Agency policy and sound contract management
        practices in all of their contract actions.

      - Examine CMD's or EPA's competitive contracting process and
        streamline where possible to eliminate unnecessary
        administrative burden, delays, and incumbent bias (i.e.,
        personnel commitments) and to overcome program management's
        resistance to competitive process awards.

      - Establish jointly with ORD, periodic/cyclical on-site reviews
        of laboratory management of contacts
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Chapter 2
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      AGENCY RESPONSE AND PIG EVALUATION OF AGENCY COMMENTS

                                ORD Response

      ORD expressed no disagreement with the findings and
      recommendations presented in Chapter 2.   ORD suggested changes to
      Chapter 2 and Chapter 3 to clarify our background information and
      interpretation of the 1977 FGCA Act and related legislative
      history.  These changes were primarily incorporated into the
      initial Background section of Chapter 2.

      ORD included planned corrective actions for each recommendation
      and milestone dates for completion of these actions.   ORD's
      response to the recommendations was acceptable for resolution of
      recommendations addressed to ORD in Chapter 2.   ORD's specific
      comments to Chapter 2 recommendations are included in Appendix I.

                                GAD Response

      GAD expressed concerns that the audit report overstated the FGCA
      Act requirements regarding the proper utilization of CAs versus
      contracts.  Therefore, we modified certain statements in Chapters
      2 and 3 based on suggested revisions by ORD Headquarters to
      resolve concerns expressed by both GAD and ORD.

      GAD stated that they had issued numerous policies on CA
      administration and that the report was incorrect in stating that
      there was a lack of policy or inadequate guidance from GAD.
      However, during the audit we requested all of GAD's guidance on
      CAs and only received the Assistance Administration Manual and
      EPA Order 1000.19, issued 1979.   GAD's response states that
      current guidance or policy does need supplementing which
      indicates, based on what we found,  that current guidance is at
      least inadequate.  Therefore,  we have changed "lack of" policy to
      "inadequate" guidance or policy in the report.

      GAD generally agreed with Chapter 2's recommendations to the GAD
      director and the response included planned or initiated actions
      for some recommendations.  GAD's comments and OIG's evaluation on
      Chapter 2's recommendations are detailed in Appendix I.  GAD's
      complete response to Chapter 2  and OIG's evaluation is available
      on request.

                                QAM Response

      Disagreements expressed by 0AM essentially deal with findings on
      the award of repetitive TAI contracts at ERL-A.   Specifically,


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Chapter 2
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      OAM was concerned that the report implied that EPA programs
      should not provide general support for the 8(a) program.  In
      addition, OAM believed that it had encouraged competition and
      developed procedures to enhance the proposal review process.
      Also, OAM appears to take the position that the TAI competitive
      procurement was not restrictive and did not favor the incumbent.

      The contract findings in Chapter 4 relate only to the AScI and
      TAI contracts which provided on-site support at ERL-A and
      presents information only on CMD's activities as it relates to
      these two contractors.  The report does not question the value of
      the 8 (a) program in developing disadvantaged business and the
      importance it plays in EPA's overall contracting scheme.  Neither
      does the report question the need for sole-source procurements
      early in the life of an 8 (a) firm to shelter emerging firms and
      give it a start in the marketplace.  However,  we do recognize
      that the overall goal of the 8 (a) program is to promote the
      development of small business concerns owned and controlled by
      socially and economically disadvantaged individuals so that such
      firms can compete on an equal basis in the American economy.
      From our review of 8 (a) contracting at ERL-A,  we could only
      conclude that the goal of the Small Business, Act's 8(a) program
      was not the laboratory's main interest in the program.  Also,
      based on our review of the 8 (a)  statute and related legislative
      history of the 1988 amendment of the Act, we could not conclude
      that repetitive sole-source procurements to the same contractor,
      during the entire time it qualified under the 8 (a) program, would
      accomplish the prime objective of the Act which was to "promote
      the development" of 8(a) firms.   The Act was amended in 1988
      because firms were graduating from the program and then could not
      survive in the competitive environment.  From our review, we
      could only conclude that Congress under CICA and the Small
      Business Act intended that competition be part of the 8 (a)
      program.

      We do not dispute. OAM' s claim that CMD does encourage
      competition.  We did not audit CMD's overall competitive award
      efforts.  We only examined competition for contract awards at
      ERL-A and found it lacking.  Therefore, we questioned the
      judgement used by CMD in allowing the repetitive sole-source 8 (a)
      awards which spanned an 11 year period to a contractor (TAI) who
      had obtained a competitive position at ERL-A,  and the splitting
      of another 8(a) contractor's procurement with the intent of
      avoiding competition requirements.

      OAM generally agreed with Chapter 2's recommendations.  OAM's
      response included planned or initiated actions for some

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Chapter 2
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      recommendations.  OAM's comments and 'OIG's evaluation on Chapter
      2's recommendations are detailed in Appendix I.  OAM's complete
      response to Chapter 2 and OIG's evaluation is available on
      request.
                                               Audit NO.  E1JBF2-04-0300
                                     38

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                            CHAPTER 3
             MISUSE AND MISMANAGEMENT OF COOPERATIVE
                    AND INTERAGENCY AGREEMENTS
Our review of 11 CAs  ($11.15 million maximum value) and 6 lAGs
($1.3 million maximum value)1 disclosed that in all 17 extramural
agreements, ERL-A managers:   (1) improperly used less restrictive
CAs and lAGs to procure goods and services in  lieu of the more
controlled contracting process,  (2) did not encourage the
competitive award of  CAs,  (3) exhibited apparent favoritism in
noncompetitive CA awards, and (4) did not effectively manage CAs
to assure compliance  with terms of extramural  agreements or that
government assets were safeguarded against waste or abuse.  ERL-A
staff apparently sacrificed adherence to statutory requirements
and ORD policies and  procedures to supplement  inadequate
intramural resources.  In addition, ERL-A seemed unaware of the
proper criteria for determining the use of CAs versus contracts.
As discussed in Chapter 2, inadequate and inconsistent guidance
from GAD and ORD Headquarters contributed to ERL-A's confusion
over the proper use and selection of extramural agreements.
Further, ORD and GAD  oversight of ERL-A operations was
insufficient to prevent misuse and mismanagement of extramural
resources by-1RL-A.   ERL-A's misuse and mismanagement of
extramural agreements resulted in a lack of assurance that the.
research -performed under these agreements was  properly overseen"
and that government resources were adequately  controlled and
effectively utilized.

Several deficiencies  related to ORD's CA award and management
processes had been previously identified by a  1983 OIG audit of
ORD's CA program.2  Nine years later  these problems remained
uncorrected at ERL-A.  Based on our review at  ERL-A, corrective
action taken on the prior audit was both inadequate and
ineffective because ORD issued faulty guidance, ERL-A ignored
some of the controls  instituted by ORD and ORD failed to oversee
and ensure proper implementation by its laboratories.*


MISUSE OF COOPERATIVE AGREEMENTS

In all 11 CAs reviewed, ERL-A circumvented statutory requirements
by improperly using less restrictive CAs in lieu of more         ;
     1   ERL-A CAs and lAGs included in our sample,  along with
award dates and potential values, are shown in Appendix III.

     2   Audit Report No.  ElgB2-ll-0019-30828,  "Review of the
Office of Research and Development's Extramural Research
Activities", issued March 31, 1983.

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      controlled contracts to obtain goods and services for the direct
      benefit of ERL-A and/or EPA.  ERL-A also apparently misused CAs:
      (l) to fund PhD attainment for an ERL-A employee, (2)  to fund a
      CA sub-project to develop an operating plan for ERL-A's child-
      care center, (3) to make payments to a UGA cooperator "in
      absentia", and  (4) by not fully disclosing extensive foreign
      travel for academics in support of ERL-A initiatives.

      As previously discussed in Chapter 2 of this report, the misuse
      of CAs was directly related to ERL-A's lack of full-time
      equivalents (FTEs/federal employees) and related intramural
      funding, their determination to complete their assigned tasks by
      any means available, and a management culture which encouraged
      the innovative, albeit questionable, use of extramural funds.
      Misuse of CAs resulted in a lack of controls over the research
      performed and the resources used.  Such abuses of CAs were
      condoned/encouraged by ORD Headquarters and were not prevented by
      ORD or GAD controls over CA use and approval (See Chapter 2}.

      Background

            Authorizing Statute and Related Congressional Intent
                                                        :*-.

      Public Law 95-224, the Federal Grant and Cooperative Agreement
      (FGCA) Act of 1977, intended to eliminate ineffectiveness and
      waste resulting from confusion over the definition and purposes
      of the legal instruments used to carry out transactions between
      federal and non-federal entities.  The FGCA Act established
      government-wide criteria for selection of the appropriate class
      of legal instrument, e.g.,  contracts,  grants, and CAs.  The Act
      required that the choice and use of these legal instruments
      reflect the principle purpose and type of relationship expected
      between the Federal and non-federal parties.

      The current codification of the Act, 31 U.S.C.  6305, identifies
      the following basic relationships found in transactions between
      federal agencies and recipients of contracts, grants,  or CAs:

      Instrument     Relationship

      Contract       The principal purpose of the relationship is to
                     acquire by purchase, lease, or barter,  property or
                     services for the direct benefit or use of the
                     Federal government.  This is Federal purchase for
                     Federal or third-party use.

      Cooperative    The principal purpose of the relationship is to
      Agreement      transfer money,  property, services, or anything of
                     value to the recipient to accomplish a public

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                     purpose of support or stimulation;  there willbe
                     substantial involvement between the Federal agency
                     and the recipient during performance of the activ-
                     ity, establishing the agency as a "partner" during
                     performance.  Agency "control"  as might be typical
                     during a contract is not anticipated.

      Grant          The principal purpose of the relationship is to
                     transfer money, property, services, or anything of
                     value to the recipient in order to  accomplish a
                     public purpose of support or stimulation; there
                     will be no substantial involvement  between the
                     Federal agency and the recipient during perfor-
                     mance of the activity.  Normal  grant monitoring
                     would not ordinarily be considered  as substantial
                     involvement.  The Federal agency is a "patron" of
                     the grantee.

      The 1977 Act recognized that within an authorized  assistance
      program, different transactions involving procurement contracts
      or assistance (i.e. stimulation or support)  could  occur.
      However, Congress expressed concern that assistance agreements .
      were being overused and wanted to assure that  the  cfioice of
      instrument (i.e., contract v. CA or grant)  was considered
      carefully.  Congress intended that the government's principal
      purpose in using the extramural funding would  determine the
      proper mechanism.  When the purpose was to provide direct
      research products for the use of the federal government, a
      contract was the proper mechanism-.  When the purpose of the .
      transaction was to provide assistance to accomplish a public
      purpose of support or stimulation, a CA or grant would be the
      appropriate mechanism.  Therefore, in the selection of a
      procurement or assistance instrument, the Act  called on executive
      agencies to make a judgmental determination on the principal
      purpose of each individual transaction.

      As previously stated, the FGCA Act's legislative history shows
      the Act resulted from Congressional concerns over  the misuse of
      assistance agreements.  Senate Report No. 95-449,  dated September
      22, 1977, from the Governmental Affairs Committee  on the 1977 Act
      stated that:

           ... the objective of this added flexibility [authority
           to either employ contracts, grants, or cooperative.
           agreements] is to require the agencies to make
           conscious decisions on whether a particular transaction
           or class of transactions is in fact a procurement
           transaction for the direct benefit of the government or
           whether it is an assistance transaction serving non~

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           Federal public purposes [emphasis added].   The
           discipline of this choice will tend to prevent the use
           of grants [and cooperative agreements] to avoid
           competition.

      The Senate Report specifically addressed research projects and
      the use of CAs versus contracts:

           When research is for the direct benefit of the
           government,  it should be competed under procurement
           rules...The benefits derived through open competition
           and improved control are expected to offset any
           inconvenience that may result from the increased use of
           contracts.

      This report also included a quote from the previous Grants Act
      reports which commented on research performed by educational
      organizations:

           Where the Government desires to engage the services of
           an educational or nonprofit organization for the
           conduct of a specific piece of research directed toward
           a specific problem, the use of the contract form is
           obviously in order.

      In addition, Senate Report No. 97-180, dated August 13, 1981,
      related to hearings on amendments to the FGCA Act, stated:

           Congress is making every effort to achieve economy and
           efficiency in the administration of Federal programs.
           These goals are subverted if agencies ignore the
           economies of competitive procurement and
           indiscriminately use grants [and other assistance
           agreements,  i.e. CAs] in place of contracts....

      Thus, an agency's research program could legitimately include
      research conducted by federal personnel, through procurement
      transactions (contracts), and through cooperative research
      performed in concert with non-federal researchers under a CA.
      For example, if the principal purpose of a transaction is to
      assist a non-federal entity in advancing the state of knowledge
      in an area of environmental science, then the existence of some
      degree of indirect benefit to EPA's mission from some aspect of
      the research may not negate the determination to award an
      assistance agreement.  However, if the principal purpose of a
      transaction is to provide research in direct support of a
      specific EPA research problem or on-going research project, the
      use of the contract form is obviously in order.
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                   Synopsis of CA Review and Award Process

      CAs can be awarded either competitively, as encouraged under the
      FGCA Act, or noncompetitively under certain conditions.  The
      awards, within certain dollar thresholds ($250,000
      noncompetitive, $1 million competitive3)  are  reviewed and
      approved by ORD Headquarters.  Only 2 of the 27 active CAs (total
      maximum value of $14.2 million)  awarded by ERL-A had been
      reviewed by ORD under these thresholds.  All CA awards are
      subject to final review and approval by GAD.

      Requests for Proposals (RFPs) are issued for competitive awards.
      Review panels, consisting of both laboratory and external
      scientists, review and evaluate proposals for both competitive
      and noncompetitive awards.   Based on these reviews, the panel
      chairman recommends proposals for award in "decision
      memorandums."  Laboratory directors approve or disapprove these
      decision memoranda in making CA awards.  Post-award CA management
      is usually performed by EPA POs and cooperator project.
      managers/Pis.

      CAs Improperly Used to Directly Benefit ERL-A

      All of the CAs in our sample appeared to either partially or
      fully contribute directly to the support of ERL-A research
      projects.  A letter from the Assistant Administrator (AA) for
      Administration and Resources Management, dated December 2, 1992,
      provided the following examples of activities that cannot be
      funded through assistance agreements:

         - Provide technical, analytical, and application review
           advice .for the direct benefit of EPA offices.

         - Deliver computer models specifically for EPA regulatory use.

         - Produce specific information that will be directly
           incorporated .into Agency technical, policy, or regulatory
           decisions.

      All of the CAs in our sample funded one or more of these type
      activities, in whole or in part, especially the last activity,
      related to the production of specific information for
      incorporation into Agency technical, policy,  or regulatory
           3  ORD issued interim guidance on October  1, 1992, that
      lowered the threshold for noncompetitive CA awards to those
      exceeding $50,000 and increased required ORD approval for
      competitive awards to those  over $5  million.

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      decisiqns.  Although this guidance was issued subsequent to most
      of the questionable uses of CAs cited below, it only clarified
      already established provisions and intent of the 1977 FGCA Act
      and it served to illustrate ERL-A's use of CAs for direct support
      of its on-going research projects.

      For example, ERL-A had used the UGA CA for years to provide on-
      site laboratory personnel for direct support to ERL-A scientists
      and their research projects.  In addition, RFPs and decision
      memorandums of several of the off-site CAs in our sample
      indicated the importance of the research to ERL-A's or the
      Agency's mission and the importance of a close working
      relationship, including on-site cooperation.  These documents
      evidenced the direct benefit of the research to EPA.  We also had
      CAs where cooperators were tasked to perform work (i.e., computer
      modeling development) similar to those activities already being
      performed by ERL-A contractors.

      ERL-A did not use the statutory criteria of end-consumer (EPA or
      public purpose), as specified in Sections 4-6 of the 1977 FGCA
      Act, in determining what extramural mechanism (CA or contract) to
      use to accomplish research objectives.  The mechanism used was
      usually selected more on the type of entity performing the
      research.  If the laboratory wanted the work done by a
      university, they automatically used a CA.  ERL-A gave no
      consideration as to whether a contract would be more appropriate
      for the tasks to be performed by universities.  Other factors
      used by ERL-A to decide whether to use-a contract, CA, or IAG
      included:  (1) time considerations (CAs require less time for
      award), (2) the preferences of ERL-A Pis and managers, (3)
      Headquarters fund allocations for contracts and CAs, and (4)
      administrative convenience.  None of these factors relate to
      statutory requirements for determining the use of CAs versus
      contracts.

      Both ERL-A's laboratory director and senior scientists
      demonstrated an apparent misunderstanding of the basic
      differentiation between CAs and contracts.  The laboratory
      director and other ERL-A scientists explained to us that the type
      and level of interaction between cooperators and federal
      employees was the difference. However, Senate Report No. 97-180,
      dated August 13, 1981, related to the FGCA Act,  specifically
      stated that this is not a criteria for deciding between contracts
      and assistance agreements.

           ...When choosing between procurement and assistance,
           the degree of anticipated involvement is of no
           consequence; the choice is governed solely by the
           principal federal purpose in the relationship.   It is

                                      44        Audit No. E1JBF2-04-0300

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           only after an agency -has determined the principal
           purpose of a transaction that the degree of involvement
           by the federal government becomes a relevant inquiry.

      Several ERL-A, GAD, and/or ORD staff also maintained that the
      research being funded benefitted the universities more than it
      benefitted ERL-A or EPA and that therefore the CA mechanism was
      appropriate.  However, Senate Report No. 97-180 stated as
      follows:

           An assessment of relative benefit to the parties affected by
           a transaction needlessly complicates the task of determining
           whether a contract or some other instrument should be used.
           The Act requires no such analysis; it only requires an
           agency to assess the principal purpose of the federal
           government in entering into a transaction [assistance or
           procurement] - and act accordingly.

      Examples of CAs used for the direct benefit of ERL-A and EPA
      follow:

      1.   UGA Cooperative Agreement Used For On-Site Support

      On-Site Support:  Under the $5.2 million UGA CA,  awarded non-
      competitively on September 30, 1991, at least-14 UGA employees
      worked on-site at ERL-A in 1992.  These pn-site cooperators
      either directly supported ERL-A scientists with their research or
      provided administrative support to ERL-A staff.  Two of the on-
      site UGA employees performed secretarial tasks for ERL-A staff.
      The remaining 12 UGA employees consisted of 7 post-docs, 2
      graduate research assistants, 1, research technician, and 2
      student assistants.  The original UGA CA proposal included five  .
      projects with numerous sub-projects.  Most of the on-site UGA
      employees worked under projects (total budget $1.3 million) oh
      which the UGA project manager was named PI.  Since the UGA
      project manager had no expertise or involvement in the research
      being performed by these UGA employees and had no contact with
      the on-site UGA employees,  we could only conclude these employees
      were being used by ERL-A to directly support its own research.

      EPA's Assistance Administration Manual, Chapter 44, Section 5b,
      warns CA POs not to attempt to direct or supervise cooperator
      employees.  The ERL-A laboratory director was the PO for this CA.
      The designation of the UGA Project Manager as the PI on sub-
      projects in which he had no expertise or involvement was an
      obvious ruse by ERL-A to obtain additional support staff for its
      own research.  ,
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      ERL-A's most flagrant abuse of the UGA CA to supplement ERL-A
      staff was the use of UGA employees as secretaries.   A UGA
      employee located at ERL-A served as a Senior Administrative
      Secretary for the Assessment Branch from April 1991 through June
      1992.  In this position she told us she basically served as the
      "office manager."  The employee stated that she was told in June
      that she could ho longer perform the duties of this position
      because it would be "personal services."  Her duties were then
      limited to providing support to the UGA post docs located at
      ERL-A.  Due to lack of work, her position was terminated in
      September 1992.  Secretarial support for the Assessment Branch is
      currently being provided by a full-time National Council of
      Senior Citizens (SEE) employee.

      Another UGA employee, who currently serves as the UGA Coordinator
      and works on-site at ERL-A, also performed secretarial duties.
      This employee's desk was adjacent to the laboratory director's
      office.  During the audit fieldwork, auditors worked with her for
      two days to obtain CA files before they were informed that she
      was not an EPA employee.  Although the current on-site
      coordinator's position is a full-time job, it was previously only
      a part-time position.

      This UGA coordinator stated that besides her coordinator duties,
      she "obviously" answered the telephone.  In addition, she said
      that on a rare occasion she did typing.  However, our review
      disclosed that her role in ERL-A activities was more encompassing
      than she had described.  For example, a memo to ERL-A employees
      in the Global Change Program directed them to notify the UGA
      coordinator if they were unable to attend an upcoming meeting.
      We also observed that almost every time we called the laboratory
      director's office, the UGA coordinator answered the phone.  In
      addition, there were several occasions when the laboratory
      director's secretary was not in the office and the UGA
      coordinator apparently filled in for her.

      On several occasions during the audit we were informed by ERL-A
      management that the purpose of a CA was to provide for
      collaborative research between scientists at ERL-A and scientists
      at colleges and universities.  Secretarial support for ERL-A
      staff is not an appropriate use of R&D funds or of cooperator
      employees.  Subsequent to our briefing of the ERL-A laboratory
      director on our concerns related to the use of UGA employees, we
      learned that the UGA coordinator was no longer located in the
      laboratory director's office. . Also, she now splits her time
      between an office at ERL-A and an office at UGA.

      Lack of UGA Input:  There was also a lack of UGA PI input into
      much of the research performed on-site by UGA employees. ERL-A

                                      46        Audit NO.  E1JBF2-04-0300

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      sub-POs wrote or assisted in writing many of the sub-project
      proposals and supervised/directed the research under some of the
      sub-proj ects.

      For instance, until questions arose during our audit survey, the
      UGA Project Manager/Pi was unaware that he was listed as the UGA
      PI on several of the sub-projects pertaining to on-site UGA
      personnel.  Regarding his designation as the PI on these
      projects, he stated, "I said [during the audit survey] it was
      totally inappropriate.  I don't know how this came about.  I
      can't contribute to this kind of science."  He said that he had
      not contributed at all to the sub-projects on which he was listed
      as the PI.  According to the Project Manager, ERL-A has an undue
      level of influence on the packaging of the CA and UGA received no
      benefit or added value from these sub-projects.  He added that
      this is npt what a cooperative agreement is about.

      Two letters from UGA Pis were very critical of ERL-A's management
      of the CA and the restriction of their input into project
      activities.  Although these letters were either addressed to or
      copied to the ERL-A PO/laboratory director, they were not
      provided by ERL-A when we requested all UGA correspondence files.
      We only learned of these letters from our review of UGA's files
      and ERL-A sub-PO files related to the CA.

      According to a July 1992 letter from one UGA PI to the UGA
      Project.Manager, $40,029 of the budget for his sub-project was
      designated as "off-campus" funds and would be used on a project
      that the ERL-A sub-PO and an ERL-A co-worker were conducting.
      The remaining $5,468 was allocated as "on-campus" funds.  In
      commenting on ERL-A's practice of listing UGA faculty as Pis in
      sub-project proposals without informing them, the PI"wrote:

           I have felt all along this was little more than a
           vaguely veiled way of the local EPA laboratory getting
           more funds for their own research by pretending to fund
           investigators at the University.

      The PI concluded this letter by stating:

           I propose that the proper way to proceed is to reduce
           my research award to $5,468 and to fund [sub-PO's] EPA*
           work independently.  Since the remainder is EPA money
           being used to fund EPA investigators, I see no
           justification for the University being involved at all.

      Although the ERL-A sub-PO initially informed us that the UGA PI
      was incorrect about the funding, we obtained a memorandum from
      the sub-PO to the PI, dated June 1992, which contained the budget

                                      47        Audit No. B1JBF2-04-0300

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      information as described by the UGA PI in his letter.   The sub-PO
      memorandum further stated:

           I regret that recent EPA-HQ mandated constraints on our
           non-competitive cooperative agreements with UGA greatly
           limited the on-campus component.   The remainder are
           funds that were designated as "off-campus" by our
           program manager and EPA HQ.  These funds are being used
           to support the work here by [ERL-A employee] and myself
           plus to provide funds for the seminar series.

      Another UGA PI wrote letters to the UGA Project Manager in
      January 1992 and to the ERL-A PO (laboratory director) in
      February 1992, in which she expressed  concerns about ERL-A1s
      management of the UGA CA.  The UGA PI  explained in her letter to
      the EPA PO (laboratory director]I. that  she was contacted by an
      ERL-A scientist in Spring 1991 to discuss a potential cooperative
      research project.  She heard nothing else until she was told by
      UGA's Office of Sponsored Programs in  January 1992 that some
      money had been put into her CA account.  Her February 1992 letter
      to the laboratory director (PO) further stated:

           ...I received a call from the Institute of Ecology
           saying that [a UGA research technician] was over there
           wanting them to sign his personnel forms because he was
           my employee, and they had no idea which grant he was
           supposed to be on.

      According, to the letter, the UGA PI went over to ERL-A to discuss
      this situation with the co-PO and sub-PO and:

           ... [The ERL-A co-PO] explained that he had put some
           fiscal 1991 money into this subproject to support [the
           UGA research technician].  He also explained that he
           originally hired [the UGA research technician] on a UGA
           project because he personally needed some technical
           help in his laboratory,  and [the  UGA research
           technician] worked for him. ...I told [the co-PO]  that
           my name was on this project,  and  I felt that I needed
           to be involved in this research....

      The UGA Pi's letter also stated:

           For most of the 15 years I have been at UGA, I have
           been involved in collaborative research projects.  I
           would very much like to work with the scientists at EPA
           on this global change project,  but it needs to be done
           as collaborative research usually is done: principal
           investigators meet, discuss,  plan the research,  go over

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           the budgets,  agree on personnel to be hired and their
           work assignment, design experiments,  discuss the data,
           and review the resultant manuscript.   I hope that is
           also how the EPA views these collaborative projects.
           If it is not, then I need to know that.

      The UGA PI concluded the letter by urging  the ERL-A PO to
      schedule a previously proposed UGA Cooperators meeting.

           ...At the meeting I would like^to have clarified (1)
           What is expected from this project, where it's to be
           done, and when it is due; (2)  a -budget stating how much
           money will be available to do the work; (3)  who is
           working on this project, for what faction of his/her
           time, and who is that person's supervisor; and-(4) if
           equipment is.to be purchased,  who has the
           responsibility for purchasing, operating and
           maintaining that equipment,  and where does it remain at
           the end of the project?  I hope you find this a
           reasonable request - 'it is the way I  have become
           accustomed to doing collaborative research.   I think
           other cooperators share my concern and would/ al,so like
           to have this  information clarified.

      A subsequent meeting between the ERL-A laboratory director and
      these UGA Pis was  conducted in April 1992.  Both of the UGA  Pis
      told us that many of the problems cited in their letters had
      since been resolved.  However, we find it  disturbing that these
      problems ever existed.  Also disturbing is the failure of ERL-A
      staff to provide these letters to us when  we initially requested
      UGA CA correspondence files;

      Day-Care Center Development:  According to a documented proposal,
      ERL-A planned a $30,000 sub-project under  the UGA CA for
      development of an  operating plan for ERL-A's planned, on-site
      day-care center, an unallowable use of R&D funds.   Such use  of
      R&D funds is not specified in current EPA/ORD policy and
      potentially represents a violation of the  Agency's 1992 R&D
      Appropriation Act  which states the purpose of R&D funds were:

           For research  and development activities,  including
           procurement of laboratory equipment,  supplies,  and
           other, operating expenses in support of research and
           development.... [emphasis added]
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      Senate Committee Report 102-107 on EPA's 1992 appropriations
      defines R&D operating expenses as follows:

           ...operating expenses, such as laboratory support,
           supplies and materials, operation and maintenance of
           facilities, equipment, automated data processing, human
           resource development, and printing and reproduction.

      Provisions in 40 U.S.C. 490b authorize the use of federal
      facilities and equipment for the operation of day-care centers as
      long as it is for the direct benefit of federal employees.
      According to Senate Report 102-107 and House Report 102-94, EPA's
      1992 S&E appropriation was to cover all EPA personnel and
      administrative costs (to include federal employee benefits)
      associated with EPA's program operations.  Therefore, only S&E
      funds could have been properly justified for such a direct
      benefit to ERL-A employees.

      When questioned regarding this proposal, the PO (the laboratory
      director) stated, that UGA's role was to develop a curriculum for
      an early childhood environmental education program.  However,
      testimonial and documented evidence obtained during the audit
      indicated that the PO (laboratory director) knew or~ should have
      known that the documented proposal was for a day-care operating
      plan.

      The ERL-A sub-PO and the UGA PI initially informed us that UGA's
      role was to develop an operating plan for the day-care center.
      When asked specifically if any curriculum development would be
      done during the current phase, the UGA PI replied no.  In June
      1992, UGA submitted a "working copy" of the proposal to ERL-A,
      which was for development of an operating plan for an ERL-A day-
      care center.  There was no curriculum development task in this
      draft proposal.  File documentation showed that the PO
      (laboratory director) reviewed UGA's "working copy" of the
      proposal in June 1992.   The laboratory director stated in a
      transmittal slip attached to the draft proposal that it was a
      "good job so far— You need to work w/them in improving/revising
      this plan..."  The files also contained a copy of the budget for
      a proposed Phase II, which included an estimated cost for the
      director of the day-care center.  The Phase II budget stated that
      this cost was "included to provide information if ERL-A chose to
      have the director's salary come out of UGA's budget."  There was
      a note on the budget from the PO (laboratory director) to the UGA
      Coordinator, which documented that the PO had seen this Phase II
      budget.

      Subsequent to our review and questions regarding the day-care
      center sub-project, the PO (laboratory director) had a meeting

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      with the sub-PO and the UGA PI to make sure everyone understood
      that UGA's role was to be curriculum development for the day-care
      center.  After this meeting, the UGA PI said that UGA's role had
      changed.  She said that UGA would now be developing a curriculum
      to be used which had an environmental focus and that they had
      until March 1993 to complete this task.

      Although ORD policy includes environmental education as a proper
      use of CA R&D funds, we continue to question the use of $30,000
      of scarce federal resources for development: of a day-care center
      curriculum, especially for ERL-A on-site child care - a direct
      benefit to EPA employees.  We do not believe this qualifies as
      environmental education within the intent of ORD policy. . We
      could not conclude that the use of R&D funds for such a purpose
      furthered, enhanced, or promoted environmental research as
      intended by Congress in appropriating these funds.

      QRD/GAD Oversight;  In 1991 ORD and GAD reviewed and approved the
      UGA CA despite reviewer comments on the proposal that documented
      the CA's direct benefit to ERL-A's on-site research and ERL-A's
      intent to use the CA for direct support.      "  '

      In the ERL-A review of the original $5.2 million UGA CA proposal,
      an ERL-A in-house reviewer commented that this proposal provides
      "an obvious direct benefit to the ERL-A in-house research."  The
      ERL-A in-house reviewer also said that "the primary strength of
      this proposal lies in the obvious synergism that can be developed
      between the UGA and ERL-A."

      Because the UGA CA proposal exceeded ORD's maximum value
      threshold for noncompetitive CA awards, the UGA proposal was
      subject to review and approval by ORD Headquarters.  ORD's
      approval of the CA despite the obvious direct benefit to ERL-A's
      research (a contradiction of provisions in the FGCA Act) is
      indicative of weak or inadequate internal controls or ORD's
      misunderstanding of the requirements of the 1977 Act and related
      legislative history.  In addition, GAD subsequently submitted
      final approval for the UGA CA although our interviews with GAD
      staff indicated they were well aware that direct EPA benefit was
      not an eligible purpose for a CA.  The weaknesses in ORD and
      GAD's oversight of CA awards and uses are discussed in detail in
      Chapter 2.

      2.  ERL—A Also Directly Benefitted From Off—site CAs

      The University of Rhode Island (URI) CA (maximum value of
      $389,375)  is an example of an off-site CA which directly
      benefitted ERL-A initiatives.  The CA was competitively awarded
      in September 1990.  The requirements of the RFP were changed to


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      better fit EPA's research priorities.   The RFP and decision
      memorandum for award of the CA both contained statements
      emphasizing the importance of the work to ERL-A's and the
      Agency's mission.  File correspondence also documented attempts
      by the PO to direct the PI' s research  into areas important to
      ERL-A.

      The original CA RFP stated that the proposed research could
      include research on sulfur cycle and/or carbon cycle gases as
      relates to global climate change.   However,  the URI proposal
      received a higher review score and was awarded the CA because URI
      researchers stressed a carbon gas as its primary research agenda,
      a factor the decision memorandum stated was quite important, as
      it was consistent with EPA's current research priorities.
      According to the PO,  between the time  the RFP was issued and the
      full proposals were reviewed,  the OEPER Director decided to de-
      emphasize sulfur and focus on carbon cycle gases in EPA's
      research.

      The RFP for this CA emphasized the coordination of the research
      with the ERL-A's in-house research:

           Proposed investigations will be coordinated with ERL-
           Athens' and ERL-Narragansett's inhouse research
           programs pertaining to process model development and
           testing, necessitating a close working relationship
           between the performing organization and these
           laboratories —  Proposers should  therefore be able to
           meet periodically at selected sites and at the EPA
           laboratories as needed.

      The decision memorandum also stressed  the importance of the CA
      data to the Agency's planning and policy-making function.

           Results of these investigations will enhance the
           abilities of the Office of Policy,.Planning,  and
           Evaluation in efforts to extrapolate and model Global
           Climate Changes	This information will not only fill
           data gaps in global climate models,  but it is expected
           to provide the foundation for development of
           appropriate mitigation practices  and management
           strategies related to. marine systems.

      Communication between the PO and PI showed on several occasions
      the PO's attempt to direct the Pi's on-going research towards
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      EPA's changing priorities.   For example,  in February 1991
      correspondence to the URI PI,  the ERL-A PO wrote:

           As you know, there has been a change in direction in
           the EPA research program on global climate change.  Our .. '
           process and effects work is now focusing on the carbon
           cycle. < We have been told to de-emphasize research on
           the sulfur and nitrogen gases,  especially the
           former...I encourage you to structure your upcoming
           research to emphasize CO2, methane and various other
           species and factors that influence their sources and
           sinks...

      June 1992 correspondence, from URI staff provided additional
      evidence of ERL-A direction of URI's research.'  A URI letter
      requesting CA budget modifications stated:

           The budget modifications requested are the direct and
           indirect results of decisions by EPA.   First, EPA
      '.    . requested, part way through the first year, that we
           eliminate efforts on sulfur compounds and increase our
           emphasis on carbon.  We therefore -eliminated [name
           deleted] subcontract for this work and shifted the
           funds ($29,295) to cover the personnel and equipment
           needed to enhance the sampling and modelling of carbon
           dynamics.

      In addition,  a letter to the ERL-A PO from URI Co-Pi stated:

           ...In our discussions you suggested that EPA management
           is more interested in being able to determine RITG
           fluxes and their large scale patterns,  rather than
           focus on specific process studies at this stage.  We
           are prepared to consider some mid-course changes in
           this project, if they do not compromise our ability to
           bring the work done to date to successful completion.

           ... Over the next couple of weeks we would like to
           discuss further our future plans with you,  and find
           wavs how this work can best meet EPA's needs  [emphasis
           added].

      RFPs and decision memoranda for other ERL-A CAs, especially those
      in the Global Change Program,  contain language and objectives
      similar to the URI CA provisions.   This indicated  the research to
      be performed represented a direct benefit to ERL-A/EPA and the
      data collected would be assimilated into Agency technical,
      policy, or regulatory decisions.   In addition,  much of the work
      under these CAs involved data  collection tasks,  which have been

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      performed by contractors in other EPA programs (i.e., the EMAP
      program) and.may have been more appropriately performed under
      contracts for these projects.

      Sub-contract Inappropriately Awarded as a Supplement to the CSU
      CA

      A May 1992 supplement of $50,000 to the Colorado State University
      (CSU) CA was improperly used in lieu of subcontract support for
      an ERL-A off-site contractor.  According to correspondence from
      the CSU PI to the ERL-A PO, the purpose of the work was to modify
      a computer model for use by one of ERL-A's off-site contractors.
      The Pi's letter stated:

           ...We have been in contact with [the contractor's
           president] and he is in agreement with what is
           contained in the [CA] supplement document.  We are
           confident that we will be able to deliver the agreed
           upon products...

      In a revised workplan for WA 13(1), dated October 1, 1991, the
      contractor^ indicated that a sub-contract would be the
      appropriate mechanism for this work.  The workplan stated:

           ... if the CENTURY model is chosen as the primary tool
           for evaluating greenhouse gas emissions and soil carbon
           dynamics, the assistance of researchers from Colorado
           State University may be needed.  If this situation
           arises, we will discuss it with the EPA Technical
           Monitor and submit a request for either additional or
           alternative subcontract support.

      The ERL-A PO indicated that the funds used for the CSU CA
      supplement had originally been set aside for a subcontract.
      However, the University preferred doing the work as a supplement
      to the CA and this was also easier for ERL-A to do
      administratively.  He added that the $50,000 supplement was very
      small in comparison to the total project costs of $900,000.  When
      asked if the modeling work was a direct benefit to EPA, he
      replied that the work mutually benefitted EPA and the university.

      The CSU supplement was a clear example of an inappropriate use of
      a CA when a contract would have been more appropriate.  Again,
      the justifications of mutual benefit and administrative
      convenience are not in accord with the FGCA Act and congressional
      intent.
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      University of British Columbia (PBC) CA Used to Fund Foreign
      Travel For Academics

      The CA decision memorandum indicated that one of the primary
      purposes of the CA was to fund foreign travel to meet ERL-A
      commitments/on-going tasks (a direct benefit to ERL-A)  under
      bilateral agreements with China and the Soviet Union rather than
      to provide assistance to UBC's research proposal.  The UBC CA,
      awarded May 31, 1990 (maximum value of $247,916), budgeted 71
      percent or $175,847 of project funds to this international travel
      and only 29 percent or $72,069 for personnel and supplies to
      carry out the actual UBC research described in the CA proposal.
      UBC's research proposal related specifically to the affects of
      toxic substances/chemicals on aquatic areas and fish in
      particular; however, documentation obtained during the audit
      indicated that the international travel related to a broad range
      of research activities, some of which was principally unrelated
      to the UBC research project (i.e., Global Climate Change Research
      Program, Office of International Activities tasks).  For
      instance, the CA decision memorandum, dated February 23, 1990,
      listed one of the international meetings funded by the CA as   -
      "International Symposium on the Effects of Climate Change on
      Biogenic Emissions of Trace Gases" to be held in Beijing, China
      in May 1991.  Over $42,000 was budgeted in the CA for 10 U.S.
      scientists, 3 European scientists, and 3 South American
      scientists to attend this symposium.  This budget apparently did
      not include the UBC PI who is Canadian.
                                   i
      In addition, the project budgets did not identify any'travel
      funds for the UBC Pi to attend these international meetings.  The
      only travel budgeted for the UBC PI was $800 for two trips to
      Bozeman, Montana4  and $800  for two trips to Athens, Georgia.   The
      decision memorandum did indicate that the UBC PI would be
      involved with one international symposium, "International
      Symposium on Fish Physiology,  Toxicology,  and Water Quality
      Management" to be held in Sacramento, California.  The other
      international trips, which related to global climate change and
      the US/USSR exchange programs,  appeared to have no direct
      correlation to UBC's research project.

      When asked about the large travel budget,  the PO (the laboratory
      director) replied that it was common practice to have
      international science meetings funded through CAs.   She said that
      these meetings were the best way to present the results of the
      research.
           4  UBC research proposal represented a collaborative effort
      with on-going research at MSU,  Bozeman,  Montana.

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      In describing the relationship of this project to the EPA's
      mission, the UBC CA decision memorandum definitely stated that
      the CA projects would directly support on-going research
      projects/tasks at ERL-A,  OPTS, OPPE,  OAR,  and OIA:

           The proposed work is important to the achievement of
           EPA program objectives, with immediate application of
           results to the Ecological Risk Assessment Research
           Program in support of the Office of Pesticides and
           Toxic Substances [OPTS] and the Global Climate Change
           Research Program in support of the Office of Policy,
           Planning and Evaluation [OPPE] and the Office of Air
           and Radiation [OAR].  The international collaborative
           research activities and symposia are also in support of
           the Office of International Activities [OIA] and meet
           Laboratory [ERL-A] commitments to bilateral
           agreements....

      In addition to the stated direct benefit to EPA, we question the
      addition of a large foreign travel budget to a relatively small
      research budget which obscures the actual function of the CA.  If
      meetings are to be funded in this manner,  the travel should be
      directly related to the research proposed and this relationship
      should be documented in the proposal and decision memorandum.
      Further, separate CAs may be needed to fund such large travel
      budgets in order to establish proper oversight and control of
      this activity.  Separate CAs for this purpose would clearly
      identify the CA function and total amount of CA funds being used
      for international travel to Agency managers with oversight
      responsibility.

      Egyptian CAs Misused in an Attempt to Return Former PGA
      Cooperators to ERL-A

      ERL-A misused both the U6A and two Egyptian CAs in this case.
      ERL-A file documentation and the chronology of events indicated
      that in September 1989 ERL-A awarded CAs to Mansoura and Menoufia
      Universities in Egypt for the primary purpose of bringing back to
      ERL-A the two Pis at these Universities as direct on-site support
      for on-going ERL-A research projects.  These Pis had previously
      worked at ERL-A as post-docs under the UGA CA.  The PO stated
      that one of the Egyptian PI had not finished research he had
      started for the PO as an on-site UGA employee and he needed him
      back at ERL-A to finish this work.   The maximum potential value
      of the two CAs was $248,750 and $262,500,  respectively.  However,
      the funding of the CAs was apparently dependent on the return of
      the Pis to ERL-A because the Pis did not return to ERL-A and the
      CA funding was never increased beyond the initial award of
      $10,000 each.

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      The Egyptian CA proposals were developed while the  future Pis
      were still working as UGA post-docs at  the Athens Laboratory.
      The ERL-A PO stated that he would not have permitted the Egyptian
      Pis to write the proposals while they were working  at ERL-A under
      the UGA CA.  However,  April 1988 correspondence  from the ERL-A PO
      to the Menoufia University President stated that "We are working
      with [the future Menouf ia PI]  in writing the cooperative
      agreement."  In addition,  it appeared the Mansoura  PI was still .
      working at ERL-A in 1989 when the CA was negotiated and approved.

      The ORD International Activities Project Form for both CAs.
      indicated that ERL-A intended to bring  both Egyptian Pis back to
      ERL-A for six months each.   ERL-A staff began requesting the
      Menouf ia Pi's return to  ERL-A in April  1988, before he had even
      left Athens.   These requests were repeated in correspondence
      dated in June and August 1988,  again in November 1989 after the
      CA to Menoufia was awarded,  and twice in May 1990.

      A May 2, 1990 letter from the ERL-A PO  to the PI stated:

           It is time to make  arrangements for your return to the
           Athens Laboratory as we had discussed.  We  can "pay your
           salary while you are here but we cannot pay your travel
           expense to and from the Athens Laboratory.  I  would
           like you to come as soon as possible for 3  to  6 months.
           We hope to have more money in the  cooperative  agreement
           and we need to do planning and preliminary  work so you
           can get started on  the research.

      May 22,  1990 correspondence from the ERL-A PO to the Menouf ia PI
      stated that he had sent  letters to the  university president and
      department head requesting' that the PI  spend 3-6 months at the
      Athens laboratory starting on ,or around July 1,  1990.   The PO
      also stated:

           I feel that it is important for you to spend this time .
           in the Athens Laboratory to assist me in obtaining
           additional funding  and designing the experiments that
           need to be carried  out in EGYPT on this project.   If
           there is anything else I  can do to insure your visit,
           please let me know  right away.

      Another questionable aspect of the Egyptian CAs  are two trips to
      Egypt by the PO and his  branch chief with air fare  and lodging
      paid for by the Egyptian universities.  One purpose of these
      trips,  made in March 1988  and January 1992, was  to  negotiate the
      CAs,  to monitor their  progress,  and to  obtain additional funding
      for them.   Federal employees are not permitted to use CA funds

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      for travel.  Although the travel plans for the ERL-A employees
      stated that the funds were not coming from the CAs, this appeared
      to be only a technicality.  In actuality, ERL-A provided funding
      to the Egyptian universities and they paid for EPA travel.  Our
      review of ERL-A operations indicated that it was not an uncommon
      practice for ORD employees to have their travel paid for by other
      organizations and countries.

      Based on the events and documentation described above, we
      concluded that ERL-A awarded the Egyptian CAs and expended
      $20,000 under these CAs for the purpose of returning the Egyptian
      Pis, both former UGA CA employees, to ERL-A as on-site support -
      a direct benefit to ERL-A.  However, the Pis never returned to
      Athens and the CAs were permitted to expire without additional
      funding.  According to ERL-A files and PO comments, ERL-A never
      received a QA Plan, progress reports, or any data under these
      CAs.  The only apparent benefit to the laboratory was two trips
      to Egypt for two ERL-A scientists, with the air fare and lodging
      paid by the Egyptian universities.

      Further, in 1987 and 1988, ERL-A clearly directed and supervised
      the work of the future Menoufia PI when he was a post doc at ERL-
      A under the UGA CA.  The University was so unaware "of the
      Egyptian cooperator's activities that they continued to carry him
      on their payroll for several months after he had returned to
      Egypt.  ERL-A file documentation shows that ERL-A staff were
      aware that the Egyptian post-doc was being paid "in absentia."

      The future Menoufia PI apparently returned to Menoufia University
      in June 1988, but remained on the UGA payroll until October 21,
      1988.  An August 1988 letter from the ERL-A Branch Chief to the
      future PI in Egypt stated, "While you are indeed a valued
      employee, we cannot continue to pay you in absentia much longer."
      UGA staff told us that they were unaware that the Egyptian
      employee had returned to Egypt before October 1988.

      Montana State University (MSU} CA Used to Fund A't'ta.i.'*""ent of an
      Advanced Degree by a ERL—A Employee

      In August 1989,  ERL-A awarded a noncompetitive CA (maximum
      potential value of $279,234) to MSU.  One of the primary purposes
      of the CA was to provide funding of Phd attainment for an ERL-A
      employee through an IPA.  This ERL-A employee actually wrote the
      MSU proposal and decision memorandum for the CA.  The research
      involved appeared to be only a means to justify the funding of
      the employee's Phd degree.  The ERL-A PO later confirmed to us
      that one of the primary purposes of the CA was to fund the ERL-A
      employee's education.  Before the IPA and CA were approved, a.
      loner—term training request submitted by . ERL—A for this employee


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      had been disapproved.  This employee had chosen MSU (the
      laboratory director's former employer) as the university for his
      training and subsequent IPA assignment.

      The ERL-A employee applied for long-term training at MSU in
      October 1988.   The purpose of the advanced academic training was
      to enhance the employee's background in chemistry for application
      in the area of mass spectrometry at an estimated cost of $27,420.
      According to the employee this request was not approved; however,
      ERL-A continued to pursue other means of providing this training
      to the employee.  In April 1989 he was accepted into the PhD
      program at MSU.  At this point ERL-A began working on both an IPA
      for the employee to MSU and a CA with MSU to cover the costs of
      the IPA.  The IPA was reviewed by ORD Headquarters and approved
      by the Acting AA for ORD on August 30, 1989.  ERL-A's letter to
      ORD transmitting the IPA for approval also informed ORD that a CA
      was being awarded to MSU to help defray the cost of the IPA.
      There is no evidence that ORD Headquarters ever questioned the
      IPA, CA, or the basic purpose for these agreements.  The MSU CA
      was awarded on August 24, 1989.

      The terms of the IPA agreement made MSU responsible for 51
      percent of the ERL-A employee's salary and EPA responsible for 49
      percent.  The IPA agreement did not state or indicate that MSU's
      share of the IPA cost would also be paid by EPA through the MSU
      CA.  When we asked a GAD official if this was misleading, the
      official replied, "It is misleading." • She added that it was
      allowable to fund an IPA through a CA.  However, according to GAD
      guidance CA funds cannot be used to train EPA staff.

      Although the laboratory director and other ERL-A staff knew that
      the purpose of the IPA assignment was for the ERL-A employee to
      receive his PhD degree/training, the IPA Assignment Agreement did
      not mention the degree or the training as required by the IPA
      Policy and Procedures Manual, dated April 3, 1989.  The training
      was not mentioned in the decision memorandum for the CA either.
      According to the EPA's Assistance Administration Manual, Chapter
      l, Appendix 1-G, CAs are not to be used to provide training for
      EPA employees.   In addition, R&D appropriations have consistently
      restricted the use of R&D funds to the direct support of R&D
      activities.  Congressional appropriations reports consistently
      specify that S&E appropriated funds will be used for Federal
      employee pay,  benefits, and training.  Therefore, CAs funded with
      R&D monies can not legally be used to fund training of a Federal
      employee.

      The training/PhD degree was provided to this employee for an
      estimated total cost of $200,000 with no commitment of the
      employee to 3  years of federal service for each year of training

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      as required when training funds are used.   The CA funding
      included 51% of the employee's salary and  fringe benefits which
      the IPA stipulated would be paid by MSU.   The laboratory director
      said that she had consulted with ORD about the ERL-A employee
      getting his degree while on an IPA at a university.   She stated,
      "We were told that no policy exists.  It was a management call
      and I called it this way."  However, the Assistance
      Administration Manual, Chapter 1,  does provide that  CA funds may
      not be used to train federal employees. When questioned about
      the high cost to the taxpayers for the employee's PhD degree, the
      laboratory director responded that "$100,000 per paper
      [employee's dissertation and Pi's report]  was really not a bad
      deal."

      A negative review of the CA proposal by one extramural reviewer
      was not included in the CA decision memorandum which was written
      by the employee receiving the IPA.  According to a memorandum
      from the IPA employee to the ERL-A laboratory director, he did
      not use the review because it came in one  week after the deadline
      and he already had the decision memorandum written.   The
      extramural reviewer had rated the MSU proposal as "fair" and
      suggested "declination in present form."  The reviewer stated in
      her opinion the proposal was weak in the presentation of the
      experimental design and that the approach  "lacks coherency" and
      was "superficial."  She also stated that neither of  the MSU Pis
      seemed to have a strong background in mass spectrometry and
      suggested that another mass spectrometrist at MSU be included on
      the CA.

      In addition, the noncompetitive award of the MSU CA  was based
      upon unsupported or questionable justifications.  The decision
      memorandum, dated July 17, 1989, stated that the noncompetitive
      award was based on the original ideas of MSU personnel, MSU's
      excellent facilities, and on the immediacy of the technical
      information needs of two other EPA Offices.  None of these
      conditions were supported by file documentation or justifications
      as specified in ORD guidance on CA awards, dated November 1983.
      In fact, the subject ERL-A employee wrote  the CA proposal.
      Therefore, MSU did not submit a unique proposal for  which it
      would be unethical to solicit as stated in ORD guidance.  There
      was no proof in the files that MSU had any better, unique, or
      one-of-kind facilities than other institutions and the immediacy
      of the need for the research is in doubt since over  three years
      elapsed with no publication of technical information by either
      the employee or the MSU PI.

      In conclusion, the MSU CA was questionably awarded
      noncompetitively in order to fund an IPA assignment  of an ERL-A
      employee, primarily for advanced academic  training and degree

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      attainment.  The fact that the CA covered MSU's share of the IPA
      assignment was misleading.  In addition, we guestion the
      appropriateness of the person who was getting the IPA writing the
      CA decision memorandum and specifically, deciding to exclude a
      negative review of the proposal in the decision memorandum.  We
      do not believe that funding a PhD for an ERL-A employee through a
      CA is an appropriate use of assistance agreements.

      University of New Hampshire (PNH1 Supplement Improperly Awarded
      as a CA In Lieu of a Grant

      ORD improperly awarded a $250,000 supplement to the UNH CA in
      September 1991 that did not include substantial involvement by
      EPA as required for CA awards.  The proper mechanism was a grantJ
      According to the PO, one purpose of the UNH CA was to support
      international work through the International Geosphere/Biosphere
      Program (IGBP) .  The PO informed us that the UNH PI is the
      chairman of the IGBP committee on Global Analysis,
      Interpretation, and Modeling (GAIM), which is supported by the
      supplement to the CA.

      There was no evidence in ERL-A documentation of substantial
      involvement by EPA in the GAIM supplement as is required to
      justify a CA in lieu of a grant.  According to the PO, there is
      little EPA oversight of the.committee's activities for political
      reasons.  He said that the committee is sensitive to potential
      EPA "influence on the committee.  As a result, EPA does not
      exercise any approval authority over who is on the committee.
      According to the CA supplement decision memorandum, the Director
      of OEPER ordered the addition of the GAIM project to the CA.  The
      GAIM supplement was apparently added to the UNH CA for the
      administrative convenience of ORD.  Although this CA supplement
      is probably the only example of real assistance we found in our
      review, it should have been awarded as a separate grant because
      EPA did not have substantial involvement in the work performed.


      INAPPROPRIATE USES OF lAGs

      Our limited review of six ERL-A lAGs disclosed abuses in all six
      agreements similar to the misuses related to CAs.  To achieve
      ERL-A's objectives with limited intramural resources (i.e., S&E
      funds), lAGs were used to change extramural R&D funds into travel
      funds for FTEs, to award research funds to a foreign country
      without statutory authorization, and to inappropriately provide
      contractor staff for a joint project with the Air Force in
      violation of FAR and IAG requirements.   Internal control systems
      at ERL-A,  ORD, and GAD did not detect or preclude these abuses
      (See Chapters 2 and 6).  As a result, management oversight was

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      limited, effective use of Agency resources was questionable,
      laboratory initiatives were canceled without completion, and FAR
      and Agency regulations/requirements were circumvented. .  Also,
      unauthorized reprogramming of funds between appropriations
      (extramural to intramural)  may have occurred through exchange of
      extramural funds with another agency.  As stated in Chapter 2,
      ERL-A's management culture encouraged circumvention of
      regulations and procedures and questionable uses of extramural
      resources.
      Two pairs of ERL-A lAGs (maximum value of $520,000)  with NASA
      appear to exchange extramural funds on related projects for use
      by NASA and ERL-A employees for travel expenses.  The net effect
      was to re-program extramural funds, without authorization, into
      FTE travel dollars for both agencies and circumvent Agency travel
      ceilings for FTEs.  Although one of the ERL-A POs involved stated
      that the laboratory did not intend to circumvent any
      appropriation or fund restrictions, the fact that another ERL-A
      PO also exchanged travel funds through an IAG with another NASA
      PO indicated recurring misuse and circumvention of regulations.

      All four of the NASA lAGs we reviewed are related to the Global
      Climate Change Program and their scopes of work appear to be
      related.  One pair was a funds-in IAG (IAG No. RW8093532Q) in
      which ERL-A has or will receive up to $45,000 5in NASA funds  for
      FTE travel over the first year of the three year IAG performance
      period and a funds-out IAG (IAG No. DW80935084) in which ERL-A
      paid or will pay out up to $41,000 in extramural funds the first
      year exclusively for NASA travel costs.   The total maximum value
      of the funds-out IAG prepared by ERL-A was $100,000.  We could
      not determine the maximum value of the funds-in IAG prepared by
      NASA for the three year performance period.  The NASA PO on this
      pair of lAGs was a former EPA/ORD..employee.  This pair of funds-
      in and funds-out lAGs also had the same EPA and NASA POs.

      The other pair of NASA lAGs was an even swap between the two
      agencies - a funds-in IAG (IAG No.  RW80935444) and a funds-out
      IAG (IAG No. DW80935165),  both budgeted $35,000 exclusively for
      travel the first year.  The funds-out IAG prepared by ERL-A had
           5  The first year, authorized dollar amounts for funds-in
      lAGs prepared by NASA include in-kind labor costs,  as well as
      reimbursable travel costs.   Therefore, the maximum first year
      value of the funds-in lAGs  shown in Appendix III will be greater
      than the travel dollars shown above.  EPA will be reimbursed only
      for travel costs.

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      maximum value of $200,000 over the lAG's  performance period.   We
      do not know the maximum value of the. f unds-in  IAG prepared by
      NASA.  As with the previous pair of NASA  lAGs,  these lAGs had the
      same EPA and NASA POs.

      According to the EPA Resource Planning  and Budgeting Manual,
      Chapter 4, dated February 1, 1985,  EPA  allowance  holders have a
      travel ceiling which sets a maximum for FTE travel.   The manual
      also provides that funds transfers affecting the  travel object
      class require an approved change request  and the  issuance of  a •
      new Advice of Allowance before any funds  may be committed or
      obligated based on the reprogramming.

      Resources Management Directives state that Advices of Allowance
      are the Agency's principal mechanism  for  controlling funds and
      ensuring that allowance holders, are allocating resources
      according to EPA's Operating Plan.  However, the  NASA lAGs
      represent more than a reprogramming or  budget  circumvention
      within the S&E intramural appropriation but a  potential
      unauthorized transfer between separate  appropriations, R&D
      extramural and S&E intramural,  which  may  violate  or at least
      circumvent appropriation restrictions.

      The IAG Compendium also specifically  states that  lAGs may not be
      used to circumvent travel ceilings; however, it appears that  this
      exchange of lAGs enables ERL-A and the  NASA offices to indirectly
      re-program their extramural funds,  without authorization, into
      travel money for FTEs and,  thereby, circumvent travel ceilings
      for federal employees.   The first fiscal  year  budgets for all
      four NASA lAGs show that, ERL-A intended  to send  $76,000 in
      extramural funds budgeted for travel  to NASA and  would receive in
      return $80,000 in travel dollars for  their scientists.

      An ERL-A PO for one pair of NASA lAGs replied  that the Economy
      Act of 1932 provided for lAGs to allow  government agencies to
      interact more effectively.   The PO stated that current lAGs are
      only for the exchange of travel monies  because of the current
      planning activities for BOREAS (Boreal  Ecosystems Atmosphere
      Study).  He added that as the project progresses,  other funds
      will be needed for equipment, etc.  However, according to the IAG
      Compendium, the Economy Act cited by  the  PO allows agencies with
      greater capabilities to provide related services  or procure
      specialized materials for other agencies  with  less experience.
      The exchange of funds by two federal  agencies  for travel costs
      alone does, not seem remotely related  to this criteria.

      The other ERL-A PO explained the exchange of lAGs by saying that
      not all of the money on his NASA lAGs was used for travel. Some
      of the funds ERL-A received were used for supplies and equipment.

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      However, according "to file documentation, these IAG funds were
      only recently re-categorized (August 1992)  from travel to
      equipment after our discussions with ORD and GAD officials about
      our concerns with these lAGs.  The ERL-A PO further said that EPA
      scientists were under pressure to minimize research activities
      that overlapped other agencies' efforts.  The PO felt that the
      cost savings they achieved outweighed any apparent improprieties.
      The funds were for a specific targeted project, it was a one-time
      situation requiring funds above the ERL-A appropriation, and the
      amount of money involved was small.

      Correspondence in one of the PO's files shows that the funds-in
      and funds-out lAGs were developed concurrently with NASA and were
      dependent on each other.  The NASA PO wrote to the EPA PO.in
      December 1990, stating, "A draft of what tasks for you to do
      might look like, with the idea that you would ask us to do
      something, similar."  Then, in February 1991 he wrote:

           I've changed a few words in the Scope of Work that I
           originally drafted (what EPA does for NASA), made one
           addition in your Task 1 and rewrote your Task 2 (what NASA
           will do for EPA) fairly substantially to reduce any
           potential duplication.

      This memo also indicated that similar IAG exchanges had occurred
      between other NASA and EPA offices.

      A GAD Branch Chief was asked about the appropriateness of EPA
      swapping IAGS with another Agency for travel.  She replied that,
      "I would get an OGC opinion on that real quick...That's sneaky.
      I would question that."  She said the effect would be that
      agencies would be supplementing each other's travel.  According
      to this GAD Branch Chief,  a laboratory can't have a "travel
      grant," the Agency is not in that business.  She said that a GAD
      specialist reviewing lAGs should ask questions if there is only
      one IAG line item and that line item is for travel.  However, the
      GAD employee stated that for her office to have caught this
      "swap-out", the lAGs would have had to come in at the same time
      and been assigned to the same specialist.  She added: "The
      program offices see the IAG as a free-wheeling deal."

      Although the first year dollar amounts involved in this exchange
      of lAGs between NASA and ERL-A for FTE travel were relatively
      small, the three year funds-out for EPA could be $300,000.  In
      addition, this situation revealed a high potential for misuse
      which was not prevented by the internal control systems of ERL-A,
      ORD, or GAD.
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      ERL-A Improperly Initiated an IAG to Venezuela Without Proper
      Statutory Authority

      On September 1, 1990, ERL-A initiated an IAG (maximum value of
      $401,250)  directly to the Institute Venezolano de Investigaciones
      cientificas (IVIC) in Venezuela although the IAG compendium
      states that lAGs with foreign countries are not authorized.  GAD
      erroneously approved the original award of the IAG with IVIC in
      1990 and the first amendment which increased funding in 1992.
      GAD refused to approve a continuation of the IAG at the end of FY
      1992.  Because of the improper award of this IAG, the almost
      $200,000 funded to date under this agreement was lost because the
      project/research will apparently not be completed.

      According to the IAG Policy and Procedures Compendium "No element
      of EPA is authorized to enter into an IAG with any foreign
      organization." "The Compendium further states that the proper
      procedure requires EPA to enter into an IAG with the Department
      of State instead, unless an exception is made by the Office of
      International Activities (OIA).  We found no such exception in
      the IAG files.

      The IAG files did contain a Clearance of Foreign Research Award
      which was signed by EPA officials but was not signed by the State
      Department.  Further, the Clearance form was a request for the
      approval of an award of a foreign errant or contract, not an IAG.
      A record of communication in the IAG files between the ERL-A
      laboratory director and OIA also referred to expediting the State
      Department Clearance for a Venezuelan cooperative agreement.

      A record of communication,  dated September 28,  1992, documented a
      telephone conversation in which ERL-A's Extramural Assistant was
      told by OGC that agreements with foreign governments would have
      to be a grant or CA.  This' was confirmed in a memorandum from the
      Acting Chief of the Grants Information and Analysis Branch (GIAB)
      to ERL-A,  dated October 8,  1992, in which OGC had advised that
      "the authority to transfer funds directly from EPA to foreign
      governments or international organizations through an IAG is not
      permitted since the authority for lAGs under the Economy Act or
      the cooperative statutes is limited to agreements between federal
      agencies."

      The PO stated that they had discussed awarding a CA to Venezuela.
      However, since the agreement was with a Venezuelan federal
      laboratory in Venezuela, an IAG seemed more appropriate.  He said
      that CAs have primarily been used for universities and private
      institutions.   Awarding the agreement as an IAG instead of a CA
      was a "judgement call" according to the PO.  He also commented
      that it is really more tedious to do an IAG than a CA because an

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      IAG must be re-submitted every year.   This statement conflicted
      with statements made by GAD officials who said that programs and
      laboratories liked to use lAGs because they were easier to award
      than CAs.

      In August 1992, GAD officials stated that they had been refusing
      to approve foreign lAGs since July 1992.   A GAD manager said that
      she was not signing anymore foreign lAGs  without a written memo
      from OGC citing the statutory authority.   She said that she could
      not reconcile in her own mind how to do an IAG with a foreign
      country.  GAD is currently considering *awarding an IAG. to the
      State Department as required by the IAG Compendium instead of
      awarding lAGs directly to foreign countries.

      A GAD manager said that programs like to  award lAGs in lieu of
      CAs to foreign countries because it's less work.  lAGs require
      only a decision memorandum/ no proposals, no competition, no
      applications, and no reviews are necessary.  She said that the
      programs like to use lAGs because "It's a shortcut."  She added
      that GIAB mentioned to the OIA that foreign lAGs might not be
      allowable and that they were being used as a shortcut in some
      cases.  She said they "hit the roof"  and  said that they were sure
      this was not the intention.

      The ERL-A PO was disturbed that the Venezuelan IAG was not
      renewed when the project was two thirds complete, most of the
      equipment was already bought, and the researchers were in the
      middle of time-dated fieldwork.  He stated that the laboratory
      was not informed until September 28,  1992 that the Venezuelan IAG
      would not be funded.  Up to that point ERL-A thought that the new
      policy prohibiting foreign lAGs would only apply to new lAGs, but
      that those already in place would be renewed.  The EPA PO
      explained that the Venezuelan PO for the  LAG was a very well-
      known scientist and any "glitch" in his project could be very
      embarrassing.  He added EPA has been criticized for starting
      projects and not completely funding the research and that
      stopping this work in the middle of the project would be another
      example of the Agency not meeting its commitments.

      According to the PO, prior to the IAG award, ERL-A gave some
      consideration to funding this research as a cooperative
      agreement.  However, upon examination of  the Venezuelan IAG, we
      concluded that the appropriate mechanism  for this project would
      have been a contract because the field studies and data gathered
      would have directly benefitted ERL-A.  The decision memorandum
      stated that the information gathered would be used to "fill data
      gaps in global climate models of tropical fluxes of trace gases!'
      and that the ."direct client" of the project was EPA.
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      Although the IAG provided IVIC with $144,000 in equipment (four
      wheel drive vehicles, laboratory equipment, etc.)  and CAs with
      foreign countries are permitted, the primary purpose of the
      agreement was to benefit ERL-A research.  Therefore, it would
      have been more appropriately awarded as a contract.  In addition,
      although we believe GAD acted appropriately in refusing to
      approve the continuation of this IAG, the IAG was in place for
      two years before this corrective action was taken.  As a result,
      almost $200,000 of funds were expended to date and the project
      was left incomplete.

      ERL-A Nohcomplied with FAR and IAG Requirements In Providing
      Contractors to the Air Force Under the Tvndall AFB IAG

      EPA improperly supplied contract employees to the Air Force under
      the Tyndall Air Force Base (AFB) IAG (awarded May 25, 1990)  by
      disguising the contractor charges as FTE personnel in the IAG
      budget.  As a result, FAR requirements for identifying contractor
      use and approval of a sole-source justification were
      circumvented.  In addition, a university researcher (and former
      ERL-A on-site cooperator) specifically requested by Tyndall AFB
      was hired as a consultant under ERL-A fs on-site TAI...contract
      resulting in apparent directed subcontracting.

      The budget included in the 'research proposal submitted by ERL-A
      to Tyndall AFB showed almost ninety percent ($335,400) of the
      $389,000 in funds ERL-A would receive from Tyndall were for
      personnel.  Neither the research'proposal/budget nor the IAG'
      included funds allocated for procurement/assistance.  In fact,
      IAG Form 1610-1 specifically asks if funds will be used on
      extramural agreements and ERL-A responded "no".  However, we
      found that funds designated in the IAG award and amendment as * EPA
      personnel costs were actually expended on the TAI contract and
      two CAs.       ' .

      The ERL-A Chemistry Branch Chief and the ERL-A PO both stated
      that IAG funds were spent on the TAI contract but that none of
      the funds were being used on the UGA cooperative agreement.
      However, the May 1991 Report of Reimbursable Services Rendered
      showed that funds were expended under CAs with both the National
      Academy of Science and the University of Georgia.

      According to the Interagency Agreement Policy and Procedures
      Compendium, if contractors will be used, the name of the
      contractor, the contract amount, and the percentage, if any, to
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      be funded by EPA should be identified on EPA form 1610-1.   The
      Compendium also- states:

           When using another agency's funds for a contract,
           consider the FAR (see Chapter 3 - FAR)  and obtain  PCMD
           approval of Sole Source justification...If grants  or
           cooperative agreements will be used,  determine
           recipient, award amount, and subproject amount,  if
           known (identify on EPA form 1610-1)  and determine  if
           both agencies have required statutory authority  for
           assistance...

      By failing to disclose that a contractor would be used, ERL-A
      evaded FAR requirements, including those for competition or
      approval of sole-source justification.

      In addition, ERL-A cited the Economy Act as authorization  for the
      reimbursable IAG with Tyndall.  However,  this Act does  not
      authorize lAGs which use funds under assistance awards.
      According to the Compendium, the Economy Act does not provide
      authority where a receiving agency would award an assistance
      agreement.  The IAG Compendium also states:

           In cases where an interagency agreement would involve
           the use of a grant or cooperative agreement by the
           receiving agency, independent program authority  outside
           of the Economy Act must be established.  If independent
           program authority exists, an IAG may be executed
           provided both the receiving and providing agencies have
           comparable assistance award authority.

      Since the Tyndall IAG only cited the Economy Act as
      authorization, ERL-A was not authorized to utilize assistance
      agreements under- it.  According to the Report of Reimbursable
      Services Rendered for this IAG, however,  at least $57,500  was
      expended for CAs under this IAG.

      File documentation further showed that Tyndall AFB initially
      wanted a CA awarded to a northern university under the  IAG
      because of their past association with a researcher at  that
      university.   The original research proposal ERL-A sent  to  the
      Tyndall PO in June 1989 included tasks and dollars to fund the
      CA.   However, the IAG award did not include funds for a CA with
      the university- and most of the funds budgeted for the CA in the
      original proposal were moved to the personnel budget  item.
      Inter-office correspondence to the ERL-A laboratory director from
      the Chemistry Branch Chief asked, "Is there any way we  can get
      money to [the university researcher] (30K)  besides thru a  CA?"
      Apparently ERL-A decided against the CA approach because the

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      researcher was subsequently hired as a.consultant under the TAI
      on-site contract - apparent directed subcontracting.

      In conclusion, ERL-A misstated how the funds" received from
      Tyndall AFB under this IAG would be used,  disguising the fact
      that the work would be performed by contractors and cooperators
      and not FTEs.  Further, there was no GAD oversight to match IAG
      expenditures to the IAG budget which would have disclosed that
      contractors were being used to do the work instead of federal
      personnel.  Inadequate controls resulted in several hundred
      thousand dollars worth of Air Force work being assigned to TAI
      without any competitive bidding or approval of sole-source
      justification.  In addition, the hiring of the university
      researcher requested by the Air Force as a consultant under the
      TAI contract indicated ERL-A may have accommodated directed sub-
      contracting by the Air Force.

      Decision Memorandums Improperly Prepared

      The IAG Compendium requires specific information be included in
      an IAG decision memorandum.  This includes EPA authority for
      entering into the agreement, a summary of alternatives considered
      other than the IAG, and a rationale and justification for
      selecting the proposed agency.  None of this information was
      included in any of the decision memorandums for the six IAGS we
      reviewed.  In addition, the ERL-A PO for two of the lAGs wrote
      and signed the decision memorandum and recommended approval of
      the lAGs with himself as PO.  The fact that the decision memos
      were incomplete and two of them were inappropriately prepared by
      the prospective PO is indicative of a lack of controls over the
      IAG awards, both at ERL-A and at GAD (see Chapter 2).  Deficient
      controls and/or the failure to implement controls apparently led
      to the misuses of lAGs detailed in this section.  Weaknesses in
      ORD, GAD, and ERL-A's internal control processes are discussed in
      more detail in Chapter 6.                   .

      Because lAGs do not require competition, proposals, applications,
      or reviews they are even more vulnerable to misuse than other
      extramural instruments.  Despite this high level of
      vulnerability, ORD and GAD did not implement adequate controls to
      prevent the misuse of lAGs by ERL-A.  ERL-A scientists and
      managers appeared to be virtually unchecked in their use of lAGs
      - re-programming extramural funds into FTE travel dollars,
      awarding an IAG to a foreign country .without statutory
      authorization, and falsely budgeting funds as FTE personnel
      expenditures when they were used to fund contractor and
      cooperator employees.
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      During a discussion with ORD Headquarters management in January
      1993, several ORD officials indicated that uses  of CAs and lAGs
      that we were citing as misuses may not violate any laws or
      regulations.  For example, the NASA lAGs, which  exchanged
      extramural funds between agencies to supplement  intramural travel
      of FTEs, was one of the cases cited by these officials.   ORD
      officials indicated they had requested an OGC opinion on this use
      of lAGs.

      Although these officials may be correct that no  laws or specific
      regulations were broken, ethical and internal control questions
      still remain.  The circumvention of budget and funding controls
      established by Congress and the Agency through separate
      appropriations for extramural and intramural activities should
      not be encouraged or condoned regardless of the  existence or non-
      existence of specific appropriation or regulatory restrictions.
      This policy would be ethically unsound and,  in the case of the
      NASA lAGs, could result in substantial bypasses  of fund controls
      the Agency currently has in place.  If ORD Headquarters informs
      its field units that such practices are "okay",  laboratories may
      be encouraged to become even more creative in their approaches to
      supplementing their intramural resources.  Such  encouragement
      without stringent controls (which do not currently exist)  over
      these creative funding mechanisms, may result in laboratories
      violating laws and regulations far more serious  than currently
      contemplated.
      RECOMMENDATIONS - USE OP EXTRAMURAL AGREEMENTS

      Recommendations to the Assistant Administrator*  Administration
      and Resources Management

      We recommend that the Assistant Administrator for Administration
      and Resources Management ensure significant improvements are made
      in ERL-A's extramural agreement award and management to comply
      with applicable statutes, regulations,  and policies,  and to
      safeguard Agency assets against waste or abuse.   Specifically,
      the Assistant Administrator should require the:

      Director. Grants Administration Division to;         .

      - Provide guidance to ORD managers and CA POs on the differences
        between acquisition and assistance and appropriate uses of
        contracts and assistance agreements with illustrations and
        definitive examples.
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      - Assist ORD in preparing guidance on the proper uses of R&D
        funds as relates to the specific types of activities
        that are eligible for funding under CAs.

      - Assign responsibility for ERL-A extramural agreements to one
        grants specialist to .improve controls over extramural resources
        through increased familiarity with laboratory operations/staff.
        Currently, ERL-A agreements are assigned systematically to
        whichever specialist can take another case.  Therefore, ERL-A's
        agreements are scattered among many specialists with no one
        person seeing the whole picture of ERL-A agreement awards.
        If one specialist had seen all of the NASA XAGs for exchange of
        extramural funds for FTE travel, the GAD specialist may have
        detected the improper use and disapproved the agreements.

      - Provide guidance to POs that prohibit the use of lAGs for the
        purpose of reprogramming appropriated funds and awarding
        research funds to foreign countries unless proper approval or
        statutory authority is obtained.

      Recommendations to the Assistant Administrator, Research and
      Development

      We recommend that the Assistant Administrator for Research and
      Development:

      - In collaboration with GAD and the Comptroller, promulgate
        definitive guidance on the proper uses of R&D funds
        under CAs, especially those uses related to ambiguous project
        areas .such as curriculum development.  Prohibit the use of R&D
        funds, either directly or indirectly, for the direct benefit of
        federal employees.

      - Receive and review all CA RFPs and decision memorandums to
        assure that the purpose of the agreement is to provide
        assistance and not directly benefit or support ERL-A/ORD
        research projects.

      - Develop a policy which clearly states how graduate
        academic training and/or advanced degrees for EPA employees
        will be funded, either through IPAs or established Agency
        training programs.  Require commitment of 3 years of federal
        service for every 1 year of training received whether training
        is funded through IPAs or regular training funds.  Prohibit the
        funding of federal employee training under CAs in accordance
        with requirements of the Assistance Administration Manual.

      - Develop a policy on the funding of foreign travel under CAs
        which will result in improved ORD controls over any foreign

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        travel funded by EPA,  including, full disclosure to Congress of
        total expenditures for foreign travel by FTEs,  contractors, and
        cooperators/non-federal persons (academics) under such
        agreements.

      - Remind the ERL-A director that directed and sole-source
        contracting through lAGs is prohibited without proper
        approval and that use of extramural agreements under lAGs
        should be clearly disclosed on the IAG application in
        accordance with the IAG Compendium.  In addition, instruct the
        ERL-A director that currently no authority exists under the
        Economy Act for use of CAs under lAGs.                   .  <

      - Determine, with assistance from OGC, if any unauthorized
        reprogramming of R&D funds to S&E funds occurred under the NASA
        lAGs,  Also, obtain a formal, written OGC opinion as to whether
        R&D appropriations can be used under a CA or IPA for the direct
        benefit, compensation, or training/travel expenses of a federal
        employee.

      Directory. Environmental Research Laboratory - Athens to;

      - Provide to all POs all Agency policy and procedural guidance
        necessary to effectively manage their extramural agreements
        through the pre-award and post-award phases.

      - Require ERL-A managers to review all current and future CA RFPs
        and decision memorandums to assure that the primary purpose of
        the agreement is to provide assistance and not to procure goods
        and services which directly benefit ERL-A or ORD and that
        decision memorandums for all extramural agreements have all of
        the required elements.  Terminate funding of those current CA
        projects or subprojects that directly benefit or support ERL-A
        or that violate laws,  regulations or Agency policies.  Award
        contracts if there is a need for continuance of these CA
        projects.

      - Where appropriate, immediately move all UGA and other
        cooperator employees off-site to preclude direct supervision of
        cooperators by ERL-A staff and remove inappropriate direct
        benefit to ERL-A under the UGA CA.

      - Clearly identify in all CAs the primary function of the
        CA.  Large travel or equipment budgets should not be added
        as an addendum to relatively small research budgets to obscure
        the actual function of the CA.

      - Provide all ERL-A employees with equal access to IPA
        training opportunities.  In addition, provide full disclosure

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        of all sources of funding in IPA applications and cease
        utilizing CAs to fund IPAs for academic training of FTEs.

        Prohibit ERL-A PCs, scientists, and on-site cooperators from
        preparing or assisting in preparation of proposals and/or
        decision memorandums for CAs in which they will benefit or act
        in a PO capacity.

        Establish policies which allow cooperators the maximum
        involvement and control possible in their research projects.

        Review and terminate lAGs with NASA that are being used to fund
        FTE travel and circumvent Agency fund controls.

        Require.and ensure proper documentation of authority,
        rationale, and justifications in IAG decision memorandums
        and preclude prospective POs from preparing IAG decision
        memorandums.                                         •
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      ERL-A'S COOPERATIVE AGREEMENT AWARDS LACKED COMPETITION

      ERL-A did not encourage the competitive award of CAs as
      emphasized by the FGCA Act and did not have sufficient controls
      in place to assure that the proposal review process for
      competitive and noncompetitive awards was fair and equitable.
      Almost 63 percent of ERL-A's 27 active CAs,  comprising over $10
      million of ERL-A's $14.2 million in CA funding,  were awarded
      without competition.  ERL-A maintained, in many instances, it
      knew the institutions and individuals best qualified to perform
      the research assistance needed and used its discretionary
      authority to award noncompetitive agreements to these
      individuals/institutions.  In fact, all seven of the
      noncompetitive awards in our sample of 11 CAs were to current
      employers of former ERL employees and on-site cooperators and to
      alma maters or former employers of laboratory management.  These
      non-competitive awards created the appearance of favoritism in
      the CA award process.  The fairness and openness of the
      competition in ERL-A's competitive CA awards is also
      questionable.  We reviewed five of the CAs which were awarded
      competitively and, in every case, identified potential review
      panel conflicts of interest (COIs) which may have compromised the
      free and open competition in the CA awards.  None of the review
      panels for competitive awards in our sample included ORD
      Headquarters staff as required by ORD procedures.  Potential COIs
      also existed for review panels involved in many of the
      noncompetitive awards.  As a result, CA funds may not be
      effectively utilized to obtain the best research at the least
      cost to the government.  In addition, lack of competition and the
      appearance of favoritism in the CA award process could subject
      EPA to criticism and protests and erode public trust in EPA
      research.
                                                                    i.

      Background

      One of the major purposes of the FGCA Act of 1977 was to maximize
      competition in the award of contracts and encourage competition,
      where deemed appropriate, in the award of grants and CAs.  An ORD
      Policy on the Use of Cooperative Agreements, issued in January
      1983, stated that ORD's policy was to: (1) assure that the
      appropriate extramural mechanism is used, (2)  assure maximum use
      of competition, and  (3) seek new, well qualified sources of
      research.  It required that all CAs having a total project cost
      of $100,000 or greater be awarded competitively.

      However, revised ORD guidance on competitive CA procedures, dated
      November 2, 1983, eliminated the requirement for mandatory
      competition of new CAs valued at $100,000 or more and gave
      laboratory directors the discretion to decide when to compete

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Chapter 3
Misuse And Mismanagement Of Cooperative And interagency Agreements
      CAs.  The concurrence of the AA for Research and Development was
      required for all award decisions when the total EPA cost was over
      $250,000.  In addition, the decision to award a CA
      noncompetitively was required to be justified in a memorandum
      that is included in the project file.  A revised ORD delegation
      of authority issued in November 1984 gave laboratory directors
      approval authority for competitive CA awards up to $1 million.
      Approval authority for noncompetitive awards remained at $250,000
      total EPA cost6.

      The November 1983 guidance also gave examples of situations that
      would substantiate/justify a noncompetitive process. -This
      included:  (1) the recipient submitted a unique concept or
      approach and it would be unethical for ORD to advertise for
      applicants to use this approach, (2) the unique capabilities of
      the recipient have placed it in a pre-eminent position, (3)  the
      recipient has personnel who are considered the foremost experts
      in fields necessary to perform the work, (4)  the recipient has
      facilities, equipment or data which is specialized, vital to the
      effort, and which no one else can provide,  or (5)  an urgent
      situation exists where no other source could provide the research
      in the time allowed.

      Chapter 3 of the ORD Policy and Procedures Manual addresses
      procedures for evaluating applications for both competitive and
      noncompetitive CAs.  Both types of CAs must be technically
      reviewed by a panel of, both in-house and extramural reviewers.
      Competitive CAs must be advertised widely using all available
      means.  Pre-proposals are usually requested and rated and full
      proposals are then requested from the highest rated pre-
      proposals.  According to the Procedures Manual,  the review team
      should be comprised of one person from ORD headquarters, one
      person from the ORD laboratory, and at least two extramural
      reviewers.  The laboratory director then makes the final
      selection for award from the top three proposals and a decision
      memorandum is prepared.

      The ERL-A issued a Laboratory Operating Procedure (LOP) for
      Competitive Cooperative Agreements in April 1987 and one for
           6 AA for ORD issued "COOPERATIVE RELATIONSHIPS. Interim
      Guidance," on October 1, 1992.   This guidance reduced laboratory
      director approval of noncompetitive CA awards to $50,000 or less;
      however,  required ORD approval  of competitive awards was
      increased to $5 million.

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Chapter 3
Misuse And Mismanagement Of Cooperative And Znteragency Agreements
      Non-Competitive Cooperative Agreements in July 1991..  Both LOPs
      state:

           To help assure that cooperative agreements support the
           best research available,  ERL-A generally expects that
           cooperative agreements will be awarded on a competitive
           basis; the non-competitive award of a cooperative
           agreement must be justified by unusual or urgent
           circumstances and approved by the Director.

      The Athens Competitive CA LOP also stated that one member of the
      review panel will be selected by Headquarters and provides that
      four extramural reviewers are required if the amount of the
      projected agreement exceeds $250,000.  It notes that no current
      Project Managers for cooperators will be panel members.

      Most CAs at the ERL-A Laboratory Are Not competed

      Although the 1977 FGCA Act did not require that CAs be competed,
      it specified that competition be encouraged.  However, despite
      this provision of the FGCA Act and ORD Headquarter and ERL-A
      policies that competing CAs helps assure the best research
      available, ERL-A awarded only about one third of its CAs
      compet it ively.

      Of the 27 active CAs at ERL-A in July 1992, 10 were procured
      competitively and 17 (63 percent) were noncompetitive.  Ten of
      the 17  noncompetitive CA awards (59 percent) were just under the
      $250,000 EPA cost limit necessary to avoid Headquarters approval
      of a noncompetitive award.  For example, three awards to Clemson
      University at $249,000 to $250,000 each (total $749,850) had
      project start dates within about a two week period in 1991.  The
      dollar value for the competitive CAs was approximately $4.2
      million, while the noncompetitive CAs were over twice that at $10
      million - over 70 percent of current CA funding.  The
      laboratory's two largest CAs,  the University of Georgia and the
      University of New Hampshire, were awarded noncompetitively.  The
      University of New Hampshire CA was awarded by ORD Headquarters.
      Many of the extramural funds available for award went to
      institutions or individuals to which ERL-A managers or scientists
      had a past or current association, leading to the appearance of
      favoritism.

      Information was requested and provided by ERL-A on the proposed
      CA funding packages sent to Washington for approval at the end of
      FY 1992.  We found that 11 of the 16 new proposed CAs (69
      percent) were noncompetitive.   After our audit fieldwork was
      completed and apparently as a result of IG concerns, ORD has
      informed us that of the 9 CAs actually awarded to date, 7 of them

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Chapter 3
Misuse And Mismanagement Of Cooperative And  interagency Agreements
                        Competitive Versus Noncorrpet i t i ve Awards
                             Millions
                               1991
                                    1992
                                         1993 . Total 91-93
Noncompete
Compete
$6.39
$0.949
$0.265
$0
$4.9
$1.1
$11.56
$2.05
                                     Fiscal Years
                       Proposed Awards Shown lor 1993.
were           —
competitive.
The ERL-A lab _
director  has
informed  us
that  14 of the
planned 18 new
CAs for FY 93
are or will be
competitive.

The chart at
right shows the.-
dominance of
noncompetitive .
awards for 1991
and 1992  and
the proposed   —
awards for 1993.  The value of the  5 proposed,  competitively
awarded CAs was only $1.1 million versus almost $4.9 million
(81.7 percent of proposed CA funding)  for the noncompetitive CA
proposals.  The new proposed noncompetitive CAs included one for
$3 million with Georgia Tech which  GAD Headquarters subsequently
disapproved.  EPA's OGC concluded in its review.of the proposed
Georgia Tech  CA, "assistance was not the appropriate funding
mechanism to  use since .the proposed work appears  to primarily
benefit EPA."

Appearance of Favoritism in Noncompetitive Awards

Many  of the ERL-A's noncompetitive  CA  awards gave at least the
appearance of favoritism.  ERL-A has awarded noncompetitive CAs
to former ERL-A employees, former UGA  employees who worked at
ERL-A, and universities with which  ERL-A employees have close
ties  (former  employers, alma maters) .   In at least three of these
cases (Mansoura, Menoufia, and Montana State),  critical reviews
of the noncompetitive CA proposal were excluded from the decision
memorandum and/or the funding package  documents.

Relationships between cooperators and  ORD/ERL staff related to
our 11 sample CAs and one non-sample CA disclosed during the
audit are presented below:
                                      77
                                         Audit NO.  E1JBF2-04-0300

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       Cooperator
       Institutions
       (Type Award) I/
Relationship With
ORD/ERL-A
       Alaska (C)
No Known Relationship.
       British
       Columbia (NC)
UBC PI Co-Published
With ERL-A Director In 1988
       Clemson (C)
Review Panel Chairman - UGA
Adjunct Professor.
UGA Has Large Subcontract
Under Clemson CA.
       Colorado
       State (C)
Former Employer - ERL-A
Director.   (Part-time, 1975-77)

CSU PI - Former ERL-A Employee
(1979 -1981).  (GS-7 Graduate
Student - part-time)	
       Georgia (NC)
Near-Site University Provides
On-Site Support To ERL-A Pis.

ERL-A Staff On UGA Adjunct
Faculty.	
       Mansoura (NC)
Mansoura PI - Former On-Site
Cooperator Under UGA CA.	
       Menoufia (NC)
Menoufia PI - Former On-Site ,
Cooperator Under UGA CA.
       Montana
       State (NC)
Former Employer - ERL-A
Director.
       New
       Hampshire (NC)
Alma Mater - ERL-A Director.
(Awarded by ORD Headquarters)
       Rhode
       Island (C)
Near-Site University For
Narragansett ERL-N.
       Marine
       Biology (C)
No Known Relationship.
       Purdue 2/
Purdue PI - Former ERL-A
Employee.	
      I/  NC = Noncompetitive Award.
           C — Competitive Award.
             2/ Nonsample CA.
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      The award of the CAs to Mansoura and Menoufia Universities in
      Egypt is an illustration of both how ERL-A improperly used
      noncompetitive CA awards and the problems with the proposal
      review process discussed in this chapter.  The prospective PO for
      the Egyptian CAs provided the laboratory director with a list of
      potential external reviewers and recommended that the reviewers
      selected review both proposals since they were so similar.  The
      four external reviewers, whose reviews were included in the ERL-A
      files, all came from this list.

      One of the external reviewers was apparently a close colleague of
      the PO.  They worked together in the same laboratory in 1988.
      Another reviewer that the PO recommended was also a colleague.
      During June and July 1989, when reviews of the Egyptian proposals
      were being requested, this reviewer and the PO were working
      together to arrange an IAG between ERL-A and the Air Force.  When
      the IAG was approved, the external reviewer became the Air Force
      PO.  Unfortunately, the Air Force reviewer was on vacation when
      the Egyptian proposals reached his office and his supervisor
      reviewed the proposals instead and recommended that they not be
      funded.  This was the only review performed by an external
      reviewer not personally selected by the prospective ERL-A PO.
      one other external reviewer also recommended that the CAs not be
      funded in their present form;'

      However, only the two external reviews with positive comments
      were included in the funding package and cited in the decision
      memorandums for the CA awards.   An external review which
      questioned whether the fieldwork should be done in Egypt and
      another review which recommended that the proposed work not be
      funded in its present form were not included.  Instead, the
      decision memorandum stated, "There were no contrary reviews."

      Two reasons given in the decision memorandum to justify the.
      noncompetitive awards were that:  (l)  Egypt offers an ideal
      environment for the field studies due the widespread and
      sometimes poorly, controlled use of pesticides in the country, and
      (2) both Pis had received training at ERL-A and had expertise in
      fate processes of,organic pollutants.   However, the
      appropriateness of the Egyptian fieldwork location and the
      expertise/experience of the Pis were both questioned by external
      reviewers.

      We found other examples of potential favoritism in noncompetitive
      CA awards including the CA award to Montana State University
      previously discussed in this chapter.   Because*of the increased
      vulnerability for abuse, ERL-A managers should exercise stringent
      controls over noncompetitive CA awards to ensure fair and


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Chapter 3
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      equitable treatment and effective use of Agency resources.  The
      justifications for noncompetitive awards in decision memorandums
      should comply with ORD guidance and special efforts should be
      made to assure that CAs are reviewed by scientists who are both
      knowledgeable of the planned research and without close ties to
      the prospective PO or other ERL-A staff.  In cases where the
      applicant has close ties to ERL-A, consideration should be given
      to awarding the CA competitively to avoid the appearance of
      favoritism.

      Large Noncompetitive CA Awarded to PGA

      ERL-A awarded the $5.2 million UGA CA noncompetitively, avoiding
      the contract procurement process and ensuring that the laboratory
      would continue to have UGA on-site support through the CA as
      previously discussed.  This CA was awarded noncompetitively
      despite the reservations of the OEPER Director and^despite
      external reviewers' comments concerning the difficulty of
      reviewing the proposal due to its great diversity and size.  As a
      result of these problems, the CA was scheduled to be terminated
      in March 1993 instead of October 1994 as specified in the CA and
      the work is planned to be re-competed as at least three separate
      CAs.  However, documentation in ERL-A files indicated that the
      laboratory anticipated that UGA would win at least one of the
      awards which raised questions about how fair and open this
      competition will be.

      The decision memorandum for the September 1991 UGA CA stated four
      primary reasons for a noncompetitive award:  (1) the proximity of
      the UGA and the complementary nature of UGA's and ERL-A's
      expertise and interests, (2) the immediate need for technical
      information for certain program offices and ERL-A's
      responsibility to provide technical assistance to Regions and
      States, (3) many of the ideas in the proposal are original with
      UGA personnel, and (4) close ties with UGA will enable ERL-A to
      capitalize on the University's unique expertise.

      Although one justification for noncompetitive award in the
      decision memorandum referred to UGA's unique expertise, one
      subproject's sole-source justification was based on an ERL-A Pi's
      previous research in the area.  In addition, the decision
      memorandum stated that many of the ideas in the proposal were
      original with UGA personnel.  However, ERL-A staff either wrote
      or assisted in writing at least eleven subproject proposals.

      A February 1992 memorandum indicated that OEPER's Director was
      concerned about the extent and degree of integration of the
      laboratory and the University research activity called for in the
      CA's Research Plan.  According to the OEPER Director, "The

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      Research Plan reads as if the University is proposing an
      extension to the Laboratory itself."  However,  he conditionally
      approved and funded the Research Plan for the UGA CA because time
      did not allow competition to take place without projects and
      employees being terminated.

      Although the OEPER Director initially believed that a peer review
      would sort out the problems with the CA, the December 1991
      Research Plan apparently changed his mind.   He questioned "the
      degree of independence we must observe with respect to on-site
      cooperative agreement research."  The OEPER Director decided to
      fund the UGA CA only through March 1993 with no new projects to
      be started during the interim.  During this period the laboratory
      is to develop ^requests for pre-proposals (RFPs)  for the research
      areas coveredvin the current UGA CA.

      ERL-A file documentation, dated May 1992,  outlined guidelines for
      the UGA recompete and indicated there would be four RFPs.

           Assume UGA may bid on all 4 RFPs, but desire that they
           win #1, which may carry at least 1/3  of the budget.
           SPARC should cinch UGA for #1 [emphasis added]^  This
           #1 should be managed thru (the UGA Program Manager's)
           office,  other Universities should win enough of 2, 3
           and 4 to assure that UGA is reduced by the required 39%
           from FY '91.

      The quote above shows that it was ERL-A's  intention to manipulate
      the recompete of the UGA CA.  The plan to  include the SPARC
      (SPARC Performs Automated Reasoning in Chemistry)  project in RFP
      #1, which will have the largest budget,  to "cinch" it for UGA
      suggests that the climate of evasion and circumvention of
      statutes and regulations at ERL-A remains  unchanged.  A change
      from a noncompetitive award to a biased competitive award is not
      proper corrective action.

      QRD Awarded the University of New Hampshire (UNH)  a
      Noncompetitive CA Without Required Justification

      Despite total costs of almost $1 million,  the UNH CA was awarded
      noncompetitively in 1989 by ORD Headquarters without
      justifications documented in the original  decision memorandums as
      required by ORD procedures.  PO responsibilities for this CA were
      transferred to an ERL-A PO in October 1990.  A supplemental CA
      award of almost $900,000 was made in September 1991, also
      noncompetitively.  The decision memorandum justified this
      noncompetitive CA supplement because:   (1)  UNH is already, working
      on a similar deforestation project for NASA in Brazil, and (2)
      the UNH PI was selected by peers to chair  the GAIM core project.

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      Although the PO for the CA was at ERL-A,  the supplemental award
      to increase the CA scope of work was approved by ORD
      Headquarters.

      Reviewers were very critical of the original UNH proposal.   Some
      of the reviewers expressed concerns about the breadth of the
      proposal given the staff and resources at UNH and suggested
      reducing the scope of the research.  The PO believes that the
      negative comments by the staff at another EPA laboratory were
      probably a reflection of the fact that they wanted to do similar
      work.   When discussing the negative reviews of the proposal, the
      PO mentioned that one of the reviewers was a contractor and
      probably should not have been commenting on the proposal.

      ERL-A incorrectly categorized the original UNH CA as competitive,
      which distorted the ratio of competitive to noncompetitive CAs
      for the laboratory.  The original decision memorandum did not
      document any competition and the PO stated that probably meant
      there was none.  The ERL-A extramural coordinator called the UNH
      PI who informed her that the award had been competitive.
      However, an OEPER staff member subsequently confirmed on August
      31, 1992, that he had researched the original CA files and
      concluded that the CA had not been competitive.

      By awarding a total $2 million noncompetitive CA to UNH, ORD
      Headquarters disregarded its own procedures requiring
      justification of noncompetitive awards.  The justification
      procedures were instituted by ORD to ensure that CA awards were
      made "to the best institutions to support the most productive
      research."  We also believe that it was inappropriate for
      contractor employees to review CA proposals, especially where
      there was potential competition between a contractor and a
      cooperator.

      Lack of Controls Over the Proposal Review Process - Previously
      Identified Problems Remain Uncorrected.

      ORD's laboratories rely heavily on the proposal review process to
      ensure the quality of research proposed by CA applicants for both
      noncompetitive and competitive CAs.  However, the process lacked
      sufficient controls to ensure that ORD's goal of awarding CAs to
      the best institutions to support the most productive research was
      obtained.  The widespread potential COIs of review panel members
      and other irregularities in the proposal review process increased
      the potential for favoritism in the award of both competitive and
      noncompetitive CAs.  The pervasive influence of the prospective
      PO over the review process also represented a significant control
      weakness.
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      Audits by the General Accounting Office (GAO) in October 19807
      and EPA's OIG in March 1983s both reported that  prospective POs
      had undue control of the grant/CA review and selection process.
      The OIG audit recommended that the Acting AA for Research and
      Development fully enforce existing CA procedures or develop new
      procedures to ensure that POs are removed from selecting external
      reviewers, preparing in-house reviews, and preparing decision
      memorandums covering CA applications with which- they have been
      involved.  ORD senior management responded that they agreed with
      these recommendations and had either already taken action or
      planned to fully implement them.

      Despite the ORD assurances that corrective action would be taken,
      however, the ERL-A lab director brought to our attention that the
      ORD Policies and Procedures Manual, issued in 1986, states that
      the prospective PO will prepare the decision memorandum.  As a
      result, our review found that ERL-A's prospective CA POs, on a
      routine basis, still recommended review panel members, performed
      in-house reviews for competitive CAs, and sometimes wrote
      decision memorandums for signature by a branch chief.  In
      addition, one of the controls established by ORD to correct this
      problem was consistently ignored by ERL-A.  Subsequent to the
      1983 OIG audit, ORD required that one member on each review panel
      for competitive CA awards be from ORD Headquarters.  None of the
      review panels for the 5 competitive ERL-A CAs in our sample
      included a representative from ORD.

      The existence of these deficiencies 9 years after the prior OIG
      audit presents substantial evidence that ORD has provided little
      oversight of the CA award process,  especially considering that
      ORD Headquarters should be fully aware when laboratories continue
      to award CAs year after year and no ORD personnel have been
      selected for applicable review panels.

      Many examples of continuing problems and control weaknesses in
      the CA proposal review process were previously discussed in this
      chapter.
           7  GAO report "Promising Changes Improve  EPA's Extramural
      Research; More Changes Needed",  Audit No. GAO/CED-81-6, issued
      October 1980.

           8  OIG audit "Review of the Office of Research and
      Development's  Extramural Research Activities", Audit No.
      ElgB2-ll-0019-30828,  issued March 31,  1983.

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chapter 3
Misuse And Mismanagement of Cooperative And Znteragency Agreements
      Potential Conflicts of Interest of Review Panel Members

      We identified potential review panel COIs related to the award of
      10 of the 11 CAs in our sample.  According to ERL-A staff this
      was the result of the small number of knowledgeable experts
      available to review research proposals.  Review panel members are
      recommended by the prospective POs and although both ORD and
      laboratory guidance require reviewers from ORD Headquarters on
      the review panels for competitive CA awards,  as previously
      stated, none of the panels in our CA sample complied with this
      requirement.  In referring to CA proposal reviews, an ORD manager
      stated, "We don't want it done by the good old boy network which
      tends to be the process."

      Examples of potential COIs we identified were:

      - Panel members were from the same schools as the researchers
        submitting pre-proposals/proposals or their
        collaborators (i.e., ciemson, CSU, Marine Biology
        Laboratory, URI).

      - An ERL-A scientist, who served as the internal reviewer for one
        CA award and the panel chairman on another award,"" was on the
        adjunct faculty of UGA who had large subcontracts with both
        institutions under the CA proposals reviewed. He recused
        himself from one review, but not from the other although the
        same subcontract arrangement was in both proposals (i.e.,
        Alaska, Ciemson}.

      - Panel members had collaborated and/or published with the
        prospective PI,  collaborator, or prospective PO (i.e. UBC, MBL,
        Mansoura/Menoufia) .

      - A reviewer who was the PI on another ERL-A CA and had his
        travel to a symposium in the Peoples' Republic of China paid
        for under the UBC CA (i.e., UGA).

      - A reviewer who was recently a competitor on another ERL-A CA
        (i.e., Ciemson}.

      In these cases, the COIs may not be directly with the institution
      who is awarded the CA, but. these conflicts still taint the
      process.

      Weak, vague conflict of Interest statement

      The COI statement "being used by ERL-A review panels at the
      beginning of our audit fieldwork did not clearly define the types
      of relationships that could give the appearance of a COX.

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Chapter 3
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      Instead, the statement left the definition of what constituted a
      COI or the appearance of a COI to the discretion of the reviewer.
      It stated:

           I hereby certify that to the best of my knowledge and
           belief, no conflict of interest exists which may
           diminish my capacity to provide an impartial,
           technically sound, objective review of the subject
           proposal or otherwise result in a biased opinion or
           unfair competitive advantage.

      After being informed by us of potential review panel COIs, the
      laboratory director ordered a revision of the COI statements
      signed by reviewers.'  She used as a model an old COI statement we
      found in ERL-A files which was more explicit about what kinds of
      relationships constitute a potential COI.  While this is an
      improvement over the previous COI statement, we believe that ERL-
      A scientists need to be made more aware of the negative
      implications of this tight-knit web of reviewers, proposers,
      recipients, and ERL-A staff that would be both evident and
      questionable to any outside observer.


      RECOMMENDATIONS - COMPETITION IN CA AWARDS

      Recommendations to the Assistant Administrator. Research and
      Development

      We recommend that the Assistant Administrator for Research and
      Development ensure significant improvements are made in
      assistance agreement awards that increase competition and assure
      a fair and equitable proposal review process.  Specifically, the
      Assistant Administrator should require the:

      Director. Office of Environmental Processes and Effects Research
      to:

      - Ensure that ORD personnel are included on ERL-A proposal review
        panels for competitive CAs as required by ORD policies and
        procedures.

      - Provide training and/or guidance to ORD and ERL-A managers and
        POs, in collaboration with GAD, to enhance ORD awareness of
        potential COIs or the appearance of COIs in the review and
        award of assistance agreements.

      - Comply with prior audit recommendations to fully enforce
        existing CA procedures or develop new procedures to ensure that
        POs or prospective POs are removed from selecting, external

                                     85        Audit NO.  E1OBF2-04-0300

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Chapter 3
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        reviewers,  preparing in-house reviews,  and preparing decision
        memorandums covering CA applications.

      - Evaluate the justifications for ERL-A noncompetitive CA awards
        to ensure that they comply with ORD guidance,  especially
        repetitive awards at or near the threshold for ORD review and
        approval.

      - Establish for ERL-A and other ORD laboratories, stringent
        controls over noncompetitive awards to assure fair and
        equitable awards, eliminate the appearance of favoritism, and
        require the effective use of Agency resources.

      - Emphasize to ERL-A managers ORD's goal to compete CA awards.

      - Instruct ERL-A managers that favoritism in noncompetitive CA
        awards cannot be tolerated without clear, sound, and legal
        justifications for such awards.

      - Require complete and accurate justifications in CA decision
        memorandums for noncompetitive awards including those awarded
        by ORD Headquarters.  Review decision memorandums for all
        noncompetitive awards by ERL-A for inaccurate and/or
        unsupported justifications.

      - Closely review any follow-on competitive CA awards to UGA to
        ensure competition procedures were unbiased and equitable.

      - Require the ERL-A director to ensure that CA proposals are
        reviewed by scientists who are knowledgeable about the projects
        but who have no close ties with ERL-A or the prospective PO.
        If CA applicant has close ties to ERL-A, require competitive
        award procedures.

      - Review adequacy of ORD corrective action on the prior OIG audit
        findings related to CA review panel COIs and the influence of
        the prospective PO over panel selections and panel
      ,  recommendations.   Ensure proper implementation of prior audit
        corrective actions by ORD laboratories.
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      MISMANAGEMENT OF COOPERATIVE AGREEMENTS

      CAs were not properly managed after award to ensure compliance
      with agreement terms or that Agency resources were being
      effectively used and safeguarded by CA recipients.   ERL-A either
      did not have or did not implement procedures to determine
      compliance for extramural agreements or  the propriety of fund
      expenditures by CA recipients.   Also,  there was an overall lack
      of documentation of ERL-A's CA post-award management and
      oversight.  In addition,  a disconnect existed between the
      technical monitoring that was done by ERL-A POs and GAD's
      financial management responsibilities.   As a result, ERL-A did
      not adequately oversee the financial status or technical progress
      of its CA research.

      Background      '      '       "  •

      The Federal Managers' Financial Integrity Act of 1982 requires
      that internal accounting and administrative controls be
      established to provide reasonable assurances that:   (1)
      obligations and costs are in compliance  with applicable law,  (2)
      funds, property, and other assets are safeguarded against waste,
      loss,  unauthorized use, or misappropriation, and (3) revenues and
      expenditures applicable to agency operations are properly
      recorded and accounted for to permit the preparation of accounts
      and reliable financial and statistical reports and to maintain
      accountability over the assets.
                                                    v

      Chapter 44 of EPA's Assistance Administration Manual, entitled
      "Project Officer Responsibilities,"  advises POs that they are
      the recipients' main point of contact with EPA.  The Chapter
      states that "The Project Officer has the basic charge to manage
      and monitor the performance of work under the terms of the
      assistance agreement."  It also states that the PO "must monitor
      technical aspects of work performed and  ensure that the recipient
      complies with the terms of the assistance agreement."  The PO
      must provide "documentation to the Assistance Administration  Unit
      of correspondence,  meetings, phone calls,  etc., that have a
      significant bearing on the performance of either the project  or
      the recipient or its contractors."

      Disconnect Between Technical Monitoring  and Financial Management
      Responsibilities

      The disconnect between the technical monitoring responsibilities
      of the CA POs and the financial management responsibilities of
      GAD resulted in a lack of assurances that federal funds, property
      and other assets were protected against  fraud,  waste and abuse.
      GAD received financial information (Financial Status Reports  -

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      FSRs) related to CA projects which was not provided to POs,  and
      POs should have had knowledge of technical progress on CAs which
      was not provided to GAD.  As a result, neither  GAD nor ERL-A POs
      had complete information on both the technical progress and
      expenditures under .cooperative agreements that would be necessary
      for proper control and management of recipient activities.  When
      questioned about oversight of expenditures under CAs,  both GAD
      and ERL-A staff talked about trusting the universities.  We do
      not believe "trust" fulfills the requirements of the FMFIA or
      represents an effective internal control over the millions of
      dollars in CAs awarded and managed by the ERL-A.

      Inadequate Review Of Performance And Expenditures

      Problems with ERL-A's management of CAs were similar to those
      reported in DIG's report on EPA's Management of Computer Sciences
      Corporation Contract (Audit No. E1NME1-04-0169-2100295), issued
      in March 1992, i.e., lack of sufficient oversight of recipients'
      performance, inadequate financial monitoring, inadequate guidance
      to POs, and insufficient training of POs.  Because assistance
      agreements are not subject to the same strict FAR requirements as
      contracts, there are fewer controls over their award and
      management.  As a result, CA POs have fewer tools to manage their
      agreements and we found that they had chosen not to use even
      these limited tools.  POs were not receiving progress reports,
      FSRs and/or QA plans as required under their CAs.  Also, POs were
      not making frequent site visits, as recommended.  When they did
      make site visits, they usually did not perform QA audits or write
      up trip reports to document the results of their visits.  As a
      result, ERL-A and GAD had no assurances that recipients met the
      terms of their agreements or that government assets were
      safeguarded from fraud, waste, and abuse.

              ERL—A POs Did Not Review Financial Status Reports

      GAD staff received FSRs from the CA recipients, but did not
      forward these to ERL-A POs, as required by the EPA's Assistance
      Administration Manual.   POs had little or no knowledge of
      expenditures under their CAs because they did not request
      required progress reports from university Pis, which should have
      contained information on expenditures.  Also, GAD staff did not
      know the progress made under CAs because they did not receive
      progress reports and because there was little, if any, contact
      between GAD specialists and the POs at ERL-A.

      In 40 CFR 30.505 CA recipients are required to submit FSRs within
      90 days after each budget period and within 90 days after the end
      of project completion or termination.  According to Chapter 44,
      Section 5c of the Assistance Administration Manual (December

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      1984), the FSR must be reviewed by the Assistance Administration
      Unit (AAU) to assure that the recipient uses the funds properly.
      A copy should be sent to the PO who should then review it in
      relation to the recipient's progress reports and notify the AAU
      if there are any exceptions.

      The FSRs received by GAD are only required at the end of each
      budget period.  Since the first budget period of a CA is normally
      two years long, this means that- the Agency has no expenditure
      information during the first two years of the projects.  When
      questioned about the adequacy of this form of financial
      management oversight, a GAD manager replied, "The grants process
      is a public-trust type of relationship.  We rely on the grantees
      to follow the regulations."  GAD managers also stated that POs
      should make sure that the CA funds are being spent as intended.
      However, we found that ERL-A POs were not monitoring, expenditures
      under CAs and the POs generally denied any responsibility for
      financial oversight.  Some POs had little, if any, knowledge, of
      expenditures made under their CAs.

      Although special conditions in the UGA CA required that the UGA
      Project Manager submit to the ERL-A PO quarterly FSRs for each
      subproject, the ERL-A PO (laboratory director) said~that she did
      not receive FSRs.  She stated, "I think we should get it.  I
      think it's dumb we don't get them.  We don't get them for JAGs
      either."  She said she feels this is unfortunate because they
      cannot really monitor fund uses because they do not see actual
      expenditures.  However, the PO added, "I trust the University."

               Progress Reports Not Used To Monitor Agreements

      All eleven of the CAs reviewed required progress reports -, usually
      quarterly, as one of the special conditions.  However, most of
      the ERL-A POs were not requiring or receiving them.  Several of
      the POs stated that requiring progress reports might interfere
      with the progress of the research.  Others spoke of receiving
      oral progress reports, but we found no records of communication
      documenting these in CA or PO files.  According to a standard
      special condition included in CAs, the progress reports should be
      used by POs to monitor status, progress, problems with the
      project, changes in key personnel, and expenditures.

      OMB Circular A-110, issued July 1976, provides that performance
      reports shall not be required more frequently than quarterly or
      less frequently than annually.  Chapter 44, Section 5d, of EPA's
      Assistance Administration Manual advises POs to insist on high
      quality progress reports as well as their timely submission.
      Chapter 44 also states that progress reports can alert POs in
      advance to problems the recipient may have in meeting schedules

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      for completing certain work elements,  whether  the  overall
      approach should be modified,  and whether a deviation is needed.

      Under the UGA CA, quarterly progress reports were  required to be .
      submitted to the ERL-A PO by subproject as one of  the special
      conditions of the CA; however,  no progress reports were found at
      ERL-A or UGA during the audit.   The ERL-A PO stated that
      quarterly progress reports were not essential  and  that they
      tended to slow down the research progress. The UGA Project
      Manager stated that quarterly progress reports would really, be
      counter-productive.  In addition,  most UGA CA  sub-POs told us
      that they did not receive progress reports.  However,  some sub-
      POs stated that they received oral progress reports.   As a
      paradoxf however, some of the ERL-A on-site subprojects were
      providing progress reports to UGA because ERL-A was actually
      directing the research.

      An example of how failure to.require quarterly progress reports
      can negatively impact the management of a CA occurred under the
      UGA CA when there was a discrepancy found concerning tasks UGA
      would perform under a $30,000 subproject.  According to the PO
      {laboratory director) , UGA's task was to develop a curriculum for
      an early childhood environmental education program.'~  However,
      both the ERL-A sub-PO and the UGA PI told us that  the purpose of
      the subproject was for UGA to develop an operating plan for the
      ERL-A *s planned day-care center.   When we informed the laboratory
      director of the discrepancy between her statements and those of
      the sub-PO and UGA PI, she stated,  "I'm surprised  to hear that."
      If the PO had been receiving the required progress reports, she
      would have known of the apparent misunderstanding  over UGA's
      subproject tasks.

      When the PO for the Montana State University  (MSU)  CA attempted
      to get the required progress reports from the  MSU  PI,  he was
      chastised by the laboratory director for making this request. He
      referred to this as getting his hand "spanked." The PO was told
      that it was not necessary to document things like  this because it
      could all be handled over the phone.  The PO said  that he was
      told that one of the special conditions of the CA  stated that
      progress reports could be oral.  Although in the initial funding
      package request one of the special conditions  included oral
      progress reports, the special conditions in the actual award of
      the CA did not include this statement.

                Quality Assurance Not An Integral Part Of CA
                         Data Collection Activities

      Although ERL-A included QA audits of CAs in the list of internal
      control reviews they had performed between 1989 and 1991, we

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      found no evidence of QA audits in CA files.   In addition, the
      ERL-A QA Officer had recommended that QA plans be submitted prior
      to the start of any significant fieldwork or laboratory data
      collection activities for four large Global Change Program CAs we
      reviewed.  However, cooperators had not submitted the required QA
      plans prior to audit fieldwork.  Both ERL-A and ORD officials
      agreed that lack of QA procedures was a problem.  The ERL-A QA
      Officer stated that there was no way for ERL-A to monitor CA QA
      plans because of insufficient travel funds for field trips and an
      insufficient number of POs with available "time to make site
      visits.  As a result, there is a lack of assurance that the data
      being collected under CAs to develop national environmental
      policy is reliable or that all acquired data collected under
      these CAs are suitable for the user's intended purpose.-

      The responsibility for performance of QA activities was assigned
      to ERL-A staff.  However, because of increased work loads or
      other priorities, ERL-A viewed QA as "collateral" duties and
      delegated them to contractor employees.  QA reviews of CA
      proposals found in CA files were performed by the TAI site
      manager, a contractor.  The TAI site manager served as the
      laboratory's QA Officer and performed QA reviews of, extramural
      agreements as recently as May 1992.   OIG concluded in our ERL-A
      survey report9  that QA was an inherently governmental  function
      that should not be performed by a contractor employee.

      ERL-A's QA Officer/Director of Research stated that he did not
      feel uncomfortable with the current QA of CA field studies
      because the present ERL-A level of CA funding was so small.
      However, he stated that five years from now the Agency would be
      putting $200 million in CAs and lAGs and that the numbers/data
      generated would substantially impact policy decisions.  The
      increased use of off-site CAs will result in an extra burden on
      QA/QC procedures.  The QA Officer stated that QA was not one of
      his major functions and that he did not have "the time, the
      resources, or the intellect" to do QA for all extramural
      projects.  He added that the lack of resources to adequately
      perform QA functions makes the Agency "vulnerable."  In lieu of
      required QA plans and audits,  the QA Officer relied upon the
      ability and experience of ERL-A's POs,  site visits by these POs,
      and the fact that publications generated by the CA research go
      through the peer review process.   They also had confidence that
      the universities had good QA procedures.
           9  ORD Environmental Research Laboratory,. Athens, Georgia,
      E1XMG2-04-0102-3400007,  November 30,  1992.

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      EKL-A POs appeared to be unconcerned about the lack of QA plans.
      One of the POs stated that just having a well-documented QA plan
      was no guarantee that proper procedures are followed.  He felt
      that a better guarantee was the experience and good reputation of
      the researcher.  He added that in his opinion the peer review
      process resulted in good controls.  Another PO stated that the
      quality of the science was assured through journal articles,
      books, and other publications and databases.

      When we informed the laboratory director about our concerns
      pertaining to the lack of QA documentation, the laboratory
      director stated, "I'm worried about that myself."  When
      questioned about the accuracy of data without a QA plan, the
      laboratory director stated, "If they (universities) were totally
      lying and were clever about it, it would be hard to detect."

      Based on our preliminary findings, the laboratory director took
      some corrective actions during the audit with respect to QA.  The
      laboratory director stated that ERL-A had received additional end
      of the year travel dollars and that she sent all of the POs out
      to the various universities for site visits.  She added that they
      would be performing QA audits during these visits.  Laboratory
      Operating Procedure No. 5330-8 entitled, "Site Visits," written
      in September 1992, established policies and procedures for site
      visits made by project officers.  One of the items listed to be
      done during the site visits is a QA audit.

             Infrequent Site Visits Limited Effective Monitoring

      As previously stated, ERL-A POs did not make frequent site visits
      to cooperator locations primarily due to the lack of travel
      funds.  This same condition was reported in the 1983 OIG audit
      report and continues to be a problem nine years later.  When site
      visits were made, POs usually did not prepare the required trip
      reports and never forwarded copies to GAD for inclusion in the
      official files, as required by the Assistance Administration
      Manual, Chapter 44.  When questioned about the lack of trip
      reports in the official files, GAD managers stated that there was
      no requirement for trip reports.  They were apparently unaware of
      the requirements of their Assistance Administration Manual.

      OMB Circular A-110 (July 1976) states that the Federal sponsoring
      agency shall make site visits as frequently as practicable to
      review program accomplishments and management control systems and
      to provide such technical assistance as may be required.  EPA's
      Assistance Administration Manual, Chapter 44, Section 5b, also
      emphasized the use of site visits as a tool to monitor assistance
      agreements.  The Manual states that site visits should be used to
      monitor: (1) actual versus scheduled performance/accomplishments,

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      (2)  condition of equipment/property used on,  or purchased for,,
      the project,  (3) resources (personnel,  equipment,  facilities,
      etc.)  charged to the project are actually used on the project,
      and (4)  conditions that might adversely affect EPA's interest,
      i.e.,  change  in the recipient's financial status,  personnel
      problems, noncompliance with labor/civil rights laws, and/or
      over-extension of the facilities.

      The Assistance Administration Manual,  Chapter 44,  further advises
      POs to provide constructive advice/criticism during site visits,
      but not to attempt to supervise either the project or the
      recipient's employees.   In addition, POs are to prepare a trip
      report that highlights their findings  and evaluates the quality
      of work being performed,   copies of the trip reports are to be
      provided to the Assistance Administration Unit (AAU) for
      inclusion in  the official file, as well as documentation of any
      follow up actions that are taken.

      Site visits are probably the POs1  best tool to monitor
      performance and expenditures under CAs.  The failure of. ORD/ERL-A
      to provide adequate travel funds to perform site visits and the
      failure of the POs to effectively use  these visits, when travel
      funds were available, weakens ERL-A's  ability to assure
      recipients' compliance with CA terms and to ensure that federal
      assets are safeguarded.

      Lack Of Documentation of CA Management/Over sight in ERL-AFiles

      A general lack of documentation for the management/oversight of
      ERL-A cooperative agreements existed at ERL-A;.especially for the
      UGA CA.   ERL-A POs normally did not receive progress reports as
      required.  When they did, they were usually oral not written.   In
      addition, although most POs stated they telephoned Pis, there
      were almost no records of conversations, almost no trip reports,
      and very few  fax documents.   This lack of documentation left no
      audit trail,  but more importantly, it  left no record of either
      the decision-making process or of ERL-A's monitoring of
      activities under the extramural agreements.  Lack of
      documentation in ERL-A CA files and ERL-A's improper records
      retention policy is also addressed in  Chapter 6 of this report.

      The deficiencies in ERL-A files were especially evident in the
      case of UGA,  the only university where we interviewed cooperator
      employees and reviewed cooperator files.  From these cooperator
      interviews and file reviews we received information that we were
      not given by  ERL-A staff and found documentation that was not
      included in ERL-A files.                                  ,
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      The ERL-A PO, most of the sub-POs, and the UGA Project Manager
      stated that their contacts pertaining to the DGA CA had been
      verbal.  Both ERL-A and UGA personnel explained that the lack of
      documentation occurred as a result of the long-term relationship
      between ERL—A and UGA and because UGA was a local university.
      The ERL-A PO and the UGA Project Manager both stated that they
      had no written correspondence with each other pertaining to the
      CA; however, correspondence between the ERL-A PO and UGA Project
      Manager was later found in other files.
      RECOMMENDATIONS - MANAGEMENT OF CAS

      Recommendations to the Assistant Administrator. Research and
      Development

      We recommend that the Assistant Administrator for Research and
      Development ensure significant improvements are made in
      assistance agreement management to assure compliance with
      agreement terms and that Agency resources are being effectively
      used and safeguarded against waste and abuse.  Specifically, we
      recommend the Assistant Administrator require the:

      Director. Office of Environmental Processes and EffectsResearch
      to:

      - Review the adequacy of corrective action taken on the prior
        1983 OIG audit finding related to infrequent and inadequate PO
        site visits and determine whether ORD laboratories properly
        implemented ORD's actions in this area.

      Director. Environmental Research Laboratory^ -Athens to;

      - Require that CA POs obtain quarterly progress reports from
        cooperators, in compliance with CA special conditions and
        Agency policies, to assist them in monitoring the status,
        progress, problems, and expenditures under CAs.  CA special
        conditions should require written progress reports to document
        laboratory review and oversight of cooperator activities.

      - Require that CA POs comply with all Lab Operating Procedures
      and
        Assistance Administration Manual requirements in the management
        of CAs.

      - Require frequent, periodic site visits by CA POs and allocate
        sufficient travel resources to accomplish this critical control
        technique.
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        Require management review of PO trip reports for CA/IAG site
        visits and that the reports, in particular,  adequately document
        PO oversight of expenditures under extramural agreements.

        Remind CA POs of their financial management  responsibilities as
        delineated in EPA'.s Assistance Administration Manual and
        request that GAD' provide FSRs to POs for their use in
        monitoring cooperator financial transactions.

        Provide CA POs with copies of FSRs from GAD  as required
        by the Assistance Administration Manual and  that they review
        the FSRs and report any discrepancies to GAD.

        Require POs to maintain adequate written records to document
        their management and oversight of CAs,  including but not
        limited to all ERL-A and recipient correspondence relating to
        the award, performance, and closeout of assistance agreements.

        Require and ensure that cooperators submit QA plans and that
        ERL-A staff properly perform QA audits of cooperator projects
        and document these audits in ERL-A files.
      AGENCY RESPONSE AND PIG EVALUATION OF AGENCY COMMENTS
                                ORD Response

      ORD generally agreed with the findings and recommendations
      presented in Chapter 3.  Corrective actions and milestone dates
      for completion of these actions were sufficient to  resolve all
      but 6 recommendations made to ORD and ERL-A management.   Those
      recommendations that require additional information or changes
      regarding planned or initiated corrective actions prior to
      resolution are presented in Appendix I to this  report.


                                GAD Response

      GAD disagreed with certain statements in Chapter 3  regarding
      specific CAs and lAGs questioned.  We generally disagreed with
      GAD's comments.

      GAD agreed with our statement regarding the MSU CA  that CAs can
      not be used to train federal employees; however,  GAD indicated
      that an EPA employee on an IPA to a recipient organization is
      considered an employee of that organization and could be trained
      under a cooperative agreement if the training were  needed to
      complete the project.       -

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      The employee's training under the MSU CA was not needed to
      complete the project as the GAD response suggests.   Rather,  the
      project was conceived in order to provide a Phd for the EPA
      employee.

      In addition, we disagree with GAD's implication that an EPA
      employee on an IPA is no longer a federal employee  and,
      therefore, can be trained using CA monies.  Although an EPA
      employee's services have been temporarily assigned  to a recipient
      organization, the individual, in our opinion, remains an active
      federal employee because the federal government still dictates
      the individual's level of compensation and benefits, not the
      recipient organization.  Also, the employee continues to accrue
      federal retirement benefits and annual/sick leave,  maintains his
      federal health benefits, and is required to return  to the federal
      government, without submission of an SF-171, upon expiration of
      the IPA.  Therefore, the individual on an IPA retains all the
      attributes of a federal employee except for the possible sources
      of funding of his compensation and benefits.  In the case of the
      cited IPA, even MSU's contribution to the individual's salary and
      benefits under the IPA came from CA funds awarded by ERL-A.
      Therefore, EPA paid 100 percent of the IPA costs.

      In addition, CAs funded from R&D appropriations cannot be used to
      train federal employees.  R&D appropriations and related
      congressional reports do not authorize federal staff
      compensation, benefits, travel or training expenditures from R&D
      funds.  Only the S&E appropriation and certain trust funds can be
      used to fund personnel costs.  Therefore, if EPA employees on an
      IPA are still federal employees, the use of R&D funds under a CA
      to train these employees may constitute a violation of
      appropriation law.

      GAD also disagreed with our conclusion that the Venezuelan IAG
      was awarded without proper statutory authority.  According to
      GAD, OGC had rendered an opinion that Section 103 of the Clean
      Air Act authorized the issuance of XAGs and that with OIA
      approval, GAD had properly awarded the Venezuelan IAG under
      policy in effect at that time.  However, OGC later  ruled that
      Section 103 did not authorize foreign lAGs and GAD  discontinued
      approving foreign lAGs.

      GAD's response concerning the Venezuelan IAG omits  critical
      information.  The application form that GAD stated  was used for
      this IAG, indicates the form is for approval of a "foreign
      grant/contract."  In addition, documentation in ERL-A's files
      indicated that OIA was asked to assist with State Department
      approval of a cooperative agreement to Venezuela.   The IAG

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      compendium at. the time required an OIA exception to award an IAG
      directly to a foreign organization or government.  We found no
      such exception,  only OIA's apparent approval of a foreign CA.  In
      addition, OGC had only rendered an opinion that Section 103 of
      the Clean Air Act authorized lAGs.  OGC never stated that foreign
      lAGs were authorized.  Later OGC clarified that foreign lAGs were
      not authorized under Section 103 and the IAG compendium was
      incorrect in allowing an OIA exception to issuance of such lAGs.
      Therefore, OGC's rulings support our conclusion that statutory
      authority never existed, for the issuance of the Venezuelan IAG.

      GAD's complete response to findings presented in Chapter 3 is
      available upon request.

      GAD generally concurred with Chapter 3's recommendations to the
      GAD director.  GAD'.s response to each recommendation in Chapter 3
      and actions needed for resolution of each recommendation are
      presented in Appendix I.
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                     s
                            CHAPTER 4
       ERL-A ABUSED CONTRACTING PROCESS TO RETAIN LONG-TERM
         CONTRACTORS AND AVOID FULL AND OPEN COMPETITION
In all five on-site support contracts reviewed  (maximum value of
$31.6 million), ERL-A abused the procurement process to retain
favored contractors and their employees and then utilized these
same contracts to perform prohibited contracting activities.  To
obtain desired contracts and related services,  ERL-A either
avoided or biased the competitive procurement process for all
five contracts1.   Over the last six to seven years,  ERL-A avoided
competition by using the 8(a) set-aside program to obtain
repeated sole-source acquisitions with current  contractors.  By
using the 8 (a) non-competitive process, ERL-A prevented:  (1) the
interruption of on-site contractor  services and the loss of
contractor staff providing long-term technical/administrative
support, and (2) the additional administrative  burden required
under a competitive procurement.  After one incumbent contractor
at ERL-A no longer qualified for small business 8(a) status and
related sole-source awards, the contract was removed from the
8(a) set-aside program, without adequate justification, to allow
the incumbent an opportunity to compete.  Then, during the
follow-^on "full and open" competition, ERL-A biased the
procurement in favor of the incumbent.  In another 8~(a) set-aside
procurement, ERL-A split and underestimated procurement
requirements and costs to avoid the 8(a) competitive threshold
and justify sole-source•awards.  Further, ERL-A improperly used
these on-site contractors to supplement its in-house human
resource needs.  ERL-A's substantial dependency on on-site
contractors, especially long-term contractor employees, to
accomplish its mission resulted in  less than arms-length
relationships between ERL-A and contractor staff, including
prohibited personal services and favored treatment toward
incumbent contractors, and ERL-A ignoring the benefits that full
and open competition brings to the  procurement  process.


BACKGROUND

             History of Growth In Contractor Support

Since 1977, ERL-A has been using on-site contractors to support
its mission.  Over the years, as ERL-A's research
      1   Contracts  include the three  contracts  in our sample which
were subjected  to indepth review  and the limited  review of two
related predecessor contracts.

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      responsibilities grew from supporting two to twelve environmental
      laws, so did its dependency on contractors.  However, while the
      mission grew, its S&E appropriation and FTE ceiling remained
      fairly stable.  Growing needs for additional federal staff,
      equipment,  and travel to support in-house research did not
      increase in direct proportion to the laboratories increased
      responsibilities.  In contrast, extramural funding available for
      contracts,  CAs, and lAGs steadily increased from $5.9 million in
      1986 to $9.3 million in 1992.
                          ERL-A Historical Funding
                       Million
                       1986 1987 1988  1989 1990  1991  1992
lAGs/Other B
CAs/Grants •
Contracts H
Intramural •
$0.29
$2.77
$2.83
$4.4
$0.49
$1.48
$3.06
$4.91
$0.28
$1.5
$2.47
$4.97
$0.51
$1.75
$2.67
$5.69
$0.47
$2.34
$3.15
$6.28
$0.64
$2.91
$4.11
$6.39
$2.1
$3.3
$3.9
$6.6
                                    Fiscal Years
      With increasing responsibilities and limited in-house resources,
      ORD and ERL-A,  following Agency policy, turned to the private
      sector to augment its on-site needs for scientific, technical,
      and administrative support.  Strictly imposed federal employment
      ceilings made on-site contractor support staff critical to the
      accomplishment of ERL-A research goals.  From 1986 to 1991, on-

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      site  contractor and cooperator support grew by 84 percent and 29
      percent, respectively, as illustrated in the chart below.  On-
      site  extramural support became important in all areas of
      laboratory operations.

             On-Site Staffing Changes/1986 to 1991
                    % Change From Base Year
1UU
80
60
40
20
0
-20
An
•°'-FTEs
+ Contractors
•^Cooperators
; -••-'• "-'••;•-.'- -''
.;:;..:. ',, .:
	 : 	 1 	
^®
': i
».[
;'?SS
• • -'i — L_ —
::' ; ,,!!:.::;A.!! .•*•' •'•'•• '.
. - " !'ri", ";-;:"; -_ :' ;
HI
' '•: = '*--:%:
— , „ . " — t 	 : —
.!,',,,<'•• , :
ill
• / * ":.*•'
	 •-> — -. 	
Sgp '£
Illll
lip;';
" •'-"•y:^;-.

::.'2=484.2
:'L~v ii I.-';..-
!!§*
* " *°-4.6

                      1986  1987  1988  1989   1990   1991
FTEs
Contractors
Cooperators
0
0
0
-2.8
15.8
6.5
-7
47.4
-25.8
-4.6
50
35.5
-3.2
84.2
29
-4.6
84.2
29
                                   ATHENS LAB
             Base Year = 1986
     ERL-A utilized two methods to procure scientific, technical  and
     administrative contract support to augment its oh-site resources;
      (1) 8(a) set-aside program and (2) full, unrestricted
     competition.   However, ERL-A*s overwhelming choice for procuring
     contract assistance was the sole source, 8(a) set-asides.
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                 Small Business Act. Section 8 fal Contracts

      The purpose of Section 8(a)  under the Small Business Act (15
      U.S.C. 637)2 was to promote the development of small business
      concerns owned and controlled by socially and economically
      disadvantaged individuals so that such concerns can compete on an
      equal basis in the American economy.

      The Small Business Administration (SBA)  is responsible for
      certifying companies as eligible 8(a) status and for monitoring
      contractors certified under the 8(a) program.   The 8(a)  program
      assists small and disadvantaged businesses in building the needed
      experience where they can successfully compete against other non-
      targeted businesses.   Small disadvantaged businesses retain their
      8(a)  status for up to nine years or until they attain a certain
      dollar revenue threshold,  whereupon they are required to graduate
      from the program to full and open competition for government and
      private sector contracts.

                    EPA's 8 fa) Set Aside Contract Program

      Under the Small Business Act, EPA and other Federal agencies are
      required to establish and conduct programs to increase small
      business enterprise participation in government procurements.
      Heads of federal contracting activities are responsible for
      effectively implementing the Small Disadvantaged Business
      Utilization (SDBU)  Programs within their agency's activities,
      including achieving program goals.  In 1991,  EPA's goal was to
      award eight percent of its contracts in support of small and
      disadvantaged business.  EPA's Office of SDBU is responsible for
      providing guidance and assistance to EPA contracting and program
      offices concerning Section 8(a)  contracting.

      According to the EPA Project Officer's Handbook - Chapter 3,
      Section 3.106-8(c),  the PO has the primary responsibility for
      identifying suitable procurements for small business 8(a) set-
      asides.  While the PO may recommend that a requirement be met
      through a set-aside,  the determination to set-aside the
      procurement rests with the CO.   The CO may reserve the entire
      amount (total set-aside) or a portion (partial set-aside) of a
           2  The Small Business Act was amended November 15, 1988 under
      the Business  Opportunity Development Reform Act of 1988.  Referred
      to in this report as the Small Business Act.

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      procurement, for the exclusive participation of small 8 (a)
      business concerns.

      EPA programs electing to contract under an 8(a)  set-aside may
      rely on SBA to provide the names of eligible firms or can propose
      one of its own.  The recommendation of an 8 (a) contractor for
      contract award may be made either by the CO or the PO after
      appropriate consultation with EPA's SDBU Specialist.  If EPA
      proposes a contractor, SBA advises EPA as to whether*the proposed
      firm is 8 (a)  approved.  Under the 1988 amendments to the Small
      Business Act,  when an agency proposes a specific contractor for
      an 8 (a)  procurement, SBA must honor that request.  This
      requirement places a significant amount of responsibility on the
      requesting agency.3

      The Project Officer's Handbook - Chapter 3, Section, 106-8(c)
      states that it is EPA's policy not to seek an 8 (a)  set-aside
      contract when one or more of four conditions exist.  The last of
      these conditions states:

           ... The contracting office can make a noncompetitive-
           award directly to a small minority business concern,  or
           there is a reasonable probability that an award can be
           won by such a small minority business concern through
           normal competitive procedures.

                       Competition  In  Contracting Act

      The Competition in Contracting Act (CICA) of 1984 (Public Law 98-
      369)  requires that,  with certain limited exceptions, an executive
      agency shall obtain full and open competition in conducting a
      procurement for property or services.  Under the Act,  there are
      seven exceptions which would permit the award of contracts under
      procedures other than full and open competition.   Small and
      disadvantaged business set-asides were not specifically listed as
      an exception for awarding sole-source procurements under the
      CICA.  The Act makes specific reference to competition and small
      and disadvantaged businesses stating:
           3  GAO Report SMALL BUSINESS; Problems in RestructuringSBA's
      Minority Business Development Programf  GAO/RCED-92-68,  addresses
      problems SBA encountered in meeting geographical goals when it must
      accept  contractors recommended by Agencies.

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           In fulfilling the statutory requirements relating to
           small business concerns and socially and economically
           disadvantaged small business concerns, an executive
           agency shall use competitive procedures but may
           restrict a solicitation to allow only such business
           concerns to compete.

      However, FAR 6.302 specifically authorizes the Small Business
      Act, Section 8(a).program for other than full and open
      competition in awarding 8(a) contracts.  This allowed for sole
      source, as well as competitive acquisitions, under the 8(a)
      program.

                    1988 Amendments to Small Business Act

      The 1988 amendments to the Small Business Act,4 resulted in the
      revision of FAR 19.805-1 (effective October 1, 1989) to require
      competition for all 8(a) set-aside procurements if:

           (1) There is a reasonable expectation that at least two
           eligible and responsible 8(a) firms will submit offers
           and that award can be made at a fair market price; and

           (2) The anticipated award price of the contract,
           including options, will exceed $5 million for
           manufacturing acquisitions and $3 million for all
           others.
      ERL-A UTILIZED PROCUREMENTS TO RETAIN FAVORED CONTRACTORS

      Over the last six to seven years, ERL-A officials utilized the
      SBA's Section 8(a) set-aside program to award $16 million in
      sole-source contracts to long-term on-site contractors and then
      biased a $16.8 million competitive procurement to retain the
      favored contractor after the company was no longer eligible for
      8(a) sole-source awards.  Specifically, ERL-A: (1) exploited its
      8(a) sole-source contracting authorities to further on-site
      resource capabilities under the Technology Applications
      Incorporated (TAI) contract without competition which included a
            * Business Opportunity Development Reform Act of 1988, Public
      Law 100-656, November 15, 1988.

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      contractor promoted modification that expanded the scope and
      significantly increased the value of the sole-source contract one
      day before the contractor's 8(a) eligibility expired; (2)
      requested, after TAI graduated from the 8 (a) program, that the
      contract no longer be designated as an 8 (a) set-aside to allow
      the incumbent to compete for the business; and (3) then biased
      the subsequent competitive procurement in favor of TAI.  In 8(a)
      sole-source awards to American Scientific International (AScI),
      ERL-A intentionally split a request for contract and
      underestimated the cost of one of the resulting contracts to
      avoid the $3 million competitive threshold established under the
      1988 amendments to the Small Business Act.  In our opinion, these
      actions demonstrated ERL-A's favored treatment of incumbent
      contractors and its willingness to avoid and, if necessary, to
      impede competition in order to retain these long-term
      contractors.

      Background

      Since 1982, ERL-A awarded four scientific and technical support
      contracts to TAI and three to AScI, totaling about $31.7 million.
      Six of these seven contracts, totaling about $16 million, were
      awarded as 8(a) sole-source contracts.  The remaining contract
      was classified as an "unrestricted competitive" award, valued at
      $16.9 million, to TAI after TAI's 8(a) eligibility expired.
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            ERL-A ON-SITE TECHNICAL SUPPORT CONTRACTS SINCE  1982
                        FOR CONTRACTORS IN OUR SAMPLE
       Contractor
       Contract #     Type
Award.             Amount
 Date    Expired    (HPV)
staff
Years
TAX
68-03-3154
TAX 5
68-03-3198
TAX
68-03-3351
TAI
68-C1-0024
ASCI
68-03-3551
ASd ' >
68-CO-0054
ASd
68-C1-0012
8 (a) Sole
Source
8 (a) Sole
Source
8 (a) Sole
Source
Competi-
tive
8 (a) Sole
Source
8 (a) Sole
Source
8 (a) Sole
Source
10/01/82
10/01/83
05/05/86
05/09/91
09/30/87
09/25/90
03/21/91
09/30/83
05/04/86
04/30/91
09/30/95
O9/30/90
09/30/93
09/30/92
$332,283
$859,000
$6 ,564 ,577s
$16,83^3,253
$2,164,193
$3,291,044
$2,734,210
8
6
31
S37
24
26
10
           5  Originally  a  5-year contract (2  base/3 option years)  with
      maximum potential  value  (MPV)  of about $1.89 million.   However,
      last two option years  not exercised in order to  award follow-on
      contract 68-03-3351.

           6  Original estimate was $1.2 million for contract 68-03-3351,
      but modifications increased contract value to over  $6.6 million and
      extended performance period to 5 years.

           7   Estimated  contractor staffing level by  the fourth option
      period of the contract.
           8  Last option period not exercised.
      on September 30, 1992.
              Contract allowed to lapse
           9  AScI contracts 68-CO-0054 and 68-C1-0012 essentially split
      the SOW for predecessor contract 68-03-3551 into on-site and near-
      site contracts with significant increase in staff years from 24 to
      36.

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      As shown above, TAI on-site support has grown from 8 staff years
      in 1982 to a potential 53 staff years under the current TAI
      contract.  AScI contract staff years increased from 24 in 1990 to
      36 in 1991.  Over the life of these contracts, ERL-A became
      increasingly dependent on TAI and AScI to provide on-site support
      services.  This dependence created a virtual contractor monopoly
      which evolved into a prohibited personal services relationship
      between ERL-A and its on-site contractors.  Contractor employees
      became immersed into ERL-A's day-to-day operations and were
      treated like any other federal resource.  This prohibited
      relationship resulted in contractor performance of inherently
      governmental functions (IGFs) and increased ERL-A's vulnerability
      as contractor staff became more essential to critical laboratory
      operations.

      ERL-A Initiated Repetitive Sole-Source Contracts To TAI In Lieu
      of Competition

      ERL-A disregarded the overall goals of the Small Business Act and
      abused its authorities to maintain and further its on-site
      resource capabilities with a minimum of administrative burden.
      Between October 1982 and May 1991, ERL-A initiated three 8(a)-
      sole-source contracts to TAI.  Under 8(a) sole-source contracts,
      TAI's presence at the laboratory grew from 6 employees supporting
      one branch to 31 employees supporting all four branches.  Most of
      this growth occurred under TAI's third sole-source contract (68-
      03-3351)  which was significantly modified both in amount ($3.7
      million - 143 percent of original contract estimate) and scope
      near the end of TAI's 8(a)  eligibility.  As long as TAI was an
      8(a) contractor, ERL-A used the 8(a) umbrella to sanction sole-
      source procurements.  Even after TAI had gained a competitive
      position and a reasonable probability existed that TAI could win
      an ERL-A award through normal competitive procedures, ERL-A
      elected not to compete.

      ERL-Afs initial support of the 8(a)  set-aside program was
      encouraged by ORD and CMD.   The first two contracts awarded to
      TAI and ERL-Afs management of those contracts were in basic
      compliance with the intent of the Small Business Act.  However,
      as ERL-A responsibilities increased, annual intramural funding
      and authorized staffing levels remained relatively the same while
      extramural funding steadily increased.  ERL-Afs dependency on the
      extramural funding grew as contractor support extended into all
      operations of the laboratory.  One manager explained that as ERL-
      A became increasingly dependent on contract support: "Everyone
      wanted a piece of the [extramural] pie."  ERL-A staff fought for


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      extramural resources as the only available means of task
      accomplishment.

      The four TAI on-site contracts discussed below demonstrate the
      development of ERL-A's dependency on contractors to augment its
      intramural resource and FTE deficit.  While ERL-A's management of
      the first two TAI contracts were generally in compliance with the
      intent of the Small Business Act, they offer a historical
      perspective on TAI's growth at ERL-A.  ERL-A's 1985
      reorganization, commensurate with increases in extramural funding
      and related increases in TAI's contract, was the beginning of
      ERL-A's dependency and resulting favoritism for the contractor.
      This was clearly evidenced in ERL-A's procurement and management
      of the third and fourth TAI contracts.

      Contract No. 68-03-3154. Awarded October l. 1982;  TAI's first
      sole-source 8(a) contract at ERL-A  (68-03-3154) was a one-year
      level-of-effort (LOE)  contract.  When this contract was awarded,
      TAI had already been in business approximately 5 years and had
      contracts with other Federal agencies.  The purpose of the ERL-A
      contract was to support the Biology Branch in chemical and
      biological analyses for a project called Aquatic Ecosystem
      Simulator (AEcoS).  This initial TAI contract succeeded a
      contract ERL-A had with Bionetics .Corporation10 and was awarded
      as part of the Agency's commitment to support small and
      disadvantaged business.

      The original procurement request rationale showed that contract
      68-03-3154 was originally intended to be competitively bid and
      that the period of performance was planned at 36 months.
      However, a PO file memorandum dated March 23, 1982 documented
      that Washington had highly recommended the use of an 8 (a) firm.
      The memorandum further documented that all or some of the
      employees working under the existing Bionetics contract could be
      hired by the new firm at ERL-A's recommendation.  The PO
      concluded:

           I believe the success of a contract does not depend on
           the company that operates it but rather on the people
           who work here under the contract, and we have a large
           input into the selection of these people [emphasis
           added].
           10  Bionetics Corporation performed  on-site support at ERL-A
      from March 1980 to September 1982 under contract 68-03-2926.

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      Since ERL-A would have direct input into the selection of the
      contractor staff, changing contractors was- no longer viewed as
      much of a problem.  The PO also concluded in the March 1982
      memorandum that ERL-A would have little risk because if the
      company did not operate up to ERL-A's expectations, it would be
      easy to terminate the contract.  Another advantage, as described
      by the PO, was that under the existing statute TAI would remain
      8(a) eligible for five years with a possible two-year extension.
      This would provide ERL-A an opportunity to award repetitive
      follow-on sole-source procurements to TAI and at the same time
      eliminate the more "time consuming competitive process."

      ERL-A subsequently submitted a request for an 8(a) set-aside with
      TAI.  in a June 1, 1982 letter to CMD, the PO stated that TAI's
      proposal included the resumes of all but one of the individuals
      who had been working under the Bionetics contract.  However,
      TAI's proposed cost for the first year was about $100,000 higher
      than that being paid to Bionetics.  ERL-A files documented that
      on June 29, 1982 the PO petitioned CMD to reconsider and allow
      the laboratory to compete the on-site procurement.  The PO argued
      that it would be in the "worst interest of the government" to pay
      a higher cost to contract with an 8(a) contractor considering the
      Lab's budget constraints.  The PO claimed that there were other
      available firms with much lower overhead and G&A rates and
      requested that, instead of an 8(a) set-aside with TAI, CMD extend
      the Bionetics contract into FY 83 to accommodate budget
      constraints and to allow a competitive follow-on.  However, ERL-A
      apparently agreed to a one-year contract with TAI despite the
      higher cost.  Because the FY 83 cost of the TAI contract exceeded
      the available resources, ERL-A decreased the scope of the
      contract to approximate its budgeted resources.  The award of
      this 8(a)  sole-source contract to TAI demonstrates an EPA
      weakness in controlling contractor costs.  Although this contract
      award contributed to EPA's goals for 8(a) contracts, ERL-A
      actually suffered because it paid a higher cost for the same
      employees for less work.

      Contract No. 68-03-3198. Awarded October 1.  1983;  This was TAI's
      second 8 (a) sole-source contract.'  The PO said that ERL-A
      retained TAI for the second contract because they were pleased
      with TAI' s work and TAI had been very accommodating to ERL-A.
      Therefore, on October 1, 1983, TAI was awarded a new five-year
      contract having a two-year base period and three one-year
      options.  The contract's" initial estimated value was $1,889,999.
      During our review of contract files,  no evidence was found that
      competing this procurement was ever discussed by ERL-A or CMD.

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      Before the first option on contract 68-03-3198 was exercised,
      ERL-A went through a reorganization which necessitated an
      expansion of the contract.  Contract support was expanded to the
      Director's Office, Program Operations Office, and the four
      research branches.  Indirect research support would include
      graphic services, consulting services, typing services for
      reports, manuscripts, and setup of symposia, conferences, peer
      reviews, and meetings.  Because of the numerous changes to the
      contract scope, ERL-A decided not to exercise the contract
      options under 68-03-3198 and instead awarded a third sole-source
      contract to TAX with a greatly expanded scope. However, until the
      new contract could be procured, ERL-A, through CMD, modified 68-
      03-3198 (modification 11, dated December 11, 1984)  to compensate
      for the expanded scope.

      Contract No. 68-03-3351. Awarded May 5. 1986:  This contract was
      TAI's third straight 8(a) sole-source award.    ERL-A's
      procurement proposal to CMD on May 13, 1985 requested a
      noncompetitive 8(a) contract for the period May 5,  1986 to
      September 30, 1989 for an estimated cost of $2.6 million.  By the
      expiration of this contract, the value increased through
      modifications over two and one-half times ($6.55 million) the
      original $2.6 million estimate, the number of contract employees
      increased over 100 percent, and the period of performance was
      extended by 2 years to a 5 year performance period.  ERL-A's
      justification for its third noncompet-itive procurement (68-03-
      3351) was that the contract would be awarded to a firm [TAIJ
      pursuant to Section 8(a) of the Small Business Act.  In the
      proposal, ERL-A attempted to further justify the sole-source
      procurement as follows:

           The information to be developed or the resources to be
           provided by the contract are not available in EPA or
           from other sources.  Existing contractual mechanisms
           are inadequate in scope to address the breadth of
           support to be secured under the proposed contract
           [emphasis added].

      This justification appeared to fit one of the seven exceptions
      outlined in the CICA for awarding contracts under procedures
      other than competitive.  Specifically, the Act states that an
      executive agency may use procedures other than competitive
      procedures when "the property or services needed by the executive
      agency are available from only one responsible source and no
      other type of property or services will satisfy the needs of the
      executive agency."  However, the CICA, requires that two rules be

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      applied to determine if services are unique and available from
      only one source.

           (1) ... the property or services shall be considered to
           be available from only one source if the source has
           submitted an unsolicited research proposal that
           demonstrates a unique and innovative concept ... ; and
           (2) in the case of a follow-on contract for the
           continued development or production of a major system
           or highly specialized equipment when it is likely that
           award to a source other than the original source would
           result in (i) substantial duplication of cost ... or
           (ii) unacceptable delays in fulfilling the executive
           agency's needs ....

      in the case of the TAI procurement, neither applied.  The work
      provided for in the TAI contract was not of a unique nature and
      did not involve the development of major systems or highly
      specialized equipment which would justify other than a
      competitive procurement.  The work performed by TAI consisted
      mainly of "bench-level" support for research and development
      which was available from other sources.   In contrast^, ERL-A had
      argued the availability of alternative sources approximately four
      years earlier when it awarded TAI its first contract.  CMD took
      no exception to ERL-A's procurement proposal and awarded a third
      8(a) sole-source contract to TAI.

      During this time, the Section 8 (a) program provided for both
      sole-source arid competitive procurements.  FAR 6.302-5 provided
      that when procuring under the Small Business Act, Section 8(a)
      program agencies could use other than full and open competition.
      This interpretation allowed for sole-source as well as
      competitive acquisitions under the 8(a)  program authority.  Since
      competitive thresholds were not put into the authority until
      October 1,  1989, ERL-A and CMD had the choice between competition
      among 8 (a)  firms, an 8 (a)  sole-source award, or unrestricted
      competition.  ERL-A's and CMD's request was for a sole-source
      8(a) award.  According to the Project Officers' Handbook, April
      1984 [M-3.106-8(c)(1) ], CMD's subsequent approval of a sole-
      source 8 (a) award was contrary to EPA's policy not to seek an
      8(a) contract if:

           The contracting office can make a noncompetitive award
           directly to a small minority business concern [not
           participating in the 8(a)  program], or there is a
           reasonable probability that an award can be won by such


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           a small minority business concern through normal
           competitive procedures.

      Awarding a third 8(a) sole-source procurement to TAI also
      potentially violated the intent of the CICA which specifically
      stated:

           In fulfilling the statutory requirements relating to
           small business concerns and socially and economically
           disadvantaged small business concerns, an executive
           agency shall use competitive procedures but may
           restrict a solicitation to allow only such business
           concerns to compete.

      While a sole-source acquisition could be used, the CICA
      encouraged competition for small and disadvantaged business and
      the Small Business Act encouraged the development of firms so
      they could compete in the American market.

      At the time of this third sole-source procurement TAI had
      acquired a competitive, if not monopolistic, position at ERL-A.
      TAI had been performing successfully as the on-site~ contractor
      for the past two years and its employees were already on-site and
      familiar with the work being performed.  Furthermore, TAI had
      also gained a competitive edge through the contract modification
      to 68-03-3198 which expanded its staffing at ERL-A to perform the
      revised SOW tasks while the follow-on contract was being
      negotiated.  Although awarding 8(a) sole-source contracts was
      administratively easier and less time-consuming for ERL-A,
      competing contracts gives the added benefit to the government of
      controlling costs.  TAI had already fully demonstrated its
      ability to perform and to compete, at a minimum, with other firms
      participating in the 8(a) program.

      It was to ERL-A's advantage to restrict the procurement to TAI
      because of its desire to retain the contract employees they had
      developed and to guarantee continuity of services to preclude
      interruption of mission-critical research.  ERL-A's continued
      efforts to award TAI sole-source contracts increased with its .
      vulnerability to contractor support.  There was no evidence in
      ERL-A or CMD files where competition was ever considered for this
      contract procurement.  ERL-A's award of this sole-source
      procurement to TAI again avoided competition under the veil of

      the 8 (a) program and continued to demonstrate its favored
      treatment of the incumbent.


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      SignificantModifications ofContract 68-03-3351 Circumvented
      Competition:  ERL-A also avoided competition for contract awards
      when it made two substantial modifications (modifications 7 and
      16} to contract 68-03-3351.  Each modification's estimated value
      was over $1 million and resulted in additional services performed
      by TAI.  Both modifications were initiated and promoted by the
      contractor.  Modification 16 significantly extended the scope and
      period of contract performance just one day before TAI's
      graduation from the 8(a) program when its eligibility for 8(a)
      sole-source awards would expire.  In our opinion, both
      modifications represented a substantial change in the .size and
      scope of the contract and further abused the 8(a) program.  By
      the expiration of contract 68-03-3351, its value increased over
      two and one-half times the original estimate, the number of
      contract employees increased over 100 percent, additional
      contractor duties were added,  and the period of performance was
      extended by two years to a five-year performance period.

                               Modification 7

      Modification 7 increased the contract's LOE by "50 percent at an
      additional cost of $1,287,821.  The original LOE initially
      provided for 16 man-years.   Within eight months after contract
      award,  ERL-A was discussing the possibility of modifying the TAI
      contract.  On April 10, 1987 modification 7 was approved to
      increase the LOE by the addition of eight new staff positions.
      ERL-A file documentation indicated that the contractor may have
      initiated and promoted the request to extend and modify the
      contract.  In a letter, dated December 17, 1986, TAI's president
      wrote' to a CMD CO about extending their contract 'at the Gulf
      Breeze Laboratory.  TAI'was scheduled to graduate from the 8(a)
      program on April 21, 1987 and would be precluded from competing
      for the follow-on contract at Gulf Breeze.  The Gulf Breeze
      Laboratory and CMD had elected to keep the this procurement as an
      8(a) set-aside.  TAI's president wrote:

           ...we recognize that contractual considerations may
           preclude this action [contract extension at Gulf
           Breeze].  However, other alternatives exist.  We
           currently support the ERL (Athens, Georgia) and the
           Environmental Monitoring and Support Laboratory
           (Cincinnati, Ohio).  ...Through the appropriate
           modifications to either of these contracts, TAI could
           continue to support the Gulf Breeze laboratory without
           any cessation of services or disruption of personnel
           [emphasis added].   In tact., a precedent for this action

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           exists within the EPA and we will be happy to discuss
           the details with you at the appropriate time.

      A record of communication, dated January 7,  1987,  showed that
      within one month after receipt of this letter,  ERL-A requested an
      increase in the LOE under modification 7 roughly equivalent to
      TAI's loss of contract work at Gulf Breeze.   Therefore, the TAI
      letter regarding loss of the Gulf Breeze contract and its
      location in the ERL-A files raises questions as to ERL-A's actual
      intent in requesting an increase of the LOE under ERL-A's TAI
      contract.  While the .value of modification 7 did approximate
      TAI's contract loss at Gulf Breeze, none of the additional work
      proposed,under modification 7 appeared related  to TAI's Gulf
      Breeze work.

      ERL-A documented in the January 1987 record of  communication that
      SBA initially denied CMD's request for modification 7 to amend
      the contract's LOE.  SBA wanted ERL-A and CMP to compete the
      contract.  However, file documentation show that TAI later
      informed CMD that SBA had reconsidered and was  now saying that
      the LOE could be increased for both the current and option years.
      No file documentation existed at either ERL-A or CMD that showed
      SBA resistance to TAI's request or a subsequent change in
      attitude.  Neither did we find any record of CMD's or ERL-A's
      verification of TAI's statement.  The only documented SBA
      stipulation found was that the proposed modification must be
      received in the SBA office prior to TAI's graduation date on
      April 21, 1987.  On March 10, 1987, ERL-A officials submitted a
      procurement request to CMD stating that the modification was
      necessary due to an underestimation of manpower needed to perform
      laboratory support services for the various on-going research
      programs at the facility.  This modification request occurred
      just ten months after contract 68-03-3351 was awarded.  The
      resulting modification 7, dated May 6, 1987, increased the LOE
      for the base year by 6,080 hours and each of the two option years
      by 15,360. This approximated the value of the contract TAI lost
      at Gulf Breeze.

                               Modification 16

      A subsequent change in the. Section 8 (a) set-aside program allowed
      participating firms to extend their graduation  date.  TAI's
      graduation date was extended 12 months from April 21, 1987 to
      April 21, 1988.  In November 1987, the second year of this 3-year
      contract, TAI contacted ERL-A officials to request an extension
      of the period of performance under 68-03-3351 for an additional

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      20 months to a total of 5 years.   TAI gave ERL-A officials a
      package of sample documents with  an example of where SBA approved
      a 2-year extension of an engineering support contract between TAI
      and the Department of the Navy.   TAI informed ERL-A that:

           Contracting Officer may elect to purchase additional
           supplies or services called  by the contract or may
           elect to extend the term of  the contract (FAR 17.201).
           ...FAR 17.204(e) states "The total of the basic and
           option periods shall not exceed five years in the case
           of services, and the total of the basic and option
           quantities shall not exceed  the requirements for five
           years in the case of supplies, unless otherwise
           authorized by.statute."

      TAI also provided the laboratory  pro-forma contract .modification
      documents to assist ERL-A in its  request to CMD.   ERL-A officials
      used the pro-forma examples (filled-in the blanks)  submitted by
      TAI and on December 15, 1987 requested an extension of the
      contract from CMD under the 8 (a)  program through April 1991.  The
      PO noted in the request to CMD that the extension would serve:

           ... to ensure continuity of  services and to eliminate
           the potential cost of having to recompete [once TAI
           graduated from 8(a)  eligibility].  Also,  it would help
           EPA to meet set-aside goals  for disadvantaged
           businesses.

      SBA said that it would grant approval to the modification as long
      as the contract SOW was not changed and,  as stated previously,
      the modification was in SBA's office prior to TAI's graduation
      date on April 21, 1988.

      ERL-A took maximum advantage of TAI's extended 8(a)  graduation
      date through issuance of modification 16 which extended the
      contract's period of performance  by two additional option periods
      and increased the LOE by approximately four staff positions.
      This change permitted TAI to continue providing services to ERL-A
      20 months beyond its graduation from the 8 (a)  program and
      increased its on-site staff and workload without competing a new
      contract.

      In our opinion, contrary to SBA's warning, modification 16
      changed the scope of the contract substantially because the
      contract value increased by $2.4  million (a 92 percent increase
      over the initial contract value).   The modification also expanded

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      the contract's scope to provide additional contract services for:
      Chemistry Branch Support which included Chemical Dye
      Transformation, Metal-Humic Interactions,  Chemical Availability
      Enhancement;  Biology Branch Support included Trace Gas Fluxes and
      Bioremediation Processes and Systems;  Assessment Branch Support
      which included technical liaison between ERL-A Assessment Branch
      and OSW Waste Characterization Branch,  Analysis Modeling Section;
      and Indirect  Support included quality  assurance and Preventive
      Maintenance Program Support.  To get SBA approval, the scope of
      the contract  was to remain unchanged.   However, from our
      analysis, we  concluded that these activities were major additions
      to the scope  of the original contract  and,  therefore, the scope
      changed substantially.

      A CMD legal review dated April 7, 1988, also questioned the
      propriety of  extending a contract when a firm was about to
      graduate from the 8(a) program.  The CMD attorney commented:

           In light of legislation on the Hill which will preclude
           awards to 8(a) firms which contain options when the
           8 (a) firm is about to graduate, it concerns me that the
           addition here of Options III and  IV is an attempt to
           keep TAI on-board for 2 more periods when firm is
           graduating 4/21/88.

      Nevertheless, on April 20, 1988, lust  one day before TAI
      graduated from the SBA 8 (a)  set-aside  program.  SBA approved the
      extension of  the contract from a three to a five-year contract
      with the addition of at least four staff years in 1988.
      According to  OAM, the legal comment was only advisory and OGC
      signed the file signifying legal sufficiency of the proposed
      modification.

      EPA's vulnerability to the TAI contractor dramatically increased
      under contract 68-03-3351.  In the interest of ERL-A, the number
      of contract employees under this third TAI sole-source contract
      was increased by 100 percent and on-site contractor support
      expanded to include almost all of the  laboratory's operations.
      At the end of this contract, the contractor support services had
      developed into prohibited personal services relationships between
      contractor staff and ERL-A. staff, contractor performance of
      inherently governmental functions (IGFs),  and directed
      subcontracting by ERL-A to further avoid competition and to
      obtain consultants and other laboratory needs unattainable with
      limited intramural funds.
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      ERL-A Biased the Competitive ProcurementProcess For TAI1s Fourth
      contract Award, Contract 68-C1-0024

      ERL-A recommended the removal of the technical support contract
      from the 8(a)  program after TAI graduated from the 8(a)
      eligibility and then biased the follow-on competitive procurement
      through its technical evaluation ranking factors and evaluation
      of contractor proposals.  ERL-A documented in its Acquisition and
      Source Selection Plan and CMD concurred that the contract was
      removed from 8(a)  status to increase competition.  However, only
      two contractors submitted proposals for this procurement.  In our
      opinion, the second proposal was a token submission by the other
      ERL-A on-site 8(a)  contractor (AScI).   AScI had not attended the
      pre-proposal conference and its proposal was characterized as
      deficient.      .      .   .

      At the time of the competitive procurement, ERL-A's vulnerability
      to the TAI contractor had increased substantially.  Of the seven
      EPA contracts awarded to TAI since 1982, three provided technical
      support directly to ERL-A.   Over the life of these three
      contracts, TAI became ERL-A's primary technical support
      contractor.   Since its initial contract in 1982, the number of
      employees under the contract had grown from 6 to 31.  ERL-A had
      become as reliant  on TAI employees, as it was on its own staff,
      to perform work critical to the accomplishment of the
      laboratory's mission.

      ERL-A Recommended  Removal the TAI Contract From The 8 fa) Program; •
      At the end of contract 68-03-3351, when ERL-A could no longer use
      the 8(a) umbrella  to contract with TAI, ERL-A recommended that
      the contract be removed from the 8(a)  set-aside program.  After
      expiration of the  third 8(a)  sole-source contract (68-03-3351) on
      April 30, 1991, ERL-A would have been required to compete its on-
      site support contract under the 8(a)  set-aside program because it
      exceeded the $3 million competitive threshold established under
      the 1988 amendments to the Small Business Act.  If the contract
      remained as a 8(a)  set-aside, ERL-A risked losing TAI and its
      employees because  TAI no longer qualified as an 8(a) contractor
      and would not be allowed to compete.   By removing the contract
      from 8(a) program and allowing for full and open competition, TAI
      would be eligible  to compete.

      We found no justifiable support for removing this contract from
      the 8(a) program.   The proposed staffing levels, staffing mix,
      and the SOW for this procurement did not differ substantially
      from the requirements in the predecessor contract.  The removal

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      of the contract from the 8 (a) program contradicted ERL-A's
      previous efforts to keep the procurement 8 (a) sole source, even
      though they made substantial changes to the SOW and staffing
      levels.  Because of ERL-A's reliance on TAI and its prior efforts
      to retain the incumbent, we could not determine any other reason
      for the decision to remove the contract from the 8 (a)  program
      other than the desire of the ERL-A officials to allow the
      incumbent to bid and to continue as ERL-A's on-site contractor.

      FAR 19.501, entitled Set Asides for Small Business, states:

           Once a product or service has been acquired
           successfully by a contracting office on the basis of a
           small business set-aside, all future requirements of
           that office for that particular product or service not
           subject to simplified small purchase procedures shall,
           if required bv agency regulations [emphasis added], be
           acquired on the basis of a repetitive set aside.   This
           procedure will be followed unless the contracting
           officer determines that there is not a reasonable
           expectation that 1) offers will be obtained from at
           least two responsible small business concerns offering
           the products of different small business concerns and
           2) awards will be made at reasonable prices.

      However, EPA had no regulation to require repetitive set-asides.
      CMD's Small Business Specialist told us that the programs are not
      obligated to keep any contract in the 8 (a)  set-aside program and
      can remove a contract at any time without justification.  The
      specialist provided two examples of when it would be acceptable
      to remove a contract from 8(a) status: (1)  if it was determined
      that the solicitation would not receive enough bids from
      small/minority business and (2) if the proposed work was within
      the capability of large business only.

      To justify unrestricted competition, ERL-A stated in the
      Acquisition and Source Selection Plan (approved December 10,
      1990} that the follow-on contract would be enlarged in scope to
      over twice the original LOE due to increased demands on ERL-A's
      support.  The original LOE on the predecessor contract (contract
      68-03-3351) was 16 contractor staff compared to the proposed
      first-year staffing of 39 for the proposed contract.  However,
      approximately 31 TAI employees were actually on-site when the
      predecessor contract expired which would only represent an
      increase of 8 employees.  In our opinion, this does not represent
      a substantial enough increase in scope to argue that this

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      contract could be performed by a large business only,
      especially, since TAI had been successfully performing this
      contracted work for nine years as an 8(a) contractor.

      In addition, the SOW for the proposed contract changed minimally,
      if at all, from the SOW on the predecessor contract.  During the
      pre-proposal conference on December 19, 1990, one contractor
      asked "How do the requirements specified in this RFP differ from
      the requirements in the current technical support contract" [68-
      03-3351] at Athens-ERL?" - ERL-A responded that "The staffing
      levels, staffing mix, and specific aspects of the statement of
      work for the current contract do not differ substantially from
      those requirements stated in this RFP."  The primary change
      between this competitive procurement and the predecessor contract
      was that TAI was no longer an 8(a)  contractor.

      In the Acquisition and Source Selection Plan, ERL-A recommended
      that the acquisition be competed on an unrestricted basis to
      ensure adequate competition and to "accommodate the incumbent
      contractor which has graduated from the 8(a) program."  In our
      opinion, this was not an acceptable reason to remove.the contract
      from the 8(a)  set-aside program.   The purpose of the 8(a) program
      is to develop the minority business to the point where it can be
      competitive on an equal basis in the American economy not to
      sustain that business once it graduates from.the program.
      Regardless of the scope similarities between the current and
      proposed contract, the specialist and contracting officer
      accepted ERL-A's contention that the procurement was "Within the
      capability of large business only."

      ERL-A's logic in justifying full and open competition for this
      award was inconsistent with past justifications for 8(a) sole-
      source awards.  Under the predecessor contract (68-03-3351), the
      contract SOW expanded from support for one branch to support to
      all the branches and the LOE increased by twice the original LOE
      (from 16 employees to 31 employees.)  At that time, ERL-A
      justified keeping this contract as a sole-source procurement
      because the work to be performed by the contractor, was unique and
      not available from other sources.  Since the SOW for the proposed
      competitive contract, in ERL-A *s own words, remained basically
      the same, the work would, according to prior ERL-A logic, still
      be unique and allow awarding the contract under procedures other
      than competitive.  However, to fulfill its current objectives
      [retention of TAI], ERL-A now argued that the new procurement was
      only within the capability of large business.
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      ERL-A Biased The RFP And Technical Evaluation To Favor TAI;

      Once the procurement was removed from the 8 (a)  set-aside program,
      ERL-A went through the required actions for  a competitive
      procurement.  Although it was fairly certain that TAI would have
      a competitive advantage, ERL-A established technical ranking
      factors which favored TAI and made it extremely difficult for
      others to compete.  For instance:  (1)  the technical evaluation
      ranking factors put the most points (65 percent) on experience
      and required key employee commitment letters which also favored
      TAI; and (2) the proposed statement of work  encompassed too many
      tasks which made it difficult for competing  contractors, other
      than TAI, to have the technical expertise to fulfill all
      responsibilities.  These biases created an unfair advantage for
      TAI as the incumbent contractor because they had most of the
      employees required by the RFP already performing the SOW tasks
      and ERL-A was openly pleased with TAI's performance.  ERL-A
      predicted significant interest in the contract and anticipated
      strong competition.  However, ERL-A's relationship with TAI and
      the biasing of the procurement resulted in only one other
      contractor, AScI, submitting a proposal for  this procurement.
      AScI was also an 8 (a)  on-site contractor at  ERL-A a~nd its
      contract was due to expire and be re-awarded during this same
      time period.  With the submittal of only two proposals, we
      believe that ERL-A actions discouraged competition.  With all
      this in favor of the incumbent, ERL-A's technical review
      naturally led to the conclusion that the incumbent was the best
      qualified for award.  While this procurement went through the
      competitive process, in our opinion, it was  less than competitive
      and failed to serve the best interests of the Federal government.

      The Competition in Contracting Act of 1984 states that in
      preparing for the procurement of property or services, an
      executive agency shall:

           (A) specify its needs and solicit bids  or proposals in
           a manner designed to achieve full and open competition
           for the procurement;

           (B) use advance procurement planning and market
           research; and

           (C) develop specifications in such manner as is
           necessary to obtain full and open competition with due
           regard to the nature of the property or services to be
           acquired.

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      On September 25,  1990,  ERL-A submitted a Request for Contract for
      a follow-on contract with TAI.   The request was for a 17-month
      base year and three option years at an estimated cost of $18.8
      million.  [After  CMD review,  the performance period was changed
      to a 5-month base period and 4  one-year option periods.]  To
      promote competition, ERL-A outlined in the Acquisition and Source
      Selection Plan nine ways they would enhance competition.  ERL-A
      also documented in the  Plan that no restrictive criteria would be
      used.  Further, they would promote competition by placing more
      emphasis on personnel qualifications and the'proposed management
      plan than corporate experience,  thereby enhancing the potential
      for participation by firms that have not had direct experience
      supporting ERL-A.  The  RFP contained two lists of contractors who
      would possibly bid on the recompete of this contract.  The first
      list outlined six contractors with TAI being the first contractor
      listed.  The second was an alphabetical list of 58 additional
      contractors..  The RFP was issued to 40 sources.  During the pre-
      proposal conference held on December 19, 1990, only three
      contractors were  present.  When the RFP was closed on January 22,
      1991, only two proposals were submitted, one from TAI and the
      other from AScI,  an 8 (a)  on-site contractor also located at ERL-
      A.

      Proposals submitted for this procurement were evaluated on five
      criteria:  (1)  Demonstrated Corporate Experience; (2)
      Demonstrated Experience and Qualifications of Proposed Upper
      Level Personnel—Base Level of  Effort; (3) Qualifications of
      Other Base Level  of Effort Personnel; (4) Adequacy of Program
      Management Plan;  and (5)  Adequacy of Quality Assurance Program
      Plan.  The maximum points that  a contractor could obtain under
      this RFP was 3600.  Criteria 2  and 3 accounted for 65 percent of
      the total available points.  While most of the points were placed
      on experience qualifications, TAI had an advantage,  under
      Criteria 1,  4,  and 5, from being the incumbent for the last 9
      years.  For Demonstrated Corporate Experience, TAI had gained
      experience in managing  a contract with a SOW almost identical to
      the one outlined  in this RFP.  For criteria 4 and 5, TAI had the
      advantage because the TAI manager served as ERL-A's Quality
      Assurance Officer which was an  inherently governmental function.
      ERL-A technical review  of the two proposals resulted in TAI
      receiving a score of 2640 and AScI receiving a score of 1800 (a
      difference of 840 points).   AScI's lower score was attributed in
      great part to points lost in the experience qualifications
      category because  AScI did not obtain personnel commitment letters
      as required by the RFP.
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           Ranking Experience at 65 Percent Biased the Procurement

      In their Acquisition and Source Selection Plan, ERL-A documented
      that the offerer's capability of providing and managing highly
      qualified scientific and technical personnel was considered more
      important than cost factors under this acquisition.   EKL-A placed
      the most emphasis on personnel qualifications which accounted for
      65% of the total available points.  The RFP stated that the
      contractor would be required to provide personnel who were highly
      qualified in a number of technical and scientific disciplines.
      The work provided for under the SOW of work primarily provided
      for bench-level support.  Through review of the AScI's technical
      proposal and through an interview with another contractor in
      attendance at the pre-bid conference, we determined that
      obtaining employees qualified to perform under the proposed SOW
      was not prohibitive.  In fact, most of the employees AScI
      proposed met the SOW qualifications.  However, as the incumbent
      contractor, TAI had a significant advantage because TAI had
      provided support to Athens for the past nine years and ERL-A
      officials were openly pleased with their work.  Some favorable
      comments made on the TAI's proposal in the Technical Evaluation
      Report, dated February 20, 1991 were:  (1) the employees had
      experience with a contract SOW almost identical to the one in the
      RFP, and (2) the employees were already on site and were
      essentially or currently performing the same duties required by
      the SOW.  However, TAI's most significant advantage was that ERL-'
      A had helped to develop expertise in the employees working under
      TAI's contract.  Therefore, to have a reasonable chance at
      winning the contract the contractor would have to meet ERL-A's
      personnel expectations and hire the employees already under the
      TAI contract.

              Discounting  Corporate Experience Hurt  Competitors

      ERL-A documented that corporate experience was weighted much less
      heavily (8 percent)  than personnel qualifications, and this
      should enhance competition by reducing the incumbent's advantage
      in this area.  We determined that this would not be the case when
      ERL-A considered employees to be more important than the
      contractor itself.  Under this point allocation, another large
      business might successfully demonstrate significant corporate
      experience in performing similar support type contracts, but when
      rated at 8 percent this experience would provide little
      advantage.

      The Technical evaluation report documented that TAI had

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      demonstrated its ability to manage contracts similar in size,
      nature, and scope to that described in the RFP.   TAI described 6
      contracts to show appropriate corporate experience.   However,
      approximately 50 percent of TAI's laboratory experience was
      gained at ERL-A which could have been considered a weakness.
      AScI had broad experience in conducting and managing contracts
      such as the one described in the SOW.  AScI reported 19 contracts
      providing environmental services throughout the  U.S. with
      contract values ranging from $200,000 to $6,200,000.  However, in
      the technical evaluation, ERL-A emphasized that  AScI's experience
      spanned only a short period of time—less than 5 years.  ERL-A
      scored TAI and AScI equallytfor corporate experience.

      Considering that ERL-A documented in the Acquisition and Source
      Selection Plan that technical proficiency would  be weighted more
      heavily than cost, ERL-A officials did not seem  interested in
      determining the extent of AScI performance.  TAI had an advantage
      over any competitor because it was already performing the tasks
      documented in the SOW in support .of all four branches and also
      providing administrative support.  However, AScI did not perform
      on-site services for the Biology and Measurement branches under
      its current contract at ERL-A.  On April 9, 1991,  the CMD .
      contract specialist informed ERL-A that where the offerer is
      known to have performed contracts for comparable work, their  past
      performance under the agreements should be evaluated.   On April
      15, 1991, ERL-A commented on the past performance of each of  the
      offerers in its supplemental technical evaluation report.  ERL-A
      responded in the report that:

           Since both offerers are currently performing work at
           the laboratory, we did not seek comments from other EPA
           or government offices but are providing comments from
           the branches that these contractors are supporting.

      The RFP outlined contractor support for each of  the four
      branches.  Because AScI did not provide services to the Biology
      and Measurement Branches, no comments could be provided.
      Therefore, it appeared in the supplemental narrative,  that AScI
      did not possess the capabilities to perform the  duties in these
      branches.  AScI had outlined in its proposal work that it
      performed in the area of Biology and Measurement under other
      contracts.  However, ERL-A elected not to obtain comments from
      outside sources.  This caused us to conclude that there was a
      lack of any interest on behalf of ERL-A to actually determine the
      technical proficiency of AScI.
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       Commitment Letters and Start-Up Plan  Created An Unfair Advantage -

      ERL-A stated in the Acquisition and Source Selection Plan that
      should a contractor other than the incumbent receive the contract
      award, there was a further risk that ERL-A activities could be
      disrupted during the contractor changeover.  Therefore,  TAI had
      an obvious advantage in that it could guarantee 100 percent
      productivity from day one of the contract.  To minimize what it
      considered to be an unacceptable disruption in service,  ERL-A
      required that offerers develop a start-up plan as part of an
      overall management plan which would ensure full operations within
      30 days of award.  However, as described by ERL-A, a competing
      contractor would require many months to become familiar with work
      already being performed by the TAI employees.   Further,  as part
      of the plan,  contractors were required to submit commitment
      letters for key employees.  Unless a competing contractor hired
      the employees already working under the TAI contract, they had
      little chance of winning this procurement.

      ERL-A's requirement for employee commitment letters gave an
      additional advantage to TAI.  The commitment letters were a
      subcategory of experience qualifications which accounted for 65
      percent of the total available points.  The RFP required 37
      employees for the base level of effort for which commitment
      letters had to be .submitted.  Through review of the technical
      evaluation report, dated February 20,- 1991, we determined that
      commitment letters were easily obtainable from employees already
      working at ERL-A.  Contractors usually did not obtain the letters
      from contingency hires.   As the incumbent, TAI already had 31 of
      these 37 employees essentially performing the same duties
      required by the SOW.   Five of the remaining six employees .were
      contingency hires.  The technical evaluation report documented
      that all the on-board TAI personnel had signed a letter of
      commitment and the remaining positions would be filled as soon as
      tasking was made available.  However,  the AScI proposal was
      considered deficient in relation to the TAI contract for
      experience qualifications because they failed to submit
      commitment letters for the proposed employees.   In most cases,
      the employees AScI proposed did meet the technical qualifications
      of the SOW.   However, the non-submittal of the commitment letters
      resulted in a loss of 585 points.

      After the technical evaluation of the proposal was completed,
      AScI had another opportunity to increase its score by improving
      on the deficiencies in the proposal.  A supplemental technical
      evaluation of the proposals was issued April 15,  1991.  TAI's

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      score was increased from 2640 to 2910 and AScI's score was
      increased from 1800 to 2245.  The AScl proposal  was still
      deficient because they failed to provide commitment letters for
      some of the employees.  Therefore, we further question AScI's
      resolve and whether AScl submitted a serious bid for the
      contract.

     'Under the commitment letters, the prospective employees would be
      required to commit to working at ERL-A for a minimum of one year.
      The purpose of commitment letters according to ERL-A was to
      provide a way to evaluate the company's ability  to provide the
      necessary expertise.  However, in our opinion, commitment letters
      only served to give ERL-A a way to establish that current
      contractor employees providing on-site research  support would
      continue to be employed..  However, commitment letters made it
      more difficult for competing contractors to comply with the
      personnel requirements of the RFP.  We believe that the hiring of
      acceptable employees could have been reasonably  accomplished in
      the 30-day transitional period.  However,  the 30 day start-up
      period posed an additional obstacle to competing contractors.  As
      part of the start-up plan, the contractor had to demonstrate that
      it would be "fully operational" at the end, of 30 days.  ERL-A
      documented the importance of retaining TAI employees in its April
      16, 1991 request to extend the TAI contract 68-03-3351 by two
      weeks (from May 1 - May 14, 1991)  until the new  contract could be
      awarded.  The new contract was anticipated to be awarded by May
      1, 1991.  ERL-A justified the extension under the authority of 41
      U.S.C. 253 (c) (1) stating "only one responsible source for the
      services to satisfy the Agency's requirement".   Specifically, the
      request noted:

           Although other firms exist with the capability to
           supply the general type of services required for "the
           projects in progress, they do not have the  in-depth
           familiarity with these projects to step in  and
           immediately take over and continue task activities to
           completion.   For instance, the research activities
           require "hands on" familiarity and technical expertise
           relative to the methodology and instrumentation.   New
           personnel would require many months to gain the
           familiarity and expertise inherent in the incumbent
           personnel.  Also, new personnel would'need  to become
           familiar with previous studies,  technical approaches
           that have been followed to date,  and procedural
           requirements.
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      To further demonstrate the bias presented by the 30-day start-up
      plan,  the incumbent would be given 60 days to phase out
      operations should they be unseated in this procurement.  The
      Acquisition and Source Selection Plan documented that under the
      Continuity of Services clause the incumbent would be given up to
      60 days after expiration of the contract for phase-in/phase-out
      services.  The phase-in/phase-out services required the incumbent
      to provide phase-in training and to cooperate in any transition
      should a different contractor be selected for award.  Unless the
      competing contractor could obtain commitment letters from the
      employees already working under the TAI contract, it seems
      unlikely that it could hire 37 employees for the on-site work and
      be fully operational in 30 days.  With a 65 percent ranking
      factor, obstacles to fulfilling personnel requirements, in
      particular commitment letters, would make it very difficult for
      competitive firms to score in the competitive range.

                       SOW  Encompassed Too Many Tasks

      The SOW was also restrictive in that it encompassed too many
      tasks which made it difficult for competing contractors to have
      the technical expertise required to perform all tasks.  There was
      no apparent interest on the part of ERL-A or CMD to break up the
      contract into smaller procurements which could have permitted
      further small and disadvantaged business participation.  However,
      as discussed previously EKL-A's interest was in TAI and its
      employees not in 8 (a)  participation.  Having an all encompassing
      SOW would naturally favor the incumbent.

                     TAI Documented Minimum Competition

      ERL-A officials also documented that they anticipated strong
      competition.  In the Acquisition and Source Selection Plan, ERL-A
      documented that potential offerers had already expressed an
      interest in the RFP including a number of EPA's on-site support
      contractors.  ERL-A represented that approximately 50 firms had
      requested a copy of the solicitation.   Because of the strong
      competition anticipated, ERL-A documented that a market survey
      was unnecessary as required by the Competition in Contracting Act
      since a number of these organizations are known to have the
      capability of performing the required services.  The RFP was
      subsequently issued to 40 companies identified as potential
      sources.

      While we did not see evidence of strong competition at the pre-
      proposal conference or in subsequent proposals, we did find where

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      TAI predicted its own chances of winning the ERI/-A contract at 95
      percent.  TAI summarized its strengths which included: proven
      incumbent; high customer satisfaction;' detailed knowledge of
      customer needs and requirements; and competitive salary
      structure.  TAI's self assessed weaknesses included: customer is
      sensitive to increasing indirect costs; and as incumbent, we
      could be vulnerable to lowballer on direct labor costs.  Contrary
      to ERL-A's claim that it anticipated strong competition, TAI
      documented only minimum opposition.  TAI noted that providing
      qualified key personnel would be a major obstacle for its
      competitors.  This would be an obstacle primarily because
      commitment letters were required under the request for proposal
      and the most knowledgeable personnel were currently under the TAI
      contract.

      In a TAI Recapture Plan, dated November 29, 1990,"TAI anticipated
      competition from only three contractors.  Although the AScI
      contractor worked on-site at ERL-A, AScI did not send a
      representative to the pre-proposal conference held at ERL-A.  The
      pre-bid conference, held on December 19, 1990 showed that
      anticipated competition was more in line with what TAI had
      predicted because only three contractors (including TAI)
      attended.  Of the three firms attending the pre-bid conference,
      only TAI submitted a proposal.  We contacted the other two
      contractors who attended the pre-proposal conference to determine
      why they did not submit a proposal on the RFP.  One contractor
      did not submit a proposal because: (1) TAI had a reputation for
      low-balling, (2) the perception was that ERL-A was pleased with
      the work of the incumbent and EPA usually awarded to incumbents,
      (3)  the contract was fairly low-rated, meaning a lot of the
      positions were for technician-level employees, and (4) the    .  .
      contract was perceived as being a personal service contract.

      On December 21, 1990, two days after the pre-proposal conference,
      the other contractor who was in attendance at the pre-proposal
      conference wrote a letter to CMD requesting that the date for
      submittal of proposal be extended to January 31, 1991.  CMD
      extended the date to January 22, 1991.  However, we found no
      documentation in the CMD files relating to the request or why
      CMD and ERL-A did not take this opportunity to increase
      competition for this procurement by extending the date to January
      31,  1991, as requested.  File documentation from this contractor
      show that the extension was requested due to the significant.
      modifications expected in the RFP as a result of questions
      discussed during the pre-proposal conference, as well as the time
      and effort required to prepare a quality proposal in response to


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      the new RFP requirements.

                AScI  Proposal Appears To Be TokenSubmission

      The lack of apparent resolve on the part of AScI suggests that
      the proposal may have been submitted as a token bid.   This
      assertion is made because: (1) AScI did not attend the pre-
      proposal conference; (2) the AScI proposal was deficient and AScI
      did not try to resolve important deficiencies; and (3) ERL-A did
      not utilize all available opportunities to increase competition.
      If ERL-A had received only one proposal, ERL-A would have been
      required to take additional steps to increase competition.  This
      would have delayed the date of award and disrupted the work.
      Also, if the work was supposed to be within the capability of
      large business only, the receipt of a second proposal from an
      8(a)  contractor raises additional question as to the competitive
      nature of this procurement.  However, CMD accepted the two
      proposals as being in the competitive range; thereby, ruling that
      the procurement met the requirements of competition.

      ERL-A's long-term utilization of TAI employees as equivalent FTEs
      to perform personal services and IGFs contributed t'd TAI's
      advantage in this procurement.  ERL-A's and CMD's action or
      inactions at the pre-proposal conference, the biased ranking
      factors, a questionable second proposal, and a reluctance to
      allow a short filing extension for a third competitor makes us
      question the competitive nature of the TAI procurement.

      AScI Contract Split To Circmnvent CompetitiveLRequirements Of The
      Small .Business Act

      ERL-A officials underestimated a follow-on contract (68-CO-0054)
      with AScI to avoid the $3 million dollar competition threshold
      established under the Small Business Act, Section 8(a).   On July
      3,  1990, ERL-A requested a second contract (68-04-0012)  for AScI
      which was intended for off-site services.  The SOWs for the on-
      site and off-site contracts were identical and "off-site" was
      roughly two miles from ERL-A at a contractor facility established
      for the sole purpose of providing support to the laboratory.  The
      proposed off-site facility was to be paid for under the contract.
      According to ERL-A management, the prime motivation for a second
      AScI contract was a pressing need for additional space at the
      laboratory which necessitated the relocation of personnel off-
      site.  However,  this factor alone would not justify two separate
      8(a)  contracts.   In our opinion,  the only purpose of two
      contracts was to avoid the prolonged competition process for a

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      single 8(a)  contract in excess of $3 million and the possible
      disruption of services if a contractor other than AScI should win
      the award.  By ensuring the retention of AScI and, more
      importantly, its employees, ERL-A avoided the inconvenience and
      the perceived risk of competition.  This calculated action by
      ERL-A intentionally circumvented established provisions of the
      Small Business Act which required competition for 8 (a) contracts
      over $3 million.

      The 1988 revisions to the Small Business Act established monetary
      competitive thresholds for 8(a) procurements.  The statutory
      thresholds were written into SBA regulation 13 CFR 124.311(a)(2)
      which states:

           ... a contract opportunity offered to the 8(a) program for
           award shall be awarded on the basis of a competition
           restricted to eligible program participants if the
           anticipated award price of the contract, including options,
           will exceed $5,000,000 for contracts assigned manufacturing
           Standard Industrial Classification (SIC) codes and
           $3,000,000 for.all other contracts.

      The congressional intent as shown in the Small'Business Act,
      Section 101 was to increase competition in order to promote the
      Congressionally mandated business development objectives and
      purposes.   By establishing maximum dollar amounts for 8(a) sole-
      source contracting, Congress required competition within the 8(a)
      program.  Prior to the amendment's effective date of October 1,
      1989, large sole-source acquisitions could be awarded without
      competition.                     .

                            On-site ASel Contract

      On February 22, 1990, ERL-A submitted a three-year $4.9 million
      sole-source procurement request to be awarded sole source to AScI
      for on-site support.  The request was approved through the
      Director of OEPER and the AA for Research and Development.  On
      March 14,  1990, without ERL-A's knowledge, CMD requested that SBA
      approve a competitively bid 8 (a) set-aside .since the maximum
      potential value of the contract exceeded the $3 million
      noncompetitive threshold for 8(a) contracts established by the
      1988 amendments to the Small Business Act.  On March 19, 1990,
      SBA notified CMD of its acceptance of the competitive set-aside.
      SBA instructed CMD to advertise the procurement in the Commerce
      Business Daily and issue a solicitation.   v .
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      On March 23, 1990, after its initial review of ERL-A1s request,
      CMD informed ERL-A that the requested procurement exceeded the $3
      million threshold for noncompetitive 8 (a)  awards and would have
      to be competitively bid.  ERL-A then was faced with advertising
      for a follow-on contract and developing technical evaluation
      criteria for proposals.  CMD further stated that, if the contract
      was to be competitively awarded,  ERL-A would have to provide
      substantial effort to award the contract before September 30,
      1990, when AScI's current contract expired.

      Subsequent to CMD's communication to ERL-A that an award in
      excess of $3 million would have to be competed, a note in the
      ERL-A PO's file, dated April 9, 1990, documented:

           In accordance with [Senior Science Advisor], the AScI
           continuation procurement package beginning 10/1/90 should
           not exceed $3 million for the three year period [emphasis
           added].

      The note also stated that the laboratory director concurred with
      the decision.  On April 11, 1990,  two days after the date of this
      file note, ERL-A submitted a new request to CMD for" an on-site
      AScI contract with a revised cost estimate of $2.9 million.  This
      was just under the $3 million 8 (a)  competition threshold
      established in the Small Business Act.

      ERL-A officials maintained that there was no intent to avoid
      competition when they withdrew the initial procurement.  There
      was merely a reduction in anticipated work needed under the
      contract.  Our review of ERL-A and CMD file documents indicated,
      that while the laboratory support functions described under the
      original and revised contract request for on-site support
      remained virtually the same, ERL-A took deliberate steps to
      reduce the procurement to under $3 million threshold.   While the
      procurement request remained at three years,  the estimated cost
      was reduced to $2,984,073.   ERL-A accomplished the reduction by
      reducing consulting costs,  and eliminating $168,886 in clerical
      support costs, $708,410 in quantity option increases,  and
      $1,082,164 in labor categories and other direct costs.  By
      reducing the proposed cost estimate below $3 million,  ERL-A was
      able to award the 8(a)  set-aside sole-source contract to the
      incumbent, AScI, and avoid the additional administrative burden
      of awarding an 8(a) competitive procurement.

      No documented evidence was found that either OEPER or CMD
      questioned the significant revisions and/or omissions to the

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      proposed contract.  The only written comment found related to the
      reduction in the contract scope and estimated cost was a
      statement in the revised contract request transmittal letter
      dated April 11, 1990 as follows:

           We have re-evaluated our needs for on-site contract
           support and, as discussed with you on April 5, reduced
           the level-of-effort accordingly.

      There was no documented evidence in either CMD's or ERL-A's files
      concerning the April 5, 1990 discussion mentioned in the
      transmittal letter.

      In response to ERL-A's revised contract request, CMD wrote to SBA
      on April 19, 1990 explaining that:

           ... the scope of work for the procurement we offered to
           the SBA for a competitive 8 (a)  proposal has been
           changed.  Therefore, we are requesting a cancellation
           of the set-side.   We will evaluate the changes and
           resubmit at a later date.
                                                         • "*-

      In a second letter dated the same day,  CMD informed SBA about
      ERL-A"s proposed $2.9 million contract  stating only that:

           EPA would like to award this contract to an 8 (a)
           contractor pursuant to Section 8 (a)  of the Small
           Business Act ....  This procurement was hot publicly
           synopsized because it is the feeling of this office
           that eligible 8 (a) firms would be  at a disadvantage and
           could not win by normal competitive means.

      Based on ERL-A's assessment of AScI's performance, CMD's
      evaluation as to the contractor's ability to compete appears
      contradictory.  During interviews,  ERL-A staff repeatedly told us
      that ERL-A was very pleased with AScI's performance and AScI had
      the ability to win a competitive procurement.  Also,  AScI had
      recently won a $4.6 million full  and open competitive procurement
      at the Environmental Research Laboratory - Duluth and had ten
      other noncompetitive awards in place with a maximum potential
      value of $22.6 million.  Given the number of contracts already
      awarded to AScX noncompetitively and AScI's demonstrated ability
      to compete successfully at Duluth,  the  validity of ERL-A's
      noncompetitive 8(a) set-aside appeared  questionable.

      The $2.9 million procurement that ERL-A resubmitted to CMD was

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      ultimately awarded to AScI as a sole-source contract on September
      25, 1990 at a revised maximum potential value of $3.3 million.
      The initial $2.9 million estimate was increased above the $3
      million competition threshold during the pre/post and final
      negotiations.  The contractor's estimate was $212,283 above ERL-
      A's original estimate due to the escalation of the contractor's
      fixed fee and the annual labor hour estimate.  During
      negotiations, AScI also requested that consultant hours be
      increased to reflect historical utilization of consultants.  This
      increased the final negotiated contract costs to $3.3 million.
      CMD officials contended that sole-source procurements could be
      negotiated above the $3 million threshold for noncompetitive
      procurements as long as the procurement's estimated cost was
      initially estimated below $3 million.  CMD explained that SBA
      refused to compete anything below $3 million.

      Because the initial estimate, according to CMD's policy, was the
      determining factor for a competitive versus sole-source 8(a)
      contract, it was to ERL-A's advantage to underestimate its
      initial estimate of contract cost.  During the negotiation, CMD
      allowed the contract cost to significantly exceed the $3 million
      threshold and did not require competition.  CMD's policy provides
      no incentive to programs for accurate initial estimates of
      contract costs.

                           Off-site AScIContract

      On July 3, 1990, three months before award of the sole-source on-
      site AScI contract, ERL-A requested a second 8fa^ sole-source
      contract with AScI.  The laboratory director said the primary
      motivation for the off-site procurement was to alleviate serious
      overcrowding at the laboratory by moving some of the contract
      employees off-site.  We were told by other managers that the
      possibility of an off-site contract had been discussed for
      several months.  While we did find references as early as
      February 1990 to an off-site contract, we believe the need for an
      off-site contract became more advantageous when ERL-A learned
      that it would have to compete its original $4.9 million follow-on
      contract.  Another ERL-A concern was the possibility that the
      follow-on contract might not be in place by September 30, 1990
      when the current contract .expired.   Therefore, to avoid
      additional processing delays, we believe ERL-A elected to hold
      the on-site procurement below $3 million to allow a faster sole-
      source procurement and follow-up with an off-site contract to
      make up the difference.
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       Our review disclosed that the SOW for the proposed off-site
       contract was identical to that proposed for the on-site.   The
       only change was where "off-site" was substituted for "on-site."
       The off-site procurement request was also deficient in that it
       did not include an estimate for off-site support facilities4   on
       July 25, -1990, ERL-A corrected this oversight by decreasing the
       LOE by one staff year to "... compensate for rent estimates."  A
       note to the file which documented a meeting with the Senior
       Science Advisor remarked "We already had 57K to play with from
       the aggregate contract amount (Attach G)."  Attachment G showed
       the cost estimate for the off-site contract as $2,942,484 which
       was approximately $57.000 from the S3 million dollar limit for a
       noncompetitive 8(at contract.  This statement clearly indicates
       ERL-A's intention to also keep its initial cost estimate for the
       off-site contract under the SBA $3 million ceiling for a
       noncompetitive procurement.

       During CMD's initial review of this off-site procurement request,
       an internal review document contained a handwritten note from the
       contracting officer to the Small and Disadvantaged Business
       Utilization Specialist (SDBUS) stating "Talk to {ERL-A Official}
       about some firm other than AScI."  From interviews with the SDBUS
       and the CO, they confirmed their telephone conversations with
       ERL-A concerning the utilization of some other firm other than
       AScI.  CMD officials expressed concern with AScI obtaining an
       additional sole-source procurement since CMD was concurrently
       reviewing the on-site procurement package.  CMD officials
       suggested to ERL-A that they should either obtain another 8(a)
       contractor or compete the contract.  ERL-A officials responded to
       CMD' s concerns by stating that they needed to retain AScI because
       the AScI employees were performing work that was critical to the
       lab's mission.  They did not want the work interrupted by having
       the contract awarded to another contractor or potentially delayed
       by a long competitive award process.   During an interview with
       OIG auditors, the SDBUS stated that the program took the position
       that if they could not request AScI through an 8 (a)  set-aside,
       then they would re-do the procurement as a sole source and
       justify why they wanted AScI.  Since the program was so
       insistent, CMD decided to go with AScI as an 8(a).   In interviews
       with ERL-A officials, they confirmed the telephone conversations
       with CMD responding that they wanted to retain AScI because the
       AScI employees were performing work that was critical to the
       lab's mission.  They did not want the work interrupted by having
       the contract awarded to another contractor or potentially delayed
       by a long competitive award process.
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      On July 30, 1990, CMD received written SBA approval for the off-
      site 8 (a)  sole-source procurement to AScI .and on August 15 1990,
      CMD requested a proposal from AScI for the contract.   This was
      two weeks after the request for proposal for the on-site contract
      was issued.  While CMD had reviewed both requests,  the CO
      contended that she did not know that the proposed off-site work
      was actually "near-site" until August 23, 1990,  when AScI
      submitted its proposal.

      From August 23, 1990 to March 21, 1991,  when the off-site
      contract was eventually awarded, there was continual
      correspondence between CMD, ERL-A, and AScI concerning position
      requirements, labor rates, personnel, overhead rates, etc., which
      delayed the procurement.  In responding to questions from the
      contract specialist regarding labor rates and personnel, AScI
      stated in a September 21, 1990 memorandum that the site manager's
      time would be split between his on-site and off-site
      responsibilities.  AScI added that "The technical requirements
      for both the on-site and off-site contract in Athens, Georgia are
      similar in the level of scientific and engineering expertise
      required."  If the contracts were to be managed by the same site
      manager and required similar technical requirements^  there was
      again no logical reason why the two contracts could not have been
      combined and CMD should have been alerted to this fact.

      Interviews with CMD personnel confirmed that they had serious
      concerns over the off-site procurement.   The CO indicated that
      she brought the issue to the attention of the CMD's Director who
      stated that ERL-A would not be allowed to proceed with the second
      contract.   However, no evidence was found in CMD's files
      documenting the CMD Director's decision cited by the CO.  Despite
      apparent concerns over the off-site proposal and the potential
      for a split procurement, CMD awarded the on-site contract on
      September 25, 1990 and on March 21, 1991, after ERL-A certified
      (incorrectly) that its needs had changed and there was sufficient
      work to support both AScI contracts, CMD ultimately allowed the
      award of the off-site contract as well.   This was done even
      though CMD was aware that the site manager was the same, the
      proposed SOW was the same as the on-site contract,  and the off-
      site work would be performed actually near-site.  Also, CMD was
      aware that 10 months earlier ERL-A had submitted a $4.9 million
      request which was later reduced below $3 million because of a
      reduction in anticipated work, and that ERL-A was now certifying
      (in just 10 months) that it had sufficient work to support two
      contracts with a total estimated potential value of $5.9 million.
      At this point, CMD should have been fully aware of the extreme

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      steps ERL-A had taken to avoid competing the AScI procurement.
      However, CMD elected to go ahead and award the off-site contract
      without any documented explanation.

      During our audit, the CO reviewed CMD's files for both the ERL-A
      on-site and off-site contracts and apparently concurred with our
      conclusion that ERL-A did underestimate and split the AScI
      procurement to avoid competition.  In a letter, dated February
      13, 1992, the CO wrote to the ERL-A PO requesting that the ERL-A
      contracts be recompeted at the end of FY 1992 to rectify the
      situation.  Her rationale was that "the original contract was
      split into an on-site and an off-site contract in order to avoid
      a competitive 8(a)  RFP."  In response, ERL-A maintained that it
      was not its intent to split the AScI procurements to avoid 8(a)
      competition.  The off-site AScI contract expired on September 30,
      1992 and was not renewed.  Also, based on CMD's subsequent
      review, the last option year scheduled to start on October l,
      1992 for the on-site AScI contract was not .exercised.
      CONCLUSION                                          .^

      TAI's dramatic growth at ERL-A was attributed to the increased
      SOW and substantial modifications made to the predecessor
      contract awarded in 1985.  Contract support was expanded from one
      branch to all four branches.   TAI was also providing
      administrative support.   ERL-A's vulnerability to contract
      support increased as it  utilized the TAI employees as an
      extension of intramural  resources.  As the mission of the
      laboratory and contract  support grew, EPA employees became
      increasingly involved in the  administrative oversight of TAI's
      operations and TAI employees  became the vehicle for getting the
      work done.  The loss of  these 31 employees would have caused the
      laboratory's work to suffer greatly.  Some TAI employees had been
      on-site at ERL-A longer  than  some EPA employees.  For example,
      the TAI Program Manager  had been working on-site at ERL-A since
      1980 which was longer than the current ERL-A Director and PO put
      together.

      The actions taken by ERL-A under the 8(a) umbrella to award
      repetitive sole-source contracts to TAI disregarded the intent of
      the Small Business Act,  Section 8 (a) program and the CICA.  ERL-
      A's actions did not contribute to the development of small
      minority businesses and  avoided the recognized benefits of full
      and open competition. ERL-A's favored treatment of the incumbent
      corrupted the competitive process and increased the potential for


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      the incumbent to establish a monopoly at the laboratory.
      Subsequent removal of the procurement from the 8 (a)  program
      clearly indicated an act intended to favor the incumbent.

      ERL-A's over-reliance on the AScI employees to perform mission-
      critical work compelled them to reduce the requests for contract
      to just under $3 million to: guarantee a sole-source procurement
      to AScI; speed up the procurement process; and avoid any possible
      cessation of AScI services as a result of changing contractors.

      CMC's established role in the preaward procurement process was to
      ensure compliance with applicable federal statutes and FAR and
      EPAAR requirements.  Post-award, CMD was also responsible for
      evaluating the use and overall management of contracts.  However,
      CMD admitted that due to their heavy workload, they had become
      more of a service than an oversight function.  In retrospect, CMD
      officials said the AScI contacts should have never been awarded
      sole source.  However, with knowledge on August 23,  1990, that
      the proposed off-site contract was actually near-site and that
      both contracts had the same SOW, CMD still awarded the on-site
      contract on September 25, 1990.  Not until our audit was
      initiated did CMD attempt to rectify this overt act'to avoid
      competition and. circumvent sound procurement practices.
      Therefore, CMD was negligent in its oversight function in
      allowing ERL-A to circumvent competitive procedures and corrected
      the problem only under pressure from the OIG.

      In our opinion, ERL-A's procurement practices were driven by its
      desire to keep critical contractor employees and to maintain
      continuity of services rather than on sound contracting practices
      and cost-effective use of government resources.  Once the on-site
      contractors were procured, ERL-A treated them no differently than
      FTEs.
      RECOMMENDATIONS

      Recommendations to the Assistant Administrator,  Research aad
      Development

      We recommend that the Assistant Administrator for Research and
      Development ensure significant improvements are made in ERL-A's
      contracting process to obtain strict compliance with applicable
      statutes,  regulations, and EPA policies and ensure effective use
      of Agency resources.  Specifically, the Assistant Administrator
      should:


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      - Consider decreasing scopes of laboratory contract awards to
        award contracts to more expert firms in each technical area and
        to increase competition for technical support contracts.

      - Create an extramural resource management position at remote
        laboratories to oversee the management of extramural resources.

      - Provide that ORD managers' performance standards and
        evaluations clearly establish accountability for compliance
        with procurement regulations and Agency's acquisition policies.

      In addition, the Assistant Administrator for Research and
      Development should require the:

      Director. Environmental Processes and Effects Research to:

      - Evaluate ERL-A's research mission focusing on core programs.
        Establish "what research activities should be performed on-site
        by FTEs or on-site/off-site via contracts and other extramural
        agreements.   "               '

      - Review ERL-A's on-site contractor tasks to determine whether
        the work should be eliminated,  moved off-site,  or retained
        under strict controls.  This should include an evaluation of
        existing and future contract activities that provide long-term
        on-site support to determine if ERL-A is continuing to
        improperly award such contracts or using its contracts
        for prohibited contract activities.  Particular attention
        should be given to repetitive awards to the same contractor.

      - Revise laboratory managers'  performance evaluations to increase
        the criticality and weight of proper procurement of extramural
        resources .-

      - Provide adequate guidance, in coordination with OGC and CMD,  to
        ensure that laboratory managers understand their extramural
        limitations and provide close oversight over extramural
        operations to include:

           * The review of an annual Acquisition Plan prepared by
             ERL-A and other ORD laboratories to demonstrate
             laboratory compliance with ORD policy and procurement
             regulations during the coming fiscal years

           * Systematic reviews of laboratory operations,  in
             conjunction with CMD, to assure adherence with required

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             contract acquisition and management regulations, including
             applicable EPA/ORD policies.  Also, to ensure that ERL-A
             is in compliance with its acquisition and contract
             management plans.

           * Requiring more technical evaluation members from
             organizations other than the laboratory procuring the
             contract panels for competitive procurements to reduce the
             potential for biased procurements.
           * Eliminate requirement for employee commitment letters that
             may bias contract awards in favor of incumbents.

      In addition, we also recommend that the Assistant Administrator
      for Research and Development require:

      Director. Environmental Research Laboratory - Athens to:

      - Develop, as part of the annual planning process, a detailed
        Acquisition Plan, documenting ERL-A's planned acquisitions, the
        justification for these acquisitions, and how competition will
        be increased.  Also, for each on-site support contract, a
        contract management plan describing procedures arid controls to
        ensure that contracts are properly used and managed in
        accordance with the FAR and existing Agency policies.  Both
        documents should be reviewed and approved by ORD and CMD.


      Recommendations to the Assistant Administrator, Administration
      and Resources Management

      We recommend that the Assistant Administrator for Administration
      and Resources Management ensure significant improvements are made
      in the contract acquisition, management, and oversight processes
      conducted at CMD - Cincinnati to obtain compliance with
      applicable statutes, regulations, and EPA policies.
      Specifically, the Assistant Administrator should require the:

      Director. Office of Acquisition Management fOAM) to:

      - Provide written instructions to CAM,  ORD, and ERL-A staffs
        describing the appropriate procurement,  use, and management of
        8 (a) contracts under CMD's oversight.

      - Require CMD to perform in-depth reviews of all future 8 (a)
        procurements falling within close range of the threshold
        for competing 8(a) contracts to assess if requested sole-source

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        procurements are justified.  The review should focus' on
        determining if all necessary calculations have been included in
        the estimated cost.  CMD should make an assessment of the
        contractor's ability to compete in consultation with the SDBUS
        and SBA.  The decision for an 8(a) competitive or sole-source
        procurement should rest with CMD and the Agency's Competition
        Advocate, not ORD or ERL-A.  CMD should not routinely allow a
        sole-source procurement when:

           * contractors are currently performing work under an
             existing contract for that location.  CMD should be
             sensitive to multiple sole-source contracts awarded or
             proposed to be awarded to the same contractor within close
             timeframes that may indicate an intent to avoid
             competition.

           * the contractor has demonstrated its ability to
             successfully compete for similar contracts at other EPA

             locations.  For 8(a)  firms,  at a minimum, CMD should
             require competition with other qualified 8(a) companies.

           * Contract modifications would significantly increase the
             contract's value over the competitive threshold or extend
             the contract performance past expiration of the       .
             contractor's 8(a) eligibility.

        Establish definitive guidelines for justifying removal of
        contracts from 8(a) participation.  Once a contract has been
        set-aside for 8(a) participation for an extended period of
        time, the labs should be encouraged to keep the contract in the
        8 (a) program or adequately justify its removal.  CMD should not
        allow laboratories to remove a procurement from 8(a) status
        just to accommodate a former 8 (a)  contractor who has graduated
        from the program. .                   '  •

        Establish a maximum potential value or percentage increase for
        all contracts that will1automatically trigger a re-compete.
        Significant modifications that increase LOE or scope of
        contracts should not be allowed.

        Require ERL-A to remove any bias from all procurements.  ERL-A
        competitive procurements should:

           * Permit short extensions of solicitation periods where such
             extensions are justified due to circumstances/delays in

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             submission of proposals caused by the Agency.

           * Place a reasonable amount of technical evaluation
             ranking points on the strengths of an incumbent
             contractor.

           * Require commitment letters only when absolutely necessary.
             Contractors should be given sufficient time to staff-up
             and become operational.
      ERL-A MISUSE OF CONTRACTOR ACTIVITIES HAS SUBSTANTIALLY INCREASED

      The AScI and TAI contracts and related WAs contained broad SOW
      with undefined deliverables resulting in indefinite contractor
      operations.  ERL-A management misused contracts by personally
      directing the activities of contract employees to enhance ERL-A
      research rather than adhere to a contractual relationship.  The
      lack of an arms-length contractual relationship resulted in:
      (1) directed subcontracting; (2) personal service relationships;
      (3) contractors being involved in critical, if not IGFs;
      (4) inadequate WAs and SOWs; and (5) inadequate review and
      acceptance of contract charges.  This contract misuse greatly
      elevated ERL-A's vulnerability to fraud, waste, abuse, related
      COI situations, and a potential loss of the Agency expertise in
      critical functions.  In addition, ERL-A's close relationship with
      on-site contractors and their employees provided the incumbent
      contractor resident expertise in certain research projects which
      created a contractor monopoly on these projects and precluded, or
      at a minimum, inhibited future "open" competition for on-site
      contract support.

      With the exception of directed subcontracting, issues related to
      prohibited personal services, contractor performance of IGFs and
      critical functions, inadequate WAs and SOWs, and potential COIs
      were previously reported in OIG Survey Report E1XMG2-04-0102-
      3400007 on ERL-A contract management, issued November 30, 1992.
      Therefore, these issues are only briefly summarized below to
      provide insight into ERL-A's overall misuse of support contracts.

      ERL-A Involvement In Directed subcontracting

      ERL-A officials directed the utilization of consultants under the
      AScI and TAI contracts.  In order to accomplish research projects
      at the laboratory, ERL-A officials circumvented procurement
      regulations by directing contract employees to obtain specific

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      consultants sole source.   EPA's October 1990  Contract
      Administration manual clearly prohibits the directed hiring of
      consultants by EPA:

                EPA cannot direct the contractor to hire any
           consultants or influence the selection of such
           consultants in any way.   And,  as with subcontractors,
           EPA has no privity of contract with any  consultants
           used in the performance of its contracts.   The prime .
           contractor is responsible for all aspects of
           performance.

      Under the Contract Administration Manual,  EPA is also prohibited
      from directing-the activities of a consultant acquired by a
      contractor.  EPA has no contractual authority with the consultant
      since the privity of contract is with the contractor and not EPA.

      In order to determine the technical qualifications,  the benefits
      to be derived from his or her use,  the amount of usage, and the
      rates proposed,  all consultants are subject to the review and
      approval of CMD.  The Contract Administration manual requires
      that:             '                       .       .

           A contract modification is executed to approve the use
           of the consultant, and it will usually specify the
           fixed rate to be charged and set a limit on the number
           of hours and days the consultant can be  used.   This
           way, the Government  is protected against excessive use
           of, and excessive charging by, expert consultants under
           cost-reimbursement and indefinite quantity type
           contracts.

      During our review, consultant rates were found in ERL-A contract
      files that varied from $50 to $100 a hour,  often without
      appropriate approval by CMD or any determination of
      reasonableness for these  charges.  Therefore,  the hourly or daily
      rates charged by consultants may not have been commensurate with
      the technical benefits derived.  In addition,  consultants used
      were not approved at all  or in advance by CMD as required.   For
      example, one AScI consultant utilized on Superfund sites under
      contracts 68-03-3551 and  68-CO-0054 was obtained sole source and
      paid at a rate of $100 a  hour for a total of  $63,225 over a two-
      year period.  We did not  find in the contract files where this
      contractor or his rates had been approved by  CMD or where the
      contract was modified to  authorize his use.
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      On March 19,  1992,  a CMD procurement analyst reported to the CMD
      Director isolated contract management issues relative to the
      CMD/ORD review of on-site support contracts at ERL-A.  The issues
      were identified during CMD file reviews but were not considered
      global in nature and reported directly to ERL-A in the July 14,
      1992 CMD/ORD  report on ERL-A's contract management.   However,
      these unreported issues were discussed with applicable ERL-A
      project officers.  For the AScI and TAI contracts, the
      procurement analyst reported that consultants were often not
      submitted to  CMD for approval although they were provided for in
      the work assignments and subsequently invoiced by the contractor.
      For the TAI contract (68-C1-0024) ,  it was reported that the
      contractor was showing the use of individual consultants but no
      consultants had been previously approved by the contracting
      officer as required under the contract.  Consultants must be
      approved separately even if work plans with hours for
      unidentified  consultants have been previously approved.  For the
      AScI contract (68-CO-0054), the March review documented an
      example of one "weak" sole-source consultant approval that was
      processed.  However, the procurement analyst noted that there was
      no price analysis of the proposed rate in the file as required by
      the contract.  The review also documented that wheri~requesting
      approval of the consultant the on-site AScI contract manager
      referenced previous consultant request letters; however, the
      letters could not be located in the CMD files.  This same issue
      was reported  again by the contract specialist to the CMD Director
      on September  15, 1992.  The procurement analyst and the contract
      specialist both made the same basic recommendation to the CMD
      Director.  They recommended that CMD:  .

           Advise the contractor [AScI] of his responsibility to
           secure competition to the maximum extent practical [for
           subcontracts]  and to include his price analysis of
           proposed rates for the consultants proposed.  Advise
           the contractor that the contract requires the approval
           of the CO prior to engaging consultants.  Approval of
           work plans that do not specifically identify the
           consultants to be used even though they do not identify
           [specific] "consultants" does not constitute CO
           approval for the use of a specific consultant.

      We found no evidence in CMD or ERL-A files to show where this
      recommendation and others in the March and September reports were
      made formally to the ERL-A Director.
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      However, ERL-A did not ensure that contractors adhered to
      contract provisions to secure competition for consultants to the
      maximum extent practical and it did not submit consultants to CMD
      for approval.  Through interviews and file reviews at ERL-A, we
      learned that ERL-A management had significant input into
      selecting consultants under on-site contracts.  Also, ERL-A was
      engaged on behalf of the contractor to get consultant approval
      after the fact.  For example, on January 29,  1992, the AScI site
      manager wrote CMD for approval of a sole-source acquisition of a
      consultant to assist ERL-A on the Global Climate Project under
      contract 68-CO-0054, work assignment 2A.  The period of
      performance was scheduled for February 3-7, 1992.  On February
      19, 1992, the contract specialist wrote AScI  to explain that WA
      2A did not provide for consultant services as approved by the CO
      and that-the PO would have to request an amendment to the WA
      before approval could be given.  The contract specialist also
      cautioned AScI that consultants do not "assist" ERL-A they
      "support" in accomplishment of its mission.  However, by February
      19, 1992 (the date of CMD's letter), the consultant work had
      already been performed with apparent knowledge of ERL-A
      management as documented in'a subsequent memorandum.dated May 11,
      1992 from the PO to ERL-A program managers.  The PO^requested
      that these managers prepare the necessary paperwork to justify
      the sole-source acquisition of the consultant.  The PO indicated
      that he had .talked with CMD about the consultant issue and CMD
      had agreed, with proper documentation, to approve this consultant
      "after-the-fact" so the contractor could be paid for the work
      already performed.

      ERL~A violated contract provisions for hiring consultants on a
      reoccurring basis.  One ERL-A official stated that ERL-A
      generally used contracts to hire the consultants they wanted.
      Another ERL-A official admitted that it was simply much easier to
      obtain consultants through the contracts than to procure them
      directly through CMD.  Consultants under the  AScI and TAI
      contracts were utilized primarily for two reasons.  First, the
      AScI contract called for the contractor to organize and present
      workshops to promote the use of models which  predict the fate and
      transport of pollutants.  ERL-A would generally use the most
      prominent scientist, usually the developer of the model to
      present a workshop on the model.  Prior to contracting with AScI,
      ERL-A organized and presented these workshops.  Both AScI and
      ERL-A employees confirmed that there was a general agreement that
      AScI would continue to use the consultants utilized previously by
      ERL-A to conduct workshops and it was not likely that AScI would
      chose another consultant without the ERL-A's  consent.

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      Consultants were also utilized to provide direct assistance to
      ERL-A.  For example, consultants provided guidance to KPMs on
      Superfund Sites.  During interview, one AScI employee stated that
      ERL-A officials in almost every instance determined when and
      which consultants were used under the AScI contract.  ERL-A file
      documentation confirmed the involvement of ERL-A management in
      selecting consultants.  For example, a January 22, 1990
      memorandum from ERL-A's Director to the PO of the AScI contract
      requested the PO to:

           "put in 3 peer reviews per year with 3 reviewers
           [consultants] brought in for them (expenses for 3 days,
           plus travel to and from Athens).  May do this thru TAI,
           but best to include it here just in case."

      Budgeting for unnamed consultants (e.g. peer reviews) under.the
      AScI contract provided for directed subcontracting on the part of
      the ERL-A management.  Determining the need for consultants under
      a contract is a determination that should be made by the
      contractor not laboratory management.  As discussed above, ERL-A
      officials avoided competing the procurement of consultants by
      directing AScI to select particular individuals instead of
      soliciting bids.

      Such AScI involvement on behalf of ERL-A to justify and acquire
      consultants on a sole-source basis without CMD approval (doing
      favors for ERL-A) created the potential for favoritism during the
      contract procurement process and placed ERL-A employees in a
      potential COI situation.  The directed subcontracting occurred
      because of the close relationship ERL-A managers had developed
      with on-site contractors at the ERL-A laboratory.  Essentially no
      arms-length transactions existed at ERL-A.

      ERL-A Used the Contract For Personal Services"

      A 1992 ORD/CMD review identified all six of the FAR's indicators
      of prohibited personnel service at ERL-A (FAR at 48 CFR subpart
      37.1), including the appearance of direct supervision.  Our audit
      also documented evidence of prohibited personal services
      relationships between ERL-A and its on-site contractors.  ERL-A
      managers clearly stated that, in the past, personal service
      relationships did exist between ERL-A and its contractor staff.
           "    See  OIG  Survey Report  E1XMG2-04-0102-3400007,  issued
      November 30, 1992, page 11,  for additional details.

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      As a result of our interviews at ERL-A and CMD,  and file reviews
      including the newly prepared WAS for FY. 1993,  we remained
      concerned that the new controls established at Athens to provide
      and document technical direction are .intended  more to avoid the
      appearance of personal services rather than to actually establish
      the proper arms-length relationship between ERL-A and its
      contractors.  In some instances, ERL-A is continuing contractual
      relationships that require continuous  and routine guidance by EPA
      staff to obtain research objectives.   Under these conditions,
      this guidance may be no more than routine supervision under the
      guise of technical direction.    .                             •

      As a consequence of the lack of an arms-length relationship
      between laboratory and contract employees,  numerous examples
      existed of questionable activities by  contract employees which
      qualified as personal services.   For example,  in conjunction with
      the US-USSR Bilateral Agreement, an AScI employee was selected by
      ERL-A to travel to the Soviet Union for three  months to perform
      water quality modeling of the Don River.   ERL-A justified this
      assignment because the contractor employee was developing water
      quality models under the AScI  contract.   Another contractor
      employee accompanied ERL-A staff on a  trip to  Egypt.  AScI staff
      also performed as secretaries  at ERL-A.   One secretary working
      under the AScI contract was assigned to the ERL-A Director for
      four months before she was converted to FTE status.   ERL-A also
      utilized the TAI contract to perform -QA and health and safety
      reviews of ERL-A's activities  which involved evaluating the work
      of EPA and other contract employees.   In addition,  TAI employees
      looked to the EPA Pis for assignments  and review of projects.  As
      a  result,  instructions to the  contract staff came from EPA lead
      scientists (Pis)  who provided  research direction and guidance to
      the contract staff.   These examples not only show a personal
      services  relationship that existed at ERL-A but that work
      performed by contractors was sometimes outside the scope of on-
      site support contracts.   The PO  admitted that  he would have
      preferred using FTEs to perform  these  functions,  but with a
      controlled FTE ceiling the workload had become too great for EPA
      personnel to accomplish all required tasks.
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      Potential Inherently Governmental Functions Were Performed
      Under The TAI and AScI Contracts12

      TAI and AScI employees performed potentially IGFs.  The
      justification for allowing contract employees to perform these
      functions was based on the lack of available federal staff to
      accomplish the mission of the laboratory and not on logical
      decisions justifying the significant merits of using contract
      personnel over EPA employees.   As a result, contractor employees
      performed as surrogate FTEs with their roles not always
      distinguishable from that of the federal staff.  Using contractor
      employees to perform IGFs was a natural evolution from a
      laboratory culture which apparently emphasized "science and
      engineering research" at the expense of congressional, OMB, and
      EPA legal and regulatory reguirements.

      For example, contractor employees (AScI)  assigned to the Center
      for Exposure Assessment Modeling (CEAM)  performed activities
      which,  in our opinion, were inherently governmental.  The CEAM,
      which consisted primarily of AScI employees, was initially
      established to develop and modify computer models-designed to
      predict the fate and transport of pollutants,  and to provide
      technical assistance to outside users of those models.  CEAM's
      functions were subsequently evolved into providing direct
      assistance to RPMs on Superfund sites and other program offices.
      To  accomplish the CEAM mission,  ERL-A staff was substantially
      supported through the AScI contract.   We were told that federal
      FTEs were originally requested and would have been the preferred
      source of needed expertise; however,  because of established FTE
      ceilings,  the CEAM program had to rely heavily on the computer-
      related and scientific expertise of contractor personnel.

      TAI employees also performed inherently governmental activities
      such as QA and health and safety.   Overall responsibility for
      performance of these activities was assigned to ERL-A staff.
      However,  because of increased work loads or other priorities,
      ERL-A viewed QA and health and safety as "collateral1! duties and
      delegated them to contractor employees.   The performance of these
      activities by TAI employees created a potential conflict-of-
      interest situation where the contractor oversaw his own work, the
      work of other contractors,  and ERL-A.
          12  See OIG Survey Report E1XMG2-04-0102-3400007,  November 30,
      1992, page 4, for additional  discussion.

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      inadequately Defined Work assignments/Statements OfWork Resulted
      In Prohibited Contract Management Practices13

      The POs for the AScI and TAI contracts prepared SOWs that did not
      provide an adequate description of expected contractor activities
      and acceptance criteria for deliverables or any other tool for
      measuring the contractor's progress.   These deficient .SOWs
      permitted contractor .performance of virtually any activity
      desired by ERL-A.   As described above, the lack of adequate
      contract definition contributed to contractor performance of
      potentially IGFs,  personal services relationships, and other
      prohibited activities under the contract.   Although CMD CDs
      reviewed and approved.the SOW and WAs, CMD and ERL-A did not
      attempt to correct deficiencies in these documents until after
      the CMD/ORD contract management review (issued July. 1992} at ERL-
      A.

      The SOW and each WA should be the foundation of the work
      performed under the contract.   These documents identify the work
      the contractor is legally obligated to perform, sets the.
      boundaries within which the contractor must operate and provides
      management tools for monitoring progress.   These documents should
      serve as a guide for both the contractor and ERL-A.  However,
      ERL-A's SOW and WAs for the TAI and AScI contracts did not
      provide sufficient detail for contractor personnel to
      independently perform the tasks being procured under the various
      WAs.   In addition, there was no acceptance criteria to enable the
      WAMs to properly determine when an acceptable product or task was
      completed.   Such detail was not required by ERL-A management
      since ERL-A staff were intimately involved in the day-to-day
      performance of the contractor and its personnel.   Further, the
      work under these WAs primarily represented continuing support
      rather than definite deliverables or products.

      Inadequate Review and Acceptance of Contract Charges14

      The ERL-A survey and subsequent audit work indicated that POs and
      WAMs were not adequately reviewing contractor invoices to verify
      that billed amounts were legitimate contract charges.  ERL-A had
           13  See OIG Survey Report E1XMG2-04-0102-3400007, November 30,
      1992, page 17,  for additional discussion.

           14  See OIG Survey Report E1XMG2-04-0102-3400007, November 30,
      1992, page 20,  for additional discussion

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      no independent record of contractor performance and relied
      entirely on contractor supplied data/invoices to review and
      approve invoices.  In addition, the contractor's invoices were
      inadequate for determining the propriety of contract charges.
      This could have resulted in improper contract payments.

      Under cost-reimbursable contracts the PO has the responsibility
      to verify contractor invoices.  At ERL-A, the PO stated that he
      only performed a cursory review of the invoices.  In addition,
      since there were no WAMs in the past assigned to ERL-A contracts,
      there was no independent review or monitoring of contractor work
      to determine the appropriateness of contract charges.   In our
      opinion, the performance of only a cursory invoice review relates
      directly to the close relationship that existed between ERL-A
      managers and on-site contractors.  Essentially no arms-length
      transactions existed at the ERL-A laboratory.   EPA managers
      believed that they controlled the purchase and utilization of
      labor hours, consultants, equipment and supplies under the
      contracts.   Therefore,  ERL-A officials were less concerned with
      the administrative review of contractor invoices.   TAI and AScI
      would only invoice them for what ERL-A managers directed the
      contractors to do and purchase through the contract WAs.


      CONCLUSION

      Consultant use under contract should* be used solely for the
      benefit of the contract and should be subjected to CMD review and
      approval.   By directing subcontracting under its on-site
      contracts,  ERL-A exceeded its authority and violated sound
      procurement practices,  as well as Agency contracting procedures.
      Also,  prohibited contract activities like personal services and
      the contractor performance of IGFs should be avoided while
      management controls over contractor performance improved.

      While contracting for on-site services has created an increased
      dependency on contractors for accomplishment of ERL-A1s mission,
      it has also made the accomplishment of ERL-A's research more
      complicated and increased the staff's administrative burden.
      ERL-A was  forced to use FTEs,  hired primarily  for  their
      scientific expertise,  as practically full-time managers of on-
      site contractors coupled with the. administrative responsibilities
      dictated by contracting out essential on-site  support.   Unless
      ERL-A obtains additional FTEs to perform the on-site scientific
      and technical support work mandated by Congress,  it will continue
      to be placed in the dilemma of having to choose between achieving

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      its mission through the improper utilization of contracts to
      support on-site research or limiting the use of contract support
      to comply with legal and regulatory requirements at the expense
      of the mission.
      RECOMMENDATIONS

      We recommend that the Assistant Administrator for Research"and
      Development ensure significant improvements are made in ERL-A's
      use and post-award management of contracts to ensure adherence'
      with applicable statutes,  regulations,  and EPA policies.
      Specifically, we recommend that the Assistant Administrator:

      - Through ORD managers' performance standards and evaluations,
        establish strict accountability for contract management in
        compliance with regulations and contract terms.  This should
        include accountability for proper oversight and control of
        laboratory extramural operations.

      In addition, the Assistant .Administrator should require the:

      Director. Environmental Processes and Effects Research to;

      - Instruct ERL-A director to refrain from using on-site
        contractors for directed subcontracting of consultants.

      - Take necessary action to ensure that ERL-A contracts are
        managed in accordance with regulations and Agency policies.
        Specifically, the Director should:,

           * Require ERL-A to submit a contract management plan
             describing how contracts retained for on-site support will
             be controlled to prevent improper contract activities
             i.e., personal service relationships, directed
             subcontracting,  and contractor performance of inherently
             governmental activities.

           * Direct ERL-A to place available FTEs into the most
             critical technical  support positions .currently performed
             by contractors which are determined.to be essential for
             retention of Agency expertise or are inherently
             governmental or personal services in nature.   If
             sufficient FTEs cannot be obtained to replace
             contractors, either through staffing increases or
             conversion of extramural funds,  or the work cannot be

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             moved off-site or performed on-site without a personal
             services relationship,  these positions and related tasks
             should be eliminated.

      - Perform periodic,  on-site reviews, in conjunction with CMD, to
        independently evaluate ERL-A's on-going use and management of
        contracts.  This should include a review of the overall
        utilization of on-site contracts to eliminate contractor
        performance of inherently governmental or personal services
        which creates an over-dependence on incumbent contractors.

      Recommendations to the Assistant Administratort__ Administration
      and Resources Management

      We recommend that the Assistant Administrator for Administration
      and Resources Management ensure significant improvements are made
      in the oversight of  contract management.  Specifically,  the
      Assistant Administrator should require the:

      Directorf  Office of  Acquisition Management(QAM) to:

      - Require CO approval for consulting expenditures Bunder  contracts
        and establish a policy of not authorizing after-the-fact
        payments.   CMD should ensure that proper approval is obtained
        before consultant  expenditures are made.


      AGENCY RESPONSE AND  OI6 EVALUATION OF AGENCY COMMENTS

                                ORD Response

      ORD generally agreed with the  findings and recommendations as
      presented in Chapter 4.   Corrective actions proposed by  ORD
      appear responsive to our recommendations and,  therefore,  fulfill
      the acceptable action criteria of EPA Order 2750.  ORD's comments
      and OIG's evaluation on Chapter 4's recommendations are  detailed
      in Appendix  I.

                                QAM Response

      OAM generally agreed with our  findings and recommendations
      related to the splitting of the AScI contracts,  and ERL-A's
      misuse of contractor activities.   However, OAM took exception to
      our findings regarding ERL-A's abuse of the contracting  process
      as relates to the TAI's contracts.   Specifically, OAM objected to
      our conclusion that  ERL-A exploited 8(a)  procurements to retain

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      TAI as a favored contractor and later biased a competitive
      procurement in favor of TAI.

      According to 0AM,  standard practice within EPA and SBA was to
      award consecutive sole-source 8 (a)  contracts to firms that
      remained certified under the 8(a)  program.  OAM contends that
      during the period FY 1981 through FY 1989, the 8(a) program, did
      not contain any provision for competition among disadvantaged
      firms in civilian agencies.  According to OAM, prior to FY 1990,
      congressional legislation required agencies to support national
      socioeconomic goals for diversity in the marketplace by utilizing
      noncompetitive 8(a)  contracts [the only 8(a) mode available]
      wherever feasible.  If EPA had decided to compete the TAI
      services,  OAM contends that 'it would have had to do so outside
      the 8(a)  program.   Thus, in OAM's opinion, there was not a
      potential violation of the intent of the Small Business Act and
      CICA when TAI was repetitively retained under sole-source 8(a)
      contracts.

      Although the FAR provides a specific exception from competition
      for 8(a)  contracts,  we know of no policy, regulation, or statute
      that precluded competitive 8(a)  contracts prior to~1988.  In fact
      the 1984 CICA encouraged competitive awards among socially and
      economically disadvantaged small business concerns.  OAM
      apparently assumes that because 8(a) has a special exemption from
      competition,  only sole-source 8(a)  contracts could have been
      awarded.   This assumption is not supported by any written policy,
      regulation,  or statute that we are aware of and OAM did not
      identify any official written policy in this regard.  Based our
      examination of the Small Business Act's legislative history,  the
      exemption from competition was primarily for new 8(a) firms to
      gain entrance to the marketplace.   It was not intended to
      continue repetitive sole-source contracts to established 8(a)
      firms that had developed a competitive edge.  It is.apparent that
      Congress intended that some competition exist in the 8(a) program
      prior to 1988.   Congressional concern for lack of competition
      between 8(a)  firms prompted the 1988 amendments which required
      the competing of 8(a)  awards in excess of $3 million.

      OAM's response also implies that EPA and SBA had established a
      "standard"  practice of awarding consecutive sole-source 8(a)
      contracts  to firms that remained certified under the 8(a)
      program.   However, OAM provided no written policy or reference to
      support this position.   In any case, FAR 19.811(b) states
      agencies,  not SBA, determine the type of contract award to the
      8(a)  firm.   If EPA has allowed SBA to dictate the types of 8(a)

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      contract awards, then it has improperly ceded its authority to
      SBA.

      OAM also disagreed with our finding that modifications 7 and 16
      to the third TAX contract represented a substantial change in the
      size and scope of the contract which further abused the 8(a)
      program by avoiding competition and extending the contract period
      20 months past TAI's graduation from the 8 (a) program.  While OAM
      agreed that both modifications did significantly increase the
      size of the contract, it disagreed that the modifications
      violated any provisions of the 8 (a) program as it existed at the
      time the contract was modified.  OAM also took exception to our
      position that ERL-A improperly removed its technical support
      contract from the 8 (a) program.  OAM states that CMD reclassified
      the contract because the size of the contract was such that it
      was deemed too large for available 8 (a}  firms and was not
      suitable for the 8 (a) program.  The only known 8 (a) firm that
      might have potential to perform the requirement was AScI, an 8 (a)
      contractor which already had similar contracts at Athens.  OAM
      maintains that 8 (a)  requirements do not dictate that contracts
      automatically stay in the 8 (a) program after an incumbent
      graduates.  However, OAM conceded that last minute, extensions of
      8(a) contracts under sole-source 8(a)  procedures just prior to
      the expiration of the 8(a) firm's eligibility was not good
      business practice and CMD would no longer allow it.

      OAM's response correctly states that modification 7 to TAI's
      third sole-source contract increased the contract's LOE by 50
      percent; however,  it fails to mention that modification 16
      increased the LOE over 200 percent.  This 1986 contract was
      originally estimated at a cost of $2.6 million; however, at the
      expiration of the contract the maximum value had grown, through
      modifications to over $6.6 million, a 300 percent increase over
      the original estimated cost.   Also, contractor staff had gone
      from 6 staff years under TAI's second contract to 31 staff years
      under this third contract ( a 500 percent increase), the contract
      was extended to five years, and the contract support had expanded
      from support of one branch at ERL-A to support of all four ERL-A
      branches.   If this is not a change in contract scope, then CICA
      restrictions on contract modifications to contract scopes without
      competition are essentially meaningless.   We believe these large
      contract modifications to TAI's third sole-source 8(a) contract
      constituted a change in scope under the CICA and that CMD should
      have given some consideration to recompeting the contract.

      Finally, OAM took exception to our contention that ERL-A used

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      biased technical evaluation ranking factors which gave TAI a
      competitive advantage and that the AScI proposal was a token
      submission.  OAM concludes that its file reviews did not reveal
      any bias or unfair consideration in the RFP.  In OAM's opinion,
      the SOW represented the government' s minimum need for support
      services at the Athens laboratory and the related technical
      evaluation criteria placed the most weight on the decisive
      requirement for successful contract performance, e.g., the
      qualifications of dedicated staff located at ERL-A.   According to
      OAM,  our interpretation of a lack of resolve on the  part of AScI
      represents only a weaknesses of a small 8 (a) firm not accustomed
      to the competitive arena.  Overall,  OAM contends that the
      solicitation process and award selection were conducted in
      accordance with the precepts of FAR 15 and EPAAR 1515.  However,
      OAM did conclude that better evaluation measures must be found to
      avoid prolonged incumbency by one firm at any given  laboratory,
      particularly for on-site contracts,  where the advaritage of
      incumbency is difficult to offset.

      We maintain that ERL-A and CMD could have retained the contract
      in the 8 (a) program if they had so desired.  If the  scope of the
      contract in its form at that time was to large for"B(a)  firms,
      they could have split up the scope into smaller contracts to
      allow 8 (a)  firms to compete for the work.  In fact,  file
      documentation evidences that ERL-A requested that the contract be
      taken out of the 8 (a) program so that TAI would have a chance to
      compete for the contract.  The size of the contract  scope was
      only  a secondary consideration which could have been solved by
      breaking up the contract into smaller tasks..   Also,  the fact
      that  ERL-A and CMD considered an existing 8(a)  firm's bid for the
      contract in the competitive range indicates that the
      justification "of for large business only" was weak.   AScI
      received a substantially high technical score and the score was
      not affected by the size of the contract versus AScI's status as
      an 8(a)  contractor.

      OAM also maintains that there was no bias in the competitive
      award to TAI but later states that they are trying to eliminate
      the inherent bias in EPA's competitive procedures that favor
      incumbent contractors.  OAM goes to  great lengths to justify the
      need  for personnel commitment letters and emphasis placed on
      contractor experience with EPA operations in the competitive
      award process; however,  the perceived need for such  evaluation
      factors does not eliminate the large competitive edge such
      factors give to incumbent contractors;  thereby,  substantially
      discouraging competition.
                               \

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      In conclusion, it was OIG's intention that TAI's contract awards
      be viewed as a whole or as a trend to show ERL-A's avoidance of
      full and open competition in order to ensure retention of TAI as
      the on-site contractor.  It was not intended that each individual
      procurement be analyzed as to whether the procurement, in and of
      itself,  was proper and in compliance with policy and procedures.
      In addition, repetitive sole-source awards to an 8(a) contractor
      who has  developed the expertise to compete does not further or
      promote  the mission of the 8(a) program to develop the 8(a)
      contractor's competitive edge.  It only reduces the Agency's
      administrative burden in competing the contracts.

      Except as discussed above, OAM generally agreed with the findings
      and recommendations as presented in Chapter 4.   OAM's response
      included planned or initiated actions for some recommendations.
      OAM's comments and OIG's evaluation on Chapter 4's
      recommendations are detailed in Appendix I.   A complete copy of
      OAM's response to Chapter 4 and OIG's evaluation is available
      upon request.
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                            CHAPTER 5
            CIRCUMVENTION OF STATUTORY AND REGULATORY
                REQUIREMENTS EXTENDED  INTO USES  OF
                       INTRAMURAL RESOURCES
Our review of extramural resource management at EEL-A also
disclosed questionable uses of intramural resources and a
potential violation of appropriation law restrictions.  These
questionable actions related to the improper acquisition and
construction of an office building with S&E appropriated funds
and Superfund monies and the payment of excessive travel costs.
The building was obtained through a fiscal year-end contract
award.  These questionable uses of intramural resources indicated
that the circumvention of laws and regulations and misuse-of
resources was not restricted to extramural funds.
THE ACQUISITION AND CONSTRUCTION OF AN ERL-A OFFICE BUILDING WITH
SSE FUNDS AND SUPERFUND MONIES VIOLATED AGENCY PROCEDURES AND
APPROPRIATIONS LAWS

Appropriations laws and Agency restrictions on construction .and
acquisition of buildings with S&E funds were circumvented by the
purchase of a modular office building which was improperly
classified as personal property rather than real property.  At
the end of FY 1988, ERL-A obligated $201,817 ($170,617 in
expiring FY 1988 S&E appropriated funds and $31,200 in Superfund
monies) to purchase, through a CMD year-end contract award, a
5,320  (70 feet by 76 feet) square foot modular building.  In FY
1989, the structure was transported to ERL-A in five sections and
assembled on-site.   With incidental installation costs of
$2,770, the total cost of. the construction totalled $204,587.
                           t
According to ERL-A managers,  .prior to initiating its procurement
request on July 26, 1988, ERL-A contacted the Facilities
Management and Services Division (FMSD), Engineering, Planning,
and Architecture Branch (EPAB), Washington and the FMSD, Personal
Property and Supply Management Branch, Cincinnati to determine if
an office building qualified as personal or real property.  While
we could not locate documented evidence of these contacts in ERL-
A files, ERL-A managers remembered that both offices stated that
the purchase would be considered personal property.

CMD files evidenced that on August 8, 1988, the CO contacted the
Chief of FMSD's EPAB about the acquisition of the portable
building for ERL-A.  The CO faxed a copy of the building's
specifications for EPAB's review.  In response, the EPAB Chief
told the CO that ERL-A did have the authority to purchase such
modules without EPAB oversight and without the use of EPAB (e.g.,
Buildings and Facilities Appropriation) funds.   Based on FMSD's

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response and its previous designation of "portable" buildings as
personal property, the CO concluded in the August 8 memorandum
that the acquisition and award of the contract for this building
using S&E and Superfund monies was appropriate.  The CO indicated
in the memorandum to the file that the Chief, EPAB was
subsequently apprised of the proposed acquisition but the Chief
provided no further response.

In FY 1989, the modular building was delivered to ERL-A and
permanently mounted on numerous concrete pillars next to ERL-A's
other facilities.  The buildings floor plan and an exterior
photograph are shown below:
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As shown, this building did not appear to be any more readily
transportable than other ERL-A buildings constructed by more
conventional methods.  The building, like a permanent building,
has electricity, heating/cooling units and water/sewer hookups.

Historically, Comptroller General decisions have ruled that such
modular buildings represent major construction projects or, at a
minimum, major acquisitions of real property.  For example,
Comptroller General Decision B-235086 stated the following
concerning the acquisition of modular buildings by the Forest .
Service which were initially classified as transportable personal
property:

     Congress provided the Forest Service with a specific
     appropriation in fiscal year"1984 for the construction
     and acquisition of buildings and other facilities.
     ...In fiscal year 1984, the Forest Service used the
     more general National Forest system appropriation to
     acquire three modular constructed buildings.

     Generally, an appropriation for a specific object is
     available for that object to the exclusion of a more
     general appropriation.  65 Comp. Gen. 881, 884 (1986).
     The existence'of a specific appropriation for the
     construction and acquisition of a building would thus
     preclude the Forest Service from using a more general
     appropriation to pay for such a purchase.
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     Here, each building was permanently installed and cost
     more than .$100,000.  Thus, we think it reasonable to
     classify them as major construction projects.  See 63  .
     Comp. Gen. 422, 435  (1984).  However, even if we did
     not consider them "construction" projects, we would
     nevertheless consider them "acquisitions" for purposes
     of Pub. L. No.98-146.  Therefore, since Congress
     provided a specific appropriation for the "construction
     and acquisition" of buildings, the Forest Service
     improperly used the more general appropriation to
     purchase buildings.

As in the Forest Service case above, EPA has a specific
appropriation for the construction and acquisitions of buildings
- the FY 1988 Buildings and Facilities Appropriation (Public Law
100-404) .  In addition, the FY 1988 S&E Appropriation (Public Law
100-404) contained the following restrictive provisions for the
use of the S&E appropriation for construction and alteration of
facilities:

     For necessary expenses, not otherwise provided for,
     including... construction, alteration, repair,-
     rehabilitation, and renovation of facilities, not to
     exceed $25.000 per project...[emphasis added].

The 1988 Appropriations Act (P.L. 100-404) did not provide for
any utilization of Superfund money to purchase real property.

An ORD memorandum, dated November 10, 1987, to all laboratories
reminded laboratory managers that laboratory directors only have
the authority to charge B&F (Building and Facilities) items under
$5,000 to the S&E appropriation and:

     B&F items which cost between $5,000 and $25,000 require
     prior approval of the Facilities Management and
     Services Division.  Any item exceeding $25,000 must be
     charged to the B&F appropriation.

Based on the size and permanent nature of this building and the
Comptroller General decisions regarding similar acquisitions, we
question the advice apparently provided by FMSD.  In our opinion,
the acquisition of a 5,320 square foot modular building costing
in excess of $200,000, using "portability" as the justification,
violated Agency appropriation restrictions.  CMD awarded this
contract on September 30, 1988 one day before the S&E
appropriation was due to expire.
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        PotentialViolations of Appropriation Restrictions

This questionable use of S&E and Superfund monies for the
purchase of a modular building represented only one of at least
four instances of potential violations/circumvention of
appropriations lavs found during our audit of ERL-A extramural
resource management.  In Chapter 3, R&D appropriated funds were
misused to fund, through CAs, the development of an ERL-A on-site
child-care center and the attainment of a Phd for an EPA
employee.  These actions appeared to violate the purpose and
authorities contained in the applicable R&D appropriations.'  In
another case in Chapter 3, extramural R&D funds were exchanged
through reciprocating lAGs with another federal agency to fund
intramural travel of employees working on a common project.  This
situation again appeared to violate the purpose of the R&D
appropriation since S&E appropriated funds should be used for EPA
staff travel.  At a minimum, we believe this represented
unauthorized reprogramming of extramural funds to intramural
uses.  In conclusion, such circumventions of appropriation
restrictions usurp congressional oversight of Agency funding and
bypass Agency, as well, as congressional and OMB budgetary and
fund controls.      •                               "
ERL-A USED PURCHASE ORDERS TO CIRCUMVENT FEDERAL TRAVEL
REGULATIONS AND MAXIMUM PER DIEM RATES

Through use of purchase orders, ERL-A circumvented travel
regulations and authorized per diem rates in order to hold
conferences at high cost Georgia resort areas at St. Simon's
Island and Callaway Gardens.  For example, ERL-A sponsored a
"2-day" laboratory directors meeting (May 28 to May 30, 1991) at
a high-cost resort hotel on St. Simon's Island.  ERL-A used a
purchase order to pay for accommodations, some meals and
refreshments.  In documentation, dated April 2, 1991, entitled
"Justification For Other Than Full and Open Competition" attached
to the purchase order; the ERL-A director stated:

     ...this meeting requires uninterrupted time and
     attention of attendees.  Therefore, a meeting place
    'other than EPA premises is needed.

ERL-A documentation indicated that only hotels and resorts on St.
Simon's^had been contacted and the King and Prince Hotel was
selected because the "... suggested source was the only one in the
area [emphasis added] with available rooms."  This was used as
the basic justification for the sole-source purchase.  However,
no evidence existed that ERL-A had checked lower cost areas such

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as Athens, Georgia (near the laboratory) or nearby Atlanta,
Georgia.

As stated above, ERL-A elected to pay for hotel accommodations
and some meals and refreshments with a purchase order rather than
having attendees claim the costs on individual travel vouchers.
However, attendees were issued individual travel authorizations
(TAs) and they claimed airfare, mileage, and other subsistence
and incidental costs associated with the St. Simon's conference.

By using the purchase order/invoice payment method, ERL-A was
able to circumvent the maximum per diem limits allowed by travel
regulations for the St. Simon's area.  Based on our calculations,
ORD paid almost $1,750 in excess of the total maximum authorized
per diem (150 percent of authorized per diem for St. Simon's
area) for the "2-day conference" at St. Simon's.  If the
conference had been conducted off-site in Athens (the nearest
location with adequate hotel facilities), ORD could have saved
almost $3,500 over the total travel cost for the St. Simon's
conference.  In addition, ERL-A authorized and paid for
additional travel time/costs (some attendees arrived early, some
late, and some came all the way from the West coast" just for a
2-day meeting which included travel time) for the traveler's own
convenience and separately paid $436.16 for refreshments at
breaks which is not permitted.   These types of abuses of
government funds can subject EPA to public criticism and erosion
of public trust.

ERL-A used another purchase order to exceed maximum per diem for
a three-day meeting at the Callaway Gardens resort.  ERL-A
contacted only three facilities for comparative conference room
and guest room rates.  Two of these facilities were high priced
resorts in the Atlanta vicinity  (Lake Lanier Islands -
$105/night and Stone Mountain - $189/night) and the other was
Callaway Gardens ($92.50/night).

Based on this limited survey of high cost resorts,  ERL-A selected
Callaway Gardens for a sole-source procurement because of "cost
and availability of lodging and conference facilities."  There
are many large, convention center type hotels in the Atlanta
vicinity where rooms and facilities can be obtained at prices
below the $79 per day authorized lodging rate for Atlanta.  None
of these hotels were contacted by ERL-A.

The Callaway Gardens conference took place just one week before
the St. Simon's trip discussed above.  The authorized lodging
rate for the Callaway Garden area was $40 per day.   However,
through the purchase order, ERL-A paid $92.50 a night for 35

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Chapter 5
Circumvention of Statutory/Regulatory Requirements  and Misuse of
Intramural Resources
individuals including OEPER personnel.  The rooms at Callaway
Gardens were used from May 18 through May 21, 1991, for a total
of 94 lodging nights.  When compared to the authorized rate of
$40 per diem, this purchase was  $4,935 in excess of total
authorized per diem.  Even using the maximum authorized lodging
rate (150 percent of authorized rate or $60 per day) excessive
travel of $3,055 was incurred for this conference.  In addition,
the Callaway Gardens invoice submitted with the purchase order
for payment included a $3,146 supplemental charge on the invoice
described only as "Environmental."  ERL-A could produce no
supporting documentation or explain the purpose of this
expenditure.  During.processing of the Callaway Gardens invoice,
a financial technician at the Commodities Payment Section,
Research Triangle Park, wrote ERL-A:

     Invoiced as received does not provide information we
     can use to match what you authorized on the purchase
     order against what they are charging us.  Will you
     approve payment as billed or should we return the
     invoice to the vendor.

On July 8, 1991, ERL-A instructed the technician to "Pay the
invoice as billed."  On July 16, 1991, the ERL-A Laboratory
Director signed a statement found in ERL-A files which certified:

     ... all charges were appropriate and necessary to
     accomplish the goals set for the Ecological Risk
     Assessment Research Program Science Advisory Board
     Review.  Therefore, I authorize payment of this
     purchase order.        '

According to ERL-A files, the Callaway conference package at
$92.50 per night included many complimentary items such as free
admission to the Gardens park.  However, other features of the
package included breakfast and dinner, a prime rib banquet, daily
greens (golfing) fees, etc., which may account for the $3,146
additional charge on the invoice.

We question whether paying excess lodging, totaling at least
$3,055, at a resort area within 90 minutes of Atlanta and its
available facilities (per diem lodging rate of $79 per day) ; and
an unexplained invoiced charge of $3,146 was either appropriate
or necessary.
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RECOMMENDATIONS

We recommend that the Assistant Administrator for Research and
Development:

- Provide guidance to ERL-A concerning appropriation law, proper
  uses of funds, and appropriation restrictions related to funds
  ERL-A receives.

- Obtain formal, written OGC legal opinions concerning:
  (1) potential appropriation law violations related to ERL-A1s
  use of S&E and Superfund monies to purchase and construct a
  modular building; and  (2) use of R&D funds to pay for
  development of a day-care center for ERL-A staff and training
  costs of an EPA employee (see Chapter 3).  If any violations
  occurred, report any resulting Anti-deficiency Act violations
  in accordance with applicable law.

- Instruct ERL-A to refrain from using purchase orders to
  circumvent maximum per diem rates and strictly comply with
  federal travel regulations in the authorization and payment of
  all travel costs.

- Instruct ERL-A to hold future conferences in locations that
  offer suitable accommodations at the least cost to the
  government and that comply with current EPA guidance on
  restricting EPA meetings at resort areas.

- Require ERL-A to provide supporting documentation and
  justification for the unidentified $3,146 charge on the
  purchase order for the Callaway Gardens conference,  instruct
  ERL-A that future purchase order costs should be fully
  justified in the purchase request and properly supported by
  file documentation and invoices.

We also recommend that the Assistant Administrator for
Administration and Resources Management require the:

Director. Facilities and Management Services Division to:

- Review FMSD's policies on classification of real property
  versus personal property as relates to the procurement of
  modular structures and the proper funding for such structures.
  If needed, issue revised or more definitive guidance on the
  classification and funding of modular buildings.
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AGENCY RESPONSE AND PIG EVALUATION OF AGENCY COMMENTS
                                                   T
                           ORD Response

ORD generally agreed with the findings and recommendations as
presented in Chapter 5.  Corrective actions proposed by ORD are
responsive to our recommendations and appear to fulfill the
acceptable action criteria of EPA Order 2750.  ORD's comments and
OIG's evaluation on all Chapter 5's recommendations are detailed
in Appendix I.

                           0AM Response

OAM comments are no longer germane because the audit report was
changed in accordance with those comments.  Neither OARM or OAM
responded to. our audit recommendation for the Director, PMSD.
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                            CHAPTER 6
       ERL-A'S FMFIA PROCESS DID NOT ENSURE PROPER CONTROL
               OVER EXTRAMURAL RESOURCE MANAGEMENT
ERL-A's FMFIA process did not adequately identify internal •
control weaknesses or ensure proper implementation of FMFIA
control objectives and techniques relative to the management of
contracts, CAs, lAGs and other support/administrative activities
that came to our attention during the audit.  Many material
control weaknesses in ERL-A's extramural resource and
administrative activities were not previously identified in
ERL-A's FMFIA risk assessments.  In addition, ERL-A had not
adequately assessed control techniques to ensure proper
implementation by management staff.  Critical control techniques
identified in ERL-A's FMFIA documentation were either not
implemented or improperly implemented by ERL-A management.  As a
result, there was insufficient assurance that Agency resources
were safeguarded against waste, fraud, abuse, and conflicts of
interest.  Because many of ERL-A's extramural activities were of
a mission-critical nature, proper control of the extramural 'and
administrative operations were essential to the integrity of the
Agency's programs.


BACKGROUND

The Federal Managers' Financial Integrity Act (FMFIA) of 1982
requires that each executive agency establish internal accounting
and administrative controls in accordance with standards
prescribed by the Comptroller General.  FMFIA specifies that
these controls are to provide reasonable assurance that agencies'
obligations and costs comply with applicable law; that Government
assets are safeguarded against waste, loss, unauthorized use, and
misappropriation; and that•revenues and expenditures are properly
accounted for and recorded for proper reporting and
accountability purposes.

OMB Circular A-123 and EPA Resources Management Directive 2560
prescribe the policies.and procedures for Agency implementation
of FMFIA requirements.  ERL-A has been designated as an
assessable unit under EPA procedures.  The FMFIA process for each
assessable unit consists of the following events:  (1) risk
assessments every three years to identify vulnerable operations,
(2) a Management Control Plan (MCP) every five years which
details event cycles, control objectives and techniques, and
(3) Internal Control Reviews (ICR) and Alternate Internal Control
Reviews (AICR) annually.   In addition, each EPA program manager
is responsible for periodically evaluating the internal control
systems in place and taking action to correct identified
weaknesses.


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      ERL-A'S REVIEWS OF EXTRAMURAL RESOURCE MANAGEMENT WERE
      INSUFFICIENT TO ENSURE ATTAINMENT OF FMFIA CONTROL OBJECTIVES
      Although extramural resource management was identified by ORD as
      a material weakness, no internal control reviews were conducted
      by ERL-A to determine whether internal control responsibilities
      were adequately defined and internal controls techniques were
      properly implemented to meet its extramural control objectives.
      CAs and on-site LOE contracts provided great flexibility to
      program offices, but provided little incentive for efficiency and
      placed a large oversight burden on EPA management to assure
      performance.  In addition, cooperative agreements and on-site
      contracts were highly susceptible to favoritism and COI
      situations.  Considering the high risk nature and ERL-A's heavy
      reliance on extramural resources in achieving the mission of the
      laboratory, management should have ensured that an adequate
      system of internal controls was established.  However, ERL-A's
      extramural resource management controls were not adequate or
      effective in fulfilling this large oversight responsibility and
      ensuring that extramural activities were needed and represented
      the most cost-effective approach.  In addition, ERE-A management
      did not periodically evaluate implementation of established FMFIA
      controls as related to extramural resource management as required
      by EPA guidance.  These conditions lead to the internal control
      weaknesses in extramural resource management identified in this
      and other chapters of this report.

      ERL-A's internal Control Reviews Did Not identify Major Internal
      Control Weaknesses

      Although ORD in its 1990 and 1991 FMFIA internal control reviews
      identified the management of extramural resources as a
      presidential-level weakness, extramural management was not
      identified as a material weakness at ERL-A.  ORD reported in its
      1990 FMFIA report:

           ... that there is a serious disparity between growth in
           R&D funding and human resources available to manage the
           resources properly.  This imbalance may make ORD
           vulnerable to fraud, .waste and mismanagement of funds.

      ERL-A's internal control coordinator stated that at the time of
      their 1991 FMFIA report, ERL-A did not see extramural management
      as a material weakness, although no formal reviews were conducted
      to verify their assumptions.  As a result, many of the
      deficiencies in ERL-A's extramural resource management identified
      in this report went undetected and uncorrected.

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      According to the EPA's Senior Council on Management "Controls,  the
      failure to identify previously reported Agency-wide weaknesses at
      the assessable unit level was not uncommon.   A synopsis of an
      August 15, 1990, meeting of the Senior Council on Management
      Controls recognized an inherent problem of Agency managers not
      adequately identifying their internal.control weaknesses.   EPA's
      Deputy Administrator stated that "EPA must work to change the
      culture not to hide weaknesses."  A GAO representative at the .
      meeting further defined the problem when he stated:

           Internal controls and financial management systems are
           ... treated as paperwork exercise {and}... often
           delegated to lower levels without senior management
           involvement or understanding.

      GAO also concluded, even when material weaknesses are identified
      at the Agency level:

           EPA program offices do not typically report these kinds
           of fundamental problems as material weaknesses, but as
           agency-wide weaknesses, which seem to be some sort of.
           lesser problem that does not need to be brought to the
           attention of the President and the Congress.

      At ERL-A we found the same situation as identified by the Senior
      Council on Management Controls.  ORD identified extramural
      resource management as a material weakness at the Agency level,
      but ERL-A managers did not deem extramural resource management a
      priority at the field,level.  The identification of material
      weaknesses as related to extramural resources was seen by ERL-A
      as a responsibility of ORD, CMD, and GAD.  In spite of their
      reliance on external review, the Agency's FMFIA guidance states:

           All EPA managers are responsible for operating
           effective and efficient systems of internal control.
           Periodically they must evaluate the internal control
           systems and take actions to correct identified
           weaknesses.           .              .

      In our discussions with ERL-A management, it became evident that
      many of the established controls over the management of
      extramural resources were often viewed by laboratory management
      as a bureaucratic hindrance.  Achieving the ERL-A's mission of
      research was deemed more important than working within the
      constraints imposed upon them.  'The 1990 Lab Directors Retreat's
      Resource Utilization Workgroup addressed the difficulty of
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Chapter 6
ERL-A's FMFIA Process Did Not Ensure Proper Control Over Extramural Resource
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      working within resource limitations and regulatory constraints.
      For instance, topics discussed at the retreat included:

        -  Congressional, OMB and EPA constraints on use of
           resources make it more difficult to do quality science
           and engineering research.

        -  Innovative uses of R&D [funds] to enhance in-house
           research, facilities and skill mix are being used by
           Laboratories in spite of the system.

      The innovative use of R&D funds "in spite of the system" was in
      essence the circumvention of internal controls as they related to
      the use of extramural resources.   The apparent attitude of ERL-A
      management that the end justifies the means subsequently
      contributed to the abuses detailed in previous chapters of this
      report.

      Internal Control Responsibilities Were Not Adequately Defined

      Internal control responsibilities were not adequately defined at
      all levels of extramural resource management.  Specific FMFIA
      requirements were not included in the performance standards of
      all managerial levels and managers did not understand the
      importance of the part they played in the internal control
      system.  This facilitated inadequate implementation of an
      effective internal control system over ERL-A's extramural
      resource management.

      At ERL-A, extramural resource managers from the director down to
      the PO and WAM level have an integral role in the Agency's
      adherence to FMFIA.  However,  specific FMFIA requirements and
      responsibilities were not included in PO and WAM performance
      standards.  Inadequate extramural resource oversight at these
      management levels could produce material weaknesses in the
      internal control system.  OMB circular A-123 and EPA Resources
      Management Directive 2560 require that each Senior Executive
      Service, Merit Pay and any other  employee with significant
      internal control responsibilities maintain written performance
      agreements against which a manager's internal control performance
      can be recognized and evaluated.   The performance agreement
      should outline specific internal  control responsibilities and
      establish performance standards which are specific to the
      employee under evaluation.  In order to assure a viable,
      effective internal control system, all levels of contract or
      assistance management should have specific control
      responsibilities defined in their performance standards.
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      INTERNAL CONTROLS OVER EXTRAMURAL MANAGEMENT INEFFECTIVE

      ERL-A's heavy reliance upon extramural resource activities to
      achieve its mission and the vulnerability of many of ERL-A's
      extramural activities to fraud,  waste and mismanagement,
      necessitated the need for extensive internal controls and reviews
      to assure proper implementation  of an effective internal control
      system.  However, ERL-A managers did not effectively utilize
      available resources to design and implement an effective system
      of internal controls.   As a result,  the procurement process was
      abused, extramural agreements and intramural resources were
      misused and mismanaged,  and prohibited contract activities
      developed.   These conditions were previously reported in Chapters
      2, 3,  4,  and 5.

      ERL-A DidNot Properly Document  critical Event Cycles.  Control.
      Objectives and-Control Techniques

      ERL-A managers did not identify  all critical event cycles,
      control objectives,  and control  techniques for the management of
      extramural activities.  ERL-A also did not properly follow
      through and systematically test  whether established internal
      controls were adequate or functioning.   In order to certify as to
      the adequacy of  event cycle documentation and controls,  Agency
      FMFIA guidance in Resources and  Management Directive 2560
      requires that these controls be  systematically tested.   If ERL-A
      officials had systematically reviewed its existing internal
      control documentation for extramural management,  they would have
      found that event cycles,  control objectives and control
      techniques were  insufficient to  permit a conclusion as to the
      adequacy of internal controls.   Without adequate and detailed
      event cycle documentation,  ERL-A's FMFIA process became merely a
      "paper exercise".

      As a result of identifying extramural management as a material
      weakness in its  1990 FMFIA report,  ORD contracted in early 1991
      for a review of  its administrative processes and internal
      controls.  The review objective  was to assist laboratories in
      meeting their FMFIA event cycle  documentation requirements.  The
      review produced  four studies which listed extensive control
      objectives and control techniques for all levels of contract, CA,
      and IAG administration including ORD Headquarters,  CMD,  GAD, and
      individual laboratories.  In transmitting these contractor reports
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      to the laboratories, ORD's Director of the Office of Research
      Program Management, stated:

           It is expected that individual offices and laboratories
           may use this report to evaluate and refine their
           internal controls documentation and to identify
           opportunities for improvement... Accordingly, the
           report is not intended to be a standard procedures
           manual for adoption by all laboratories, nor a
           compilation of all the variations in procedures.

      However, ERL-A did not utilize these documents to refine and
      strengthen their event cycle documentation and control techniques
      as suggested, but merely referenced these documents as examples
      of detailed control techniques.  These documents contain
      extensive listings of control techniques for all levels of
      contract, CA, and IAG management and many would not apply to
      ERL-A's operations.  In addition, this documentation by reference
      was in direct contradiction of the Director's statement that the
      "report is not intended to be a standard procedures manual".
      Therefore, ERL-A did not establish realistic, detailed FMFIA
      documentation or test ERL-A's internal controls related to its
      management of extramural resources.  ERL-A's FMFIA process
      primarily remained "a paper exercise."

      Contract Procurement and Management

      Pre-award contract management or procurement related to planning,
      requesting, evaluating proposals, and awarding of contracts was
      omitted from ERL-A's FMFIA event cycles.  ERL-A did include some
      control objectives and techniques in their FMFIA documentation
      related to post-award contract administration.  These objectives
      and controls were either superficial, inadequate, or not properly
      implemented to preclude abuse, misuse, or mismanagement of
      extramural resources.

                        Pre—Award Contract Management

      As previously stated, ERL-A's FMFIA process did not. document the
      pre-award process or control objectives/technigues for this
      highly vulnerable process.  Our audit disclosed that this process
      was substantially abused by ERL-A (see Chapter 4).  The 1991
      FMFIA documentation produced by the Procurement and Contracts
      Management Division (PCMD) listed the following control
      objectives and control techniques for its pre-award process.
      None of these critical control techniques had been documented or
      implemented by ERL-A.
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       Control Objective
       To obtain maximum competition.
       Impartial and comprehensive
       evaluation of proposals.
Control Techniques (Examples)
-Adherence to EPAAR1.
-Review of RFPs one level
 above CO.
-Acquisition Plan for RFPs
 approved by Competition
 Advocate.
-Adherence to EPAAR.
-Acquisitions over $5 million
 require 3 member TEPs.
-All TEP members must be
 appointed by Source  Selection
 Official.
-TEPs must certify to no COIs.
      As previously stated in Chapter 4, ERLrA officials did not act in
      the best interest of the Agency by maximizing full and open
      competition.   To ensure that favored, incumbent contractors and
      their employees were retained, ERL-A: (1) abused 8 (a)  set-asides
      to guarantee repetitive sole-source procurements and (2)  biased a
      competitive procurement when 8 (a) eligibility expired.  ERL-A's
      circumvention and avoidance of competition did not guarantee that
      the Agency received the best services.at the least cost,  created
      an atmosphere where contractors were reluctant to submit
      proposals against incumbent contractors, created a potential
      contractor monopoly over critical laboratory operations,  and
      increased EPA's vulnerability to extramural support for
      accomplishing the ERL-A's mission.

      In conclusion, ERL-A's pre-award process contradicted sound
      contracting practices and compromised any control objectives that
      could have been documented for this process.

                           Contract Administration

      ERL-A did document certain event cycles and related control
      objectives/techniques for overall or post-award contract
      management. " Event cycles, included PO and WAM certifications as
      to required experience and training, contract monitoring and
      review,  contract payments, and contract close-out.  However, our
      review disclosed that many of the controls identified were either
           1  EPA Acquisition Regulations.
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      insufficient to preclude improper actions or were ineffectively
      implemented.

      PO/WAM Oualif ications; Controls to ensure that POs and WAMs had
      sufficient contract management and technical expertise to
      properly manage the contract were not effective.  Although
      ERL-A's designated POs and WAMs had received the basic, required
      contract management courses, their experience was inadequate for
      the level of contract management responsibility delegated to
      these positions.  In some cases, the POs technical ability was
      also inadequate for contract monitoring. In one case, the
      (former) PO for an on-site technical support contractor was on
      the laboratory's administrative staff and did not possess the
      scientific or technical background necessary to monitor the
      contractor's operations.  Lack of contract management expertise
      contributed to numerous deficiencies in SOW and WA preparation
      and oversight.  These problems were detailed in OIG's Survey
      Report E1XMG2-04-0102-3400007 on ERL-A's contract management
      operations, issued November 30, 1992.

      In addition, ERL-A employees were performing contract management
      functions without proper certification or delegation of
      authority.  This primarily involved EPA employee oversight of
      contractor employees in prohibited personal services
      relationships.

      Contract Compliancet  Neither ERL-A or CMD provided sufficient
      resources to properly manage contracts and ensure compliance with
      contract terms and conditions.  Because of insufficient CMD
      resources, many contract management duties had been effectively
      delegated to ERL-A management who had no contract authority.
      Also, the CO and PO did not adequately review all of SOWs and WAs
      before approval or ensure that deficiencies noted in those
      reviewed were corrected.  As a result, prohibited personal
      services relationships developed, contractors performed
      potentially inherently governmental functions, and work was
      performed outside the SOW.  Details of these deficiencies were
      presented in DIG Survey Report E1XMG2-04-0102-3400007, issued
      November 30, 1992.

      Invoice Review and Approval:  Internal controls over the review
      and approval of contractor invoices were not properly
      implemented.  As a result, improper contractor charges were paid
      without question.  ERL-A control techniques did identify the
      requirement for the PO to review contractor invoices for
      compliance with contract terms; however, only limited invoice
      reviews were being conducted.  Contractors did not provide
      sufficient detail in their invoices for proper verification of

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      charges and services received by ERL-A.  Details of this problem
      were included in OIG Survey Report E1XMG2-04-0102-3400007, issued
      November 30, 1992.

                       Cooperative Agreement Management

      Event cycles for CA award and administration were, totally  .
      excluded from ERL-A's FMFIA documentation until July 26, 1991.
      ERL-A's FY 1991 event cycle documentation included a reference to
      ORD.'s contractor report on CA controls, entitled "Documentation
      of Administrative Processes/Internal Controls of Administrative
      Processes/Internal Controls of Cooperative Agreements."  As
      previously discussed, this contractor report contained an
      extensive list of possible CA controls for all levels of CA
      management.  ORD specifically informed laboratories that the
      report was not to be used in its entirety in place of detailed
      FMFIA documentation but merely as a guide in tailoring control
      plans ,to individual laboratory needs.  Therefore,  ERL-A still has
      not prepared detailed control techniques for CA activities at
      ERL-A.  Also, ERL-A's FMFIA process did not establish the
      detailed documentation necessary to permit the
      testing/verification of ERL-A's internal control processes
      related to CAs.
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ERL-A "s FMFIA Process Did Mot Ensure Proper Control Over Extramural Resource
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      Below are examples of control objectives and techniques from
      GAD's FMFIA documentation for CAs that should have been included
      in ERL-A's control processes.
       Control Objectives
       Award CAs in compliance with
       laws, regulations, policies.
       Obtain maximum competition in
       CA awards.
       Assure project progress,
       compliance, and timely,
       accurate reporting.
Control Techniques (examples)
-Oversight of review and
  approval process.
-Compliance with FGCA Act.
-Eligibility of recipient.
-Indirect cost-rate approval,
-Proper cost-sharing.
-Compliance with 1977 FGCA
 Act.
-ORD Policy.
-Needs specified in form that
 permits maximum competition.
-Properly maintain CA files.
-Monitoring compliance (site
 visits).
-Obtaining and reviewing
 progress and financial
 reports.    	          	
      However,  ERL-A did not properly document CA event cycles and
      controls  and,  as reported in Chapter 3,  this contributed to the
      misuse, abuse, and mismanagement of CAs.  ERL-A circumvented
      statutory requirements by using CAs,  instead of contracts as
      required, to obtain goods and services for the direct benefit of
      the federal government (specifically ERL-A).   Virtually all of
      the CAs we reviewed produced specific information that would be
      directly  incorporated into Agency technical,  policy,  or
      regulatory decision.

      Also,  ERL-A's CAs were not awarded in a competitive environment.
      Almost 63 percent of ERL-A's active cooperative agreements,
      comprising over $10 million of ERL-A's $14.2 million in CA
      funding,  were awarded without competition.  Potential favoritism
      was indicated in such noncompetitive awards to former employers
      or alma mater of ERL-A staff or current employers of former ERL-A
      staff or  on-site cooperators.  Also,  doubt existed as to how
      truly competitive were ERL-A's competitive CA awards.  Five of
      the CAs we reviewed were awarded competitively and, in every
      case,  we  identified potential review panel COIs and/or other
      irregularities which may have compromised the free and open
      competition of the CAs.
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      Finally, CAs were not properly managed after award.  ERL-A either
      did not have or did not implement procedures to assure compliance
      with the terms of the extramural agreements or ensure that
      government assets were safeguarded against waste or abuse.  An
      overall lack of documentation existed related to management and
      oversight of the CAs.  ERL-A POs were not properly fulfilling
      their responsibility to ensure proper cooperator use of
      government resources,

                           Interagencv Agreements

      Until June 26, 1991, ERL-A had no established event cycles or
      controls documented for the issuance and management of ZAGs.
      ERL-A's FY 1992 event cycle documentation included a reference to
      two ORD contractor reports which included examples of control
      systems for lAGs.  As previously discussed, these studies were
      not intended to be referenced in entirety as detailed FMFIA
      documentation for laboratories, but were to be used to tailor
      controls to individual laboratory operations.  These reports
      contained extensive listings of possible control techniques for
      all levels of IAG management.  Therefore, ERL-A did not identify
      or document any specific detailed control techniques for its IAG
      activities through its reference to the contractor reports.  In
      addition, ERL-A's FMFIA process did not establish the necessary
      detailed control documentation to permit testing/verification of
      ERL-A's internal controls related to lAGs.

      Examples of control objectives and techniques for CAs were found
      in GAD's FMFIA documentation.  These controls were not documented
      or implemented by ERL-A.
Control Objective
Proper award and
administration of lAGs
Awards that promote
environmental mission.
•Control Techniques (examples)
-Reviews of IAG proposals/
approvals for compliance,
completeness, accuracy,
funding.
-Review of Agency authority
for lAGs used for grants or
CAs . . •
-Review for compliance with
statutory, policy, procedural
requirements . .
                                    175
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ERL-A's FMFIA Process Did Mot Ensure Proper Control Over Extramural Resource
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      The lack of detailed documented control objectives and techniques
      for IAG award and administration contributed to the IAG
      deficiencies cited in Chapter 3.  As discussed in Chapter 3,
      ERL-A misused lAGs to improperly supplement FTE travel,
      improperly initiate research funds to a foreign government,  and
      circumvent/violate .procurement regulations in the use of an on-
      site contractor and acquisition of a subcontractor for another
      federal agency.

                  Administrative Management/Fund Controls

      During our audit we also became aware of other administrative
      management and fund control problems both related and unrelated
      to extramural management.  These deficiencies also pertained to
      inadequate FMFIA processes and related internal controls.  The
      event cycles and related deficiencies are discussed below.

      Records Management:  Although ERL-A identified an event cycle for
      records management with a control objective and control
      techniques, the control techniques were not effectively
      implemented.  As a result, ERL-A failed to assure the
      laboratories's file maintenance and record retention adhered to
      federal and Agency policies.   The following critical control
      objective and a control technique related to record
      storage/retention were documented in ERL-A's FY 1992 FMFIA
      report.

           Control objective;  To ensure that all records are
           maintained for easy retrieval and documentation.

           Control Techniques: Assure that records are stored,
           archived, and destroyed in accordance with Lab policy
           and EPA procedures (e.g., specified by the Records
           Management Manualr Office of Information Resources
           Management.

      The control technique cited above contained conflicting guidance
      because laboratory record retention policies did not agree with
      EPA records management policies.  EPA policy required 5 to 10
      year retention of PO, contract, CA, and/or IAG files to include
      correspondence, notes, telephone memos, etc; however, ERL-A's
      policy was to periodically purge such documentation from the
      files contrary to Agency policy.  Record retention problems are
      also detailed in Chapter 7 of this report.

      Our audit of ERL-A's extramural files disclosed that various
      types of documents usually found in Agency records (i.e.,
      telephone memos, routine correspondence, etc.)  were sometimes

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ERL-A's FMFIA Process Did Not Ensure Proper Control over Extramural Resource
Management
      absent.   The ERL-A director suggested that systematic file
      purging were the cause.  The director identified the continued
      practice of purging laboratory records as "operation clean
      sweep."  Lack of file space was used as a reason for this
      practice; however, the laboratory had never used the Federal'
      Records Center (FRC) for file storage.

      Also,  the ERL-A director maintained that the laboratory's files
      were not official files subject to extended retention
      requirements and that all official files were maintained at GAD
      and CMD; however, EPA's procedures did not distinguish between
      official and unofficial files.  EPA's Records Management Manual,
      Appendices C and E, specifically required retention of R&D
      laboratory contract, CA, IAG, and PO files at R&D laboratories
      for 5 to 10 years and an additional 3 to 9 years at the FRC.
      These Appendices also identify routine correspondence, telephone,
      memos, all records of day-to-day management as part of files
      subject to retention.

      A February 1992''evaluation report, entitled Records Management In
      the Environmental ProtectionAgency, prepared by the National
      Archives and Records Administration (NARA), 'found that proper
      records management practices were implemented inconsistently
      within EPA despite Agency directives and procedures that were
      generally satisfactory.  At ERL-A, the NARA evaluation team found
      that:

           No one responsible for files management has had
           training in records management.  Records have not been
           transferred to the FRC [Federal Records Center], and
           cutoffs are not used.  Instead, records are retired or
           destroyed in periodic purgings that are determined by
           needs for additional office space.

      As noted in the NARA report, records created or.acquired in the
      course of government business are government property and that
      willful and unlawful destruction of these records carries
      penalties under the law.  ERL-A by its own admission, routinely
      destroyed laboratory records for which Agency policy specifically
      identified extended retention either on-site or at the FRC.

      Standards of Conduct:  Event cycles and related controls for
      standards of conduct were totally excluded from ERL-A's FMFIA
      documentation.  As an example of a control objective and control
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ERL-A's FMFIA Process Did Not Ensure Proper Control Over Extramural Resource
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      technique related to standards of Conduct,  we utilized PCMD's
      FMFIA documentation as follows:

           Control Objective;  To ensure that a program is in
           place to establish and promote high standards of
           conduct for both Government and contractor personnel.

           Control Technicrues; Assignment of a Designated Ethics
           Official [DEO] for personnel to contact to obtain
           advice on standards of conduct.  The Management Support
           Staff distributes all ethics advisory memorandum and
           keeps them of file for reference.  Confidential
           Statements of Financial Interests are filed up to three
           times a year by managers and other senior level
           personnel.

      Although we found that ERL-A had implemented some of these
      controls, the controls were not effective.   ERL-A's DEO,  who is
      the ERL-A Director, did not ensure that ERL-A employees disclosed
      their spouses' employment on their Confidential Statements of
      Financial Interests.   At least two managers with contract
      oversight responsibilities (both POs)  had not reported spousal
      employment on their Confidential Statements.  Because the
      statements were incomplete as to spousal employment, the DEO
      could not determine whether actual or apparent COIs existed.  In
      addition, the Agency did not require WAMs to file such
      disclosures of financial interests even though they manage
      contractors.  Although WAMs at ERL-A had filed disclosure
      statements, this was due to their management position and not
      their contractual responsibilities.  WAMs prepare work
      assignments for contractors and monitor the contractors'
      performance.  Therefore, WAMs can influence a contractors'  work
      and award fees.

      Employee Travel:  Although event cycles, a control objective, and
      control techniques for travel were included in ERL-A's event
      cycle documentation, these controls were not always effective in
      preventing abuse of travel funds and violation of travel
      regulations.  ERL-A's FY 1992 FMFIA report included the following
      control objective and control techniques that were not properly
      implemented at ERL-A.

           Control Objective:  TO assure travel is necessary,
           properly authorized and documented, and in compliance
           with regulations.

           Control Technicrues: Signed copies of travel
           authorization are submitted and approved by Lab

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Chapter 6
ERL-A's FHFIA Process Did Not Ensure Proper Control over Extramural Resource
Management
           Director before travel and filed.   Signed copies of
           travel voucher are submitted along with necessary
           receipts after travel and filed.   Requires use of
           economy fares and other cost saving measures..-

      As previously discussed in Chapter 5,  our review disclosed that
      ERL-A circumvented Agency travel regulations and authorized per
      diem rates in order to hold conferences at high cost Georgia
      resort areas such as St. Simon's Island and Callaway Gardens
      without proper justifications.  For the St. Simon's conference
      alone, between $1,750 and $3,500 in questionable travel costs
      were identified.  While we did not determine total possible
      excessive travel costs for the Callaway Gardens conference, we
      did identify almost $8,100 in unsupported or questionable charges
      on the purchase order used to pay for  lodging, refreshments, and
      entertainment at the conference.  Details concerning questionable
      travel costs  for these two conferences were previously reported
      in Chapter 5.

      Acquisition and Classification of Property; 'Event cycles and
      related controls'for the acquisition and proper
      classification/reporting of property,  particularly real property,
      were omitted from ERL-A's FMFIA documentation.  Our review
      disclosed that controls related to real property acquisitions and
      related appropriation restrictions were needed but had not been
      identified or implemented.  As detailed in Chapter 5', ERL-A
      circumvented appropriation restrictions on construction and
      acquisition of buildings with S&E funds by purchasing a modular
      office building and classifying the building as personal
      property.

      As previously reported in Chapter 5, ERL-A utilized $201^817 .in
      1988 S&E appropriated funds and Superfund monies to purchase,
      through a CMD awarded contract, a modular building (70' 76') in
      five sections.  This building was erected next to the existing
      laboratory.  The 5,320 square foot structure was permanently
      mounted on concrete pillars.  However,  because the/modular
      sections came as trailers, ERL-A improperly classified the
      building as "portable" personal property instead of real property
      and, thereby, ERL-A bypassed congressional limitations of $25,000
      for S&E funding of non-budgeted construction,  renovation, etc.
      The 1989 EPA Salaries and Expense Appropriation Act (Public Law
      100-104, August 19, 1988)  specifically states:

           For necessary expenses, not otherwise provided for,
           including...  construction, alteration, repair,
           rehabilitation, and renovation of facilities, not to
           exceed $25.000 per project...[emphasis 'added]

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Chapter 6
ERL-A's FMFIA Process Did Mot Ensure Proper Control Over Extramural Resource
Management
      Similar restrictions exist for the use of Superfund monies to
      purchase real property.

      ERL-A managers stated that they contacted Facilities Management
      Services Division (FMSD)  and were told that the property
      classification and expenditure was correct.  ERL-A had no
      documentation of this FMSD approval and based on letters in the
      contract files and interviews with ERL-A staff, we concluded that
      both the CO and ERL-A presented the purchase to FMSD as
      acquisition of "portable offices or trailers" rather than a
      constructed "modular office building permanently erected on-
      site."  Comptroller General decisions have ruled that such
      modular buildings are construction and subject to applicable
      appropriation restrictions (i.e., Comp. Gen. B-235086,. issued
      April 24, 1991). (see details in Chapter 5)


      CONCLUSION

      ERL-A's FMFIA process did not adequately identify internal
      control weaknesses or ensure proper implementation of FMFIA
      control objectives and techniques relative to contracts, other
      extramural agreements, and certain administrative management
      functions.  ERL-A managers did not recognize the importance of
      FMFIA requirements.  ERL-A management gave the process low
      priority and treated the process as a "paper exercise" rather
      than as an opportunity to review and strengthen laboratory
      operations.  Therefore, few effective internal controls existed
      at the laboratory to assure adherence to sound procurement/award
      and management practices.  Critical control objectives; and
      techniques were either not identified in internal control
      documentation or improperly implemented.  Failure to fully comply
      with FMFIA requirements contributed to the problems discussed in
      this report - lack of competition, inappropriate use of contracts
      and other extramural agreements, inadequate management and
      oversight of extramural resources, and other improper uses of
      administrative funds.

      The establishment of event cycles, control objectives, and
      control techniques is only a part of the FMFIA process.  Internal
      control systems are only as good as the effort devoted to
      implementing those systems.  ERL-A's extramural resource managers
      did not assure that the controls established were functioning
      properly by defining FMFIA responsibilities and conducting
      systematic reviews of control activities.

      Of greater concern,  however,  is the seriousness of management
      problems and resource abuses at ERL-A that have gone mostly


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Chapter 6
ERL-A's FMFIA Process Did Not Ensure Proper Control over Extramural Resource
Management
      undetected and uncorrected by ORD, CMD, and GAD internal control
      systems.   In addition,  ORD management reviewed and accepted FMFIA
      documentation produced by ERL-A in 1992 and prior years even
      though this documentation obviously did not cover all critical "
      event cycles in laboratory operations and control objectives and
      control techniques were not detailed or sufficient to permit
      evaluation and testing, and were not in accordance with ORD
      instructions.  Some of the most critical, vulnerable phases of
      laboratory operations,  such as contract pre-award management,
      have never been addressed in ERL-A documentation.  As we
      concluded in Chapter 2, ORD, CMD, and GAD oversight of ERL-A
      operations is seriously flawed and needs strengthening and
      improvement.


      RECOMMENDATIONS

      We recommend that the Assistant Administrator for Research and
      Development require proper implementation of ERL-A's FMFIA
      internal control process to ensure material weaknesses are
      properly identified and adequate controls are established for
      extramural resource management and administrative processes.
      Specifically, the Assistant Administrator should require the:

      Director.  Office of Environmental Processes and Effects Research
      to:

      - Instruct the ERL-A director in the importance of proper
        implementation of the FMFIA and establishment of effective
        internal control systems over every critical phase of
        laboratory operations.

      - Incorporate into the ERL-A director's, as well as all other
        laboratory directors1 performance standards, a critical
        element for FMFIA implementation.                .

      - Establish more effective oversight of all laboratory FMFIA
        documentation and implementation to .ensure that laboratory
        directors properly implement FMFIA requirements in compliance
        with statutory and Agency procedures and establish effective
        controls that can be readily identified, tested and evaluated.

      - Incorporate into laboratory directors' performance .standards
        accountability for any future deficiencies in their FMFIA
        processes,  documentation,  and control systems.

      - Include in any future on-site reviews at ERL-A or other ORD
        laboratories an evaluation of FMFIA documentation and


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chapter 6
ERL-A's FMFIA Process Did Mot Ensure Proper Control Over Extramural Resource
Management
        effectiveness of related control systems to ensure compliance
        with applicable laws, regulations and policies.

      Director. Environmental Research Laboratory - Athens to;

      - Report extramural management as an ERL-A material weakness
        for the FY 1993 FMFIA report.

      - Review current FMFIA processes and documentation at ERL-A and
        ensure that:

        *  All critical event cycles for extramural management and
           administrative processes are identified with specific
           control objectives and control techniques.

        *  Detailed control objectives and techniques  are identified
           for all critical event cycles and are tailored to ERL-A
           operations including IAG and CA activities  (not merely
           references to all inclusive ORD reports).

       . *  Control objectives and techniques are documented in
           sufficient detail to permit testing and evaluation of
           control implementation.

        *  Reviews and tests are performed on established controls to
           ensure adequacy and proper implementation.

      - Document specific FMFIA requirements and responsibilities in
        the performance standards of all ERL-A staff with contractor or
        cooperator oversight functions and managers who supervise
        employees with oversight responsibilities.

      - Closely monitor the laboratory's FMFIA process and ensure that
        ERL-A staff, with FMFIA responsibilities, are  held accountable
        for proper implementation of controls over their extramural
        management activities.


      AGENCY RESPONSE AND OIG EVALUATION OF AGENCY COMMENTS

      ORD generally agreed with the findings and recommendations as
      presented in Chapter 6.  Corrective actions proposed by ORD are
      responsive to our recommendations and appear to  fulfill the
      acceptable action criteria of EPA Order 2750. ORD's comments and
      OlG's response to all Chapter 6 recommendations  are detailed in
      Appendix I.
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                             CHAPTER  7

            MISSING RECORDS  AND  INCONSISTENT STATEMENTS
     BY ERL-A. CONTRACTOR. AND COOPERATOR STAFFS DELAYED AND
               POTENTIALLY LIMITED AUDIT DISCLOSURE
 During our audit,  several  impediments were encountered  at ERL-A
 that hampered the  accomplishment of audit f ieldwork  and may have
 limited our assessment  of  laboratory operations.   Impediments
 included:  (1)  inconsistent (often contradictory)  statements by
 ERL-A staff,  contractors,  and cooperators and  (2)  missing
 documentation in ERL-A's contract/cooperator and/or  laboratory
 correspondence files.   In  some cases, the inaccurate statements
 made by ERL-A employees, contractors, and cooperators appeared  to
 be  "textbook"  answers to our questions rather than answers that
 accurately reflected ERL-A day-to-day operations.  Evidence.
 obtained indicated that ERL-A staff had been briefed prior to
 start of audit f ieldwork as to our audit objectives  and the
 "correct"  answers  to our questions.  Also, some of the  missing
 records could  be attributed to ERL-A's improper record  retention
 procedures.  However, according to certain ERL-A managers, the
 laboratory was seriously concerned about the negative impact of
 our audit  on  ERL-A's operations and, in particular,  about the
 effect on  contractors that worked at the laboratory.  This
 concern was based  on the impact of the recent OIG  audit of Duluth
 ERL on that laboratory's operations.  The missing  records and
 conflicting statements  necessitated alternative record  reviews
 and additional interviews  which would not have been  necessary if
 full disclosure had been made when questions were  first asked.
 These impediments  significantly delayed completion of audit
 f ieldwork  and  left us unsure that all pertinent information and
 conditions had been disclosed.
BACKGROUND

Section  6(a)(l) of the Inspector General (IG) Act of 1978, as
amended, authorizes the Inspector General or his authorized
designee access to all records, reports, documents, papers,
materials, etc., available to the Agency.  Further, Section
6(b) (1)  of the Act requires the Agency to provide any information
requested by the Inspector General or his authorized designee
unless prohibited by existing statute or Agency regulation.  In
addition, provisions of 18 U.S.C. 1516 prohibit deliberate
obstruction of a federal audit and subjects any such act to
criminal penalties.

EPA's Record Management Manual, Appendices c and E, describe
various  types of files and related file documentation and the
proscribed record retention policy for each type of file for
Research and Development and Research and Development
Laboratories, respectively.  Provisions of 44 U.S.C. 3105 and 36


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 Chapter  7
 Missing  Records  and  inconsistent:  statements  By  ERL-A  Staff,
 Contractors,  and  Cooperators
 CFR 1228.102 prohibit  the  deliberate  destruction-or removal  of
 federal records.  Provisions  in  18  U.S.C.  2071  makes it a
 criminal  offense to  conceal,  remove,  mutilate,  obliterate, or
 destroy any record,  paper,  or document  that  is  filed or deposited
 in any public office.


 INACCURATE. INCONSISTENT STATEMENTS BY  ERL-A, CONTRACTOR, AMP
 COOPERATOR STAFFS

 As stated above, EPA employees,  contractors, and cooperators
 supplied  answers to  our questions that  contradicted file
 documentation or answers given by other staff members.   Some of
 the answers provided to auditors appeared  to be "textbook"
 answers (the way things should operate  per procedures rather than
 how they  really operate).   We were  told that briefings  were
 conducted at ERL-A as  to the  audit  objectives and the importance
 of providing the correct answers to our questions.   Notes to one
 such briefing was found during the  audit which  confirmed this
 statement.

 For example, one case  of apparently contradictory statements came
 from two  UGA on-site staff.   Both of  these on-site  cooperators
 insisted  that they did not  work  directly for or talk to the  ERL-A
 sub-PO on their projects but  were only  supervised by and talked
 to the UGA PI who was  located at the  University.  However, the
 sub-PO on two occasions told  us  that  these employees worked  on
 his subprojects at ERL-A and  that he  frequently talked  with  them
 (often weekly)  about their  research.  In addition,  the  UGA PI
 (UGA Vice President  for Research) said  that until our earlier
 audit survey he did  not know  he  was the PI on these employees
 subprojects.  He further said he had  no contact with these people
 and knew nothing of their research.

We  also questioned one of the on-site UGA  employees as  to whether
he  had been briefed  on how  to respond to our questions.  He
replied no and said that he had  not been told that  auditors  were
at  the laboratory.   However,  it was evident from the  responses
of  this and other cooperators that they had been briefed to  tell
us  that they were not supervised by EPA employees.   The on-site
UGA  CA coordinator subsequently told us  that she had  informed all
the  on-site UGA employees (several of whom were  foreign post-
docs) that auditors were present and that they  should answer our
questions slowly and clearly to preclude misunderstandings.

Several inconsistent statements given by ERL-A staff  involved the
ERL-A director.   For example,  on September 25,  1992, when we
informed the director that one of the UGA CA subprojects was  for

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Chapter  7
Hissing  Records  and  Inconsistent  Statements  By  ERL-A Staff,
Contractors, and Cooperators
development: of an ERL-A on-site day-care operating plan, she
seemed surprised and said she was not aware of this.  The
laboratory director was the PO for this CA subproject.  She said
that the $30,000 R&D funded subproject was supposed to be for
developing a day-care environmental education curriculum.
However, both the ERL-A sub-PO and UGA PI had already informed us
that the subproject was definitely for the development of an
ERL-A on-site day-care operating plan.  Also, ERL-A's and UGA's
CA files contained a "working draft" of the subproject proposal
submitted by UGA to ERL-A in June 1992 which specifically
identified the work as the development of a day-care operating
plan.  There were no curriculum tasks in this draft proposal.
According to a transmittal attached to the draft proposal, the PO
(ERL-A director) had reviewed the proposal and commented "good
job so far...You need to work w/them in improving/revising this
plan..."  Also, the ERL-A director had placed a note on an
attached proposed Phase II budget for the subproject indicating
that she had reviewed the budget also.  This budget included the
salary for a day-care center director to be paid out of CA R&D
monies.
MISSING/INCOMPLETE FILE DOCUMENTATION AND IMPROPER RECORD
RETENTION PROCEDURES

ERL-A file documentation, especially PO files, for current
contracts was limited primarily to official executed documents
with little or no correspondence, memos of conversation, notes,
or other routine records to document the contract solicitation
and award processes. The routine records that good practice would
dictate be present for day-to-day contract management were
missing.  However, we noted the predecessor contract files for
these same contractors contained much more of these routine
records and correspondence.  Therefore, we were concerned that
the current files may have been "sanitized" prior to the audit.
File documentation on CAs and lAGs reviewed was equally lacking.

As previously discussed in Chapter 6, some of this missing
documentation may be attributed to ERL-A's record retention (or
"destruction") policy which conflicted with Agency records
management procedures.  The ERL-A director told us that she
directed periodic systematic cleaning-out of ERL-A files.  She
identified the records destruction as "operation clean sweep" and
indicated that this.was the reason routine correspondence,
telephone memos, etc., may be missing from current ERL-A PO,.
contract, CA, and IAG files.  Since none of these files were over
two to three-years old, ERL-A's record destruction violated EPA's
record retention policies.

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 Chapter  7
 Missing  Records  and  inconsistent  Statements  By  ERL-A  Staff,
 Contractors/  and  Cooperators
 EPA's Records  Management  Manual, Appendix C,  "Research and
 Development Records,"  and Appendix  E,  "Research and Development
 Laboratory Records," requires  the retention of PO, contract and
 assistance files  and related records on-site  for 5  (i.e.,  PO
 files) to 10 years  (i.e., contract  files), with additional
 retention at the  Federal  Records Center  (FRC) for an  additional  3
 to  9 years before destruction.  ERL-A  has never transferred any
 files to FRC for  storage.  The Records Management Manual further
 identifies records  ERL-A  routinely  purged as  part of  the files to
 be  retained.   For instance,  PO files were to  include  "site
 visits, trip reports,  telephone memos, and other records related
 to  day to day  management  ...."

 ERL-A management  explained that they did  not  realize  that  the
 laboratory records  for contracts and assistance agreements were
 official files and, therefore, were subject to retention for more
 than one year.  ERL-A  staff  indicated  that they thought the
 official files were at CMD and GAD.  However, our review
 disclosed no EPA  procedures  or policy  that specified  what.
 constituted official files or  that  would  otherwise support the
 laboratory*,s definition.  EPA's Record Management Manual makes no
 distinction between official and unofficial files,.  Appendix E
 specifically refers to "Research and Development Laboratory
 Records" and specifically identifies PO records maintained at the
 laboratories.  According to Appendix E, PO files should be
 retained for at least  five years after closeout of the project
 and these files should consist of the  type records which were
 periodically destroyed by ERL-A.  We believe  that the records
 destroyed by ERL-A  meet the definition of  "Federal records" as
 defined in44U.S.C. 3301.  In addition,  EPA  Ethics Advisory 92-
 24, dated December  10,  1992, issued by the Deputy General
 Counsel, included NARA Bulletin No. 93-2,  entitled "Proper
 disposition of Federal records and  personal papers."   Section 8.
 of this Bulletin  stated:

     As specified under 36 CFR 1222.42, nonrecord materials,
     including extra copies of agency  records kept only for
     convenience  of reference  [emphasis added], may be
     removed [permanent removal or  destruction] from
     Government agencies only with  the approval of the head
     of the agency  or  another agency official designated by
     the agency head,  such as the agency records officer or
     legal counsel.

Although some of  the missing documents may be attributed to
 improper records  retention policies, the  importance of  some of
the documents to  our audit objectives  and disclosure  of
questionable activities at ERL-A raises doubts as to  the intent

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 Chapter 7
 Missing  Records  and  inconsistent  Statements  By  ERL-A  Staff,
 Contractors,  and Cooperators
 of any records purging just prior to our audit.   For example,
 during our review of UGA files,  we found reference to
 correspondence between a UGA PI  and the ERL-A director.   This
 correspondence was very critical of the way  ERL-A managed and
 funded UGA's CA projects and essentially used the CA to  fund
 EPA's  research at the laboratory.   Even though this  letter was
 addressed to the ERL-A director  (who was the PO  on these
 subprojects),  there were no copies of the correspondence in her
 files  or  the other correspondence files provided by  ERL-A staff
 during the audit.   We later obtained copies  of these letters from'
 the UGA Pis after lengthy negotiations with  UGA  and  the  Pis over
 our access authority related to  these letters.   Although the
 laboratory later found these letters-in their files,  this did not
 occur  until after we became aware of the letters from UGA files
 and had subsequently demanded a  copy of .the  correspondence from
 ERL-A.
CONCLUSION

It was evident that ERL-A  staff, contractors, and cooperators had
been briefed as to the  "correct" answers to our questions.  . • : '
Incorrect, inconsistent statements occur in many audits due to
human error or the natural instinct of individuals to protect
their work or organization; however, this was not always the case'
at ERL-A.  At ERL-A, many  of these occurrences may have resulted
from these same circumstances.  However, the frequency of
incorrect/inconsistent  statements and missing documentation and
the nature of missing records made us question the laboratory's'
intent.•         '               -•             -

ERL-A officials should  be  forewarned that any deliberate false
statements to federal auditors or intentional destruction of
Agency records to subvert  audit disclosure could be construed as
obstruction of a federal audit and a violation of 18 U.S.C 1516
which is subject to disciplinary or criminal penalties.  Federal
employees are required  to  fully disclose all pertinent facts and
related records during  official inquiries,.

In addition, any destruction, removal or concealment of records
in a manner which is inconsistent with established Agency records
schedules or General Records Schedules is a violation of Agency
policy and federal law, as cited in 44 U.S.C. 3105 and 36 CFR
1228.102.  We believe that ERL-A's handling and improper disposal
of records may have adversely impacted the OIG's ability to
obtain critical documentation related to ERL-A's management of
extramural resources.   Without stringent controls over Agency
records,  management accountability may be lost.


                               187       Audit NO.  E1JBF2-04-0300

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Chapter 7
Hissing  Records  and  Inconsistent  Statements.  By  ERL-A staff,
Contractors, and Cooperators
RECOMMENDATIONS

Recommendations to the
Development

We recommend that the Assistant Administrator require the:

Director. Office of Environmental Process and Effects Research
to:

- Require that all,ERL-A managers and staff receive ethics
  training regarding their responsibilities as federal officials  •
  for the ethical conduct of government business and federal
  programs.

- Instruct ERL-A staff, contractors, and on-site cooperators that
  deliberate obstruction of a federal audit or destruction of
  federal records without proper approval is a crime punishable
  under 18 U.S.C.

- Inform ERL-A staff, contractors, and cooperators--of
  requirements of the IG Act and their obligation under the Act
  to furnish full and accurate information to any
  interrogatories by OIG auditors in the conduct of an official
  inquiry.

- Require ERL-A to establish record retention policies and
  procedures in accordance with EPA's Records Management Manual
  and ensure that records documenting day-to-day management of
  contracts and extramural agreements are maintained for the
  proper retention period and for easy access by any potential
  reviewers of this information.

- Require ERL-A director to utilize the FRC if additional storage
  space is needed at the laboratory.
AGENCY RESPONSE AND OIG EVALUATION OF AGENCY COMMENTS

ORD generally agreed with the findings and recommendations as
presented in Chapter 7.  Corrective actions proposed by ORD are
responsive to our recommendations and appear to fulfill the
acceptable action criteria of EPA Order 2750.  ORD's comments and
OIG's evaluation on Chapter 7's recommendations are detailed in
Appendix I.
                               188       Audit NO. E1JBF2-04-0300

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                                                       Appendix I
                 AGENCY COMMENTS ON DRAFT REPORT
                        AND QIC EVALUATION
        OFFICE OF RESEARCH AND DEVELOPMENT  (ORD) COMMENTS
                      Overa.11 _ OIG Eva.1 uation

ORD offered tio disagreement with the findings and recommendations
presented in this report.  ORD response provides specific
corrective actions and milestone dates for completion of these
actions.  ORD's corrective actions are considered acceptable for
resolution under EPA Order 2750 with the exception proposed
actions for recommendations 3IAA-5, 3ILD2, 3ILD-5, 3ILD-6, 3IIOD-
3, and 3IIIOD-1,   Our concerns with the actions proposed for ':
these recommendations are presented after the applicable ORD
response below.
       Assistant Administrator for Research and Development
       Comment; on Findings jand Proposed Corrective Actions
               In Draft Audit Resort E1JBF2-04-0300
                   CHAPTER 2 - RECOMMENDATIONS

2AA-1  Review all ORD guidance related to CAs, in coordination
with OGC and GAD, to determine whether applicable guidance fully
complies with the intent and statutory provisions of the 1977
Federal Grant and Cooperative Agreement (FGCA) Act, as amended.
Obtain a formal written OGC opinion as to compliance of current
ORD policies with the intent and provisions of the 1977 FGCA Act.

Response: Concur

Corrective Action:  -The Director of ORD's Office of Research
Program Management  (ORPM) will establish a 'team to review ORD
guidance related to CAs.  OGC and GAD will be asked to
participate on the team.  To support the review, OGC will be
asked for a written opinion on the extent-of compliance of
current ORD policies with the FGCA and for recommendations for
improving that guidance.  If any changes to ORD policy are
needed, revised policy will be reissued within 60 days of the

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                                                       Appendix I
completion of the review.  Final or interim guidance as
appropriate will be issued by September 307 1993, to reduce the
potential for confusion about which guidance or policy to follow.

2AA-2  Instruct ERL-Athens management to refrain from its pattern
of circumventing and noncompliance with laws, regulations, and
Agency policies related to extramural and intramural resources.

Response: Concur

Corrective Action: The Director of OEPER will instruct ERL-Athens
management to comply with Agency policies and regulations related
to extramural and intramural resources.  These instructions will
be contained in a memorandum to be issued by March 31, 1993.

Additionally, a Deputy Laboratory Director position will be added
to the Athens organization.  The Deputy will have full
operational responsibilities for the laboratory and will
strengthen the internal "check and balance" system for extramural
management.

2AA-3  Continue to promulgate and refine CA guidance to
laboratories which encourages or requires competitive awards and
improves ORD oversight and control of laboratory management of
assistance agreements.1

Response: Concur

Corrective Action: The Director of ORD's ORPM will continue to
refine and expand ORD policy requiring competition for CAs.  ORPM
approval will be required for all non-competitive CA awards, and
AA approval will be required for any CA award over one million
dollars.

The Director of ORD's ORPM will also develop ORD policy to
improve ORD oversight and control of laboratory management of
assistance agreements.  Although final policy may have to wait
for new Agency-wide policy, ORD interim policy will be issued by
September 30, 1993.

2AA-4  Evaluate and strengthen ORD's oversight and controls over
ERL-Athens contract management a'ctivities and encourage full and
     1  ORD  issued  interim and draft guidance  documents  during
the audit which encouraged competitive CA awards, elevated
approval level for noncompetitive CA awards, and strengthened
some oversight and management controls for laboratory programs.

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                                                       Appendix I
open competition in laboratory contracts as intended by the
Competition in Contracting Act of 1984.

Response: "Concur

Corrective Action: The Director of OEPER will participate
actively in evaluating and strengthening all extramural
management in Athens and in assuring full and open competition
when appropriate.  Effective immediately and continuing through
March 31, 1994, OEPER will review and approve all new contracts,
CAs, and lAGs proposed by the Athens laboratory.  All
modifications and amendments to existing contracts, CAs, or lAGs
will similarly be reviewed by OEPER.  OEPER will also approve all
new work assignments and will be sent copies of technical
directives at the same time they are sent to the Contract Office.

The Deputy Director of OEPER will carry out a complete audit of
all existing contracts, CAs and lAGs to verify they are
appropriate or to correct any differences that may exist.  He
will report back the results of his review audit to the Director
of OEPER by May 15, 1993.

2AA-5  Evaluate ERL~Athens staffing needs, and if appropriate,
request through the budget process additional work years for
ERL-Athens resource/contract management functions, as well as
mission critical research projects.  With the approval of EPA's
Comptroller and the Off ice of Management and Budget, this may be
accomplished through conversion of extramural funds to intramural
work year support.  Such work year increases could preclude
continuing personal services relationships with contractor staff,
prevent contractor performance of inherently governmental
functions, and improve contractor and cooperator oversight.

Response: Concur

Corrective Action: ORD has reported the lack of sufficient
Federal work years to manage extramural resources as a material
weakness under the FMFIA.  This weakness exists in each ORD
Office and Laboratory, not just in Athens.  To solve the chronic
under-staffing problem will require support from the EPA
Comptroller and Administrator, OMB, and Congress.  ORD management
is committed to addressing the underlying problem.

OIG identification of the under-staffing situation in Athens
provides an opportunity for an ORD-wide study.  The Director of
OEPER will develop a plan and schedule for completing an
evaluation of the staffing at Athens.  The plan will be submitted
to the acting AA for ORD by April 30, 1993.  -After approval, the

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                                                       Appendix I
methodology will be applied in the Athens laboratory as a pilot
test.  This evaluation will be completed by August 15,  1993.
After modifications (if needed), the methodology will be used in
each ORD laboratory to determine staffing needs.   This ORD-wide
evaluation effort will be conducted by ORPM during.FY 1994.

Notwithstanding the above actions, ORD will ensure compliance
with Administrator Browner's direction that EPA's mission will be
accomplished in full compliance with all laws,  regulations,  and
principles of sound management.  To the extent that ORD does not
have the federal work years to do all the required work, proper
prioritization and planning will be used to determine what will
and will not be done.

2AA-6  Establish periodic, recurring on-site reviews of
laboratory management of contracts and assistance agreements to
be performed jointly with CMD and GAD, respectively.

Response: Concur

Corrective Action: ORD is accountable for the integrity of its
management of extramural resources.  We are now hiring
acquisition specialists in every laboratory to assist our
management efforts.

For the Athens laboratory and the rest of OEPER,  the Director of
OEPER will redesign management review procedures to incorporate
the review and audit practices that will be necessary to fulfill
his responsibilities and accountability for management of
extramural resources.  The design for new management review
procedures will be completed by July 1, 1993.

The Director of ORPM will develop ORD-wide review procedures. CMD
and GAD will be invited to participate.  When these procedures
are issued in FY 1994, ORD managers will be held accountable for
carrying out on-site reviews that will uncover the types of
problems found in the audit.  They will be responsible for
getting expert advice from the contracts and grants offices on an
as-needed basis.

2AA-7  Evaluate the planning, timing, and funding processes for
research projects which may preclude laboratory selection of the
best and appropriate extramural mechanism.

Response: Concur

Corrective Action: Each of the ORD offices and laboratories have
the same situation as Athens, in that they do not know what their

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                                                       Appendix I
resources will  be  for a fiscal year until the Agency budget is
determined and  distributed.  This distribution is often after the
fiscal year begins.  Nevertheless, the fact that a Laboratory may
not know its exact resources for the coming year is not an
acceptable excuse  for failure to select the proper extramural
instrument for  any project.-

ORD's Issue Planning process is intended to help Athens and other
ORD laboratories plan their projects better, including the
determination of the appropriate funding and extramural
mechanism.  This process was started last year and is currently
being implemented  in all of the ORD Offices and Laboratories.

To address the  recommendation for Athens, the Director of OEPER
will require Athens to prepare its acquisition plans and
laboratory research work plans, in response to Recommendation
4IOD.4 and submit  them when required.  This guidance will be
issued by May 15,  1993.

2AA-8  Eliminate arbitrary allocations of extramural resources
which may preclude ERL-Atliens from using the appropriate
extramural mechanism.

Response: Concur

Corrective Action: The Director for OEPER will review allocation
formulas and policies that exist within OEPER.  Any that are
considered arbitrary will be eliminated.  The Office Director
will report to  the AA on findings and actions taken by June 1,
1993.                                                   .

                   CHAPTER 3 - RECOMMENDATIONS

3IAA-1  In collaboration with GAD and the Comptroller, promulgate
definitive guidance on the proper uses of R&D funds under CAs,
especially those uses related to ambiguous project areas such as
curriculum development.  Prohibit the use of R&D funds, either
directly or indirectly, for the direct benefit of federal
employees.

Response: Concur

Corrective Action: The Director of ORD's ORPM.will continue to
work with GAD,  the Comptroller,  and OGC to obtain more definitive
guidance on uses of R&D funds,  especially those related to areas
of apparent ambiguity.  In addition, we will issue revised
policies emphasizing the prohibition on the use of appropriated
funds for the direct benefit of Federal employees, except as

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                                                       Appendix I
authorized by law and regulation.  These strengthened policies
will be issued by May 30,  1993.

3IAA-2  Receive and review all CA RFPs and decision memorandums
to assure that the purpose of the agreement is to provide
assistance and not directly benefit or support ERL-A/ORD research
projects.

Response: Concur

Corrective Action: The Director of OEPER will review all CAs and
decision memoranda from ERL-A to ensure that they are
appropriate.  ORD's ORPM will develop ORD-wide policy clarifying
appropriate use of CAs and work with OEPER to assure review of
ERL-A agreements.

3IAA-3  Develop a policy which clearly states how graduate
academic training and/or advanced degrees for EPA employees will
be funded, either through  IPAs or established Agency training
programs.  Require commitment of 3 years of federal service for
every 1 year of training received whether training -is funded
through IPAs or regular training funds.  Prohibit the funding of
federal employee training  under CAs in accordance with Assistance
Administration requirements.

Response: Concur

Corrective Action: The Director of ORD's ORPM will develop and
issue new ORD-wide policy  clarifying how graduate academic
training and/or advanced degrees for EPA employees will be
funded.  This policy will  emphasize the Agency requirements
specified in the recommendation.

3IAA-4  Develop a policy on the funding of foreign travel under
CAs which will result in improved ORD controls over any foreign
travel funded by EPA, including full disclosure to Congress of
total expenditures for foreign travel by FTEs, contractors, and
cooperators/non-federal persons (academics) under such
agreements.

Response: Concur

Corrective Action: The Director of ORD's ORPM will develop
ORD-wide policy on the funding of foreign travel under CAs and
the appropriate controls on such travel by September 30, 1993.

3IAA-5  Remind the ERL-Athens director that directed and sole
source contracting through lAGs is prohibited without proper

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                                                       Appendix I
approval and that use of extramural agreements under lAGs should
be clearly disclosed on the JAG application in accordance with
the IAG Compendium.  In addition, instruct the ERL-Athens
director'that currently no authority exists under the Economy Act
for use of CAs under lAGs.

Response:  Concur

Corrective Action: The Director of ORD's ORPM will develop and
issue an ORD Directive by May 30, 1993> reminding all ORD Offices
and Laboratories of the prohibitions on IAG usage reflected in
this recommendation.

                          DIG Evaluation

ORD'.s planned corrective action on recommendation 3JAA-5 did not
address disclosure to Congress of all CA expenditures for foreign
travel by FTEs, contractors, cooperators, and academics.  We will
need ORD planned actions regarding such disclosure prior to
resolution of this recommendation.

3IAA-6  Determine, with assistance from OGC, if any unauthorized
reprogramming of R&D funds to S&E funds occurred under the NASA
lAG's.

Response:  Concur

Corrective Action: The Director of ORD's ORPM has already
requested assistance from OGC in determining the propriety of
accepting NASA funds for EPA travel usage.  We will submit any
other evidence we find in this matter to OGC for appropriate
determination as soon as we can assemble the documents.  We
expect to have all the documents by April 30,  1993.

3ILD.1  Ensure that all POs have all available written guidance
necessary to effectively manage their extramural agreements
through the pre-award and post-award phases.  .

Response:  Concur

Corrective Action: Operating Procedures on CAs from pre- through
post-award phases are already sent to each ERL-A PO.  The ERL-A
Extramural Assistant maintains relevant Operating procedures, GAD
guidance documents, the GAD Assistance Manual and IAG Compendium,
and related informational material for access by POs.  On
February 9, 1993, an ERL-A Quality Action Team was formed and
charged to review the current set of policies and procedures,
including adequacy of current reference materials and their

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                                                       Appendix I
availability to POs.  Training has been planned for all current
POs, with completion set for August 30, 1993.  The training will
include problems of favoritism, conflicts of interest, and new
ORD/OEPER procedures to guard against such actions.  A Procedures
Manual will be prepared by August l, 1993.

3ILD-2  Require ERL-A managers to review all current and future
CA RFPs and decision memorandums to assure that the primary
purpose of the agreement is to provide assistance and not to
procure goods and services which directly benefit ERL-A or ORD
and that decision memorandums for all extramural agreements have
all of the required elements.  Terminate funding of those current
CA projects or sub-projects that directly benefit or support
ERL-A or that violate laws, regulations or Agency policies.

Award contracts if there is a need for continuance of these CA
projects.

Response: Concur

Corrective Action: ERL-A has initiated a project-by^-project
review of all current CAs to determine compliance with the intent
and statutory provisions of the 1977 FGCA Act, as amended.  All
CAs or proposals found by this review to be out of compliance
with the Act will not be continued, awarded, or renewed unless
modifications are implemented to ensure compliance.  The review
of current projects will be completed by April 15, 1993.  In
addition, the DGA sub-project on day-care curriculum development
has been terminated effective March 8, 1993, and funds in this
sub-project will be deobligated and returned to the government.
The Deputy Director of OEPER will evaluate the results of these
reviews and concur if acceptable.

The Director of ORD's ORPM will work with GAD and OGC to review
current guidance on the use of CAs and will update existing
guidance by September 30, 1993.

                          OIG Evaluation

ORD actions do not address ORD compliance with OARM's December 2,
1992 policy letter which prohibited use of CAs to obtain (1) data
and reports for inclusion in EPA policies and technical,
regulatory decisions, (2) computer models for EPA regulatory use,
and (3) technical, analytical, and application review advice for
direct benefit of EPA offices.  ORD's draft response to the audit
report indicated ORD would comply with OARM's policy; however,
the final response does not address this issue.  If ORD does not
agree with OARM's policy letter, we need ORD's proposed actions

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                                                       Appendix I
to resolve this policy disagreement before resolving this
recommendation.

3ILD-3  Where appropriate, immediately move all UGA and other
cooperator employees off-site to preclude direct supervision of
cooperators by ERL-A staff-and remove inappropriate direct
benefit to ERL-A under the UGA CA.

Response: Concur

Corrective Action: By March 31, 1993, all remaining UGA
cooperator employees will be moved off-site or their appointments
terminated.

3ILD-4  Ensure that all CAs clearly identify the primary function
of the CA.  Large travel or equipment budgets should not be added

as an addendum to relatively small research budgets to obscure
the actual function of the CA.

Response: Concur

Corrective Action: The Deputy Director of OEPER will review all
active CAs to insure that the scopes of work describe the primary
function of the agreement.  All CA amendments that change the CA
objectives or scope will be developed according to GAD guidelines
and reviewed and submitted for approval with any changes from the
original agreement clearly described and justified.  When
appropriate, competitive CAs will be preferred.

The Director of ORD's ORPM will issue policy for all ORD CAs by
September 30, 1993, and will develop in consultation with the
office and laboratory directors a program to assure that the
policy is followed.

3ILD-5  Ensure that all ERL-A employees have equal access to IPA
training opportunities.  In addition, provide full disclosure of
all sources of funding in IPA applications and cease utilizing
CAs to fund IPAs for academic training of FTEs.

Response: Concur

Corrective Action: Effective immediately, no IPA assignee whose
IPA is funded by a CA will be permitted to enroll in any academic
courses that may lead to any advanced degree without the approval
of the OEPER Office Director.  The Laboratory will develop a
procedure for application and acceptance for .IPAs.  The
procedures will be reviewed by OEPER Director and implemented by

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                                                       Appendix I
June 1, 1993 and will be distributed to all employees.

The Director of ORD's ORPM is directed to develop and implement
an ORD-wide policy on IPAs, the rules on use of EPA funds to
support IPAs, and conditions under which IPAs can be used.  The
policy will be effective when issued and incorporated in the ORD
Policy and Procedures Manual when updated in FY 1994.

                          OXG Evaluation

ORD's response to recommendation 3ILD-5 states that IPAs funded
by CAs can not be used for academic attainment unless approved by
the OEPER Director.  This is the same approval level previously
used to approve the IPA partially funded by the MSU CA.  We can
see no improvement in ORD oversight or control from this action.
In addition, appropriation restrictions could preclude approval
of any IPA for an EPA employee's academic training where R&D
funds under a CA are used to fund the IPA.  Past R&D
appropriations have not authorized the use of R&D funds for
federal employee training, travel,  compensation or benefits.
Only the S&E appropriation and certain EPA trust funds have been
authorized by Congress to support EPA personnel costs.

Although GAD views an EPA employee on an IPA as an employee of
the recipient organization (see GAD comments in this Appendix),
we believe the individual is still legally a federal employee
because the federal government determines the individual's level
of compensation and benefits, the individual continues to accrue
federal retirement and annual/sick leave benefits and maintains
his federal health and life insurance, and he is required to
return to federal service upon completion of the IPA without
applying for a federal position (SF-171).  Therefore, we conclude
that R&D funds could not be legally used to train "federal
employees" under IPAs.

3ILD-6  Prohibit ERL-A POs, scientists, and on-site cooperators
from preparing or assisting in preparation of proposals and/or
decision memorandums for CAs in which they will benefit or act in
a PO capacity.

Response: Concur

Corrective Action: In accordance with existing ORD guidance, CA
proposals are jointly implemented research projects in which
Federal and academic cooperating scientists collaborate.
Scientific proposals must be prepared by the scientists proposing
to do the work.  Preparation of decision memoranda is an
inherently governmental activity and is accomplished only by

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                                                       Appendix I
appropriate Federal officials.

The Quality Action Team charged on February 9,  1993, to review
and modify existing ERL-A policies and procedures for CAs, or
propose new policies and procedures,  has been specifically asked
to address this recommendation.  The QAT will' complete their
deliberations by April 15, 1993.   Until such time as the QAT
process is complete, and effective immediately, only Branch
Chiefs or other designated Federal officials other than the
existing or proposed PO, will be permitted to develop the
Decision Memorandum.  The decision memo can only be approved by
the Laboratory Director (except for the next year, when the
deciding official will be the Director of OEPER).  An internal
ERL-A memorandum announcing this policy was issued on March 8,
1993.

                         'OJG Evaluation

ORD's response indicates that ERL-A prospective POs will not be
permitted to prepare decision memorandums for CAs; however, a
change in the ORD Policy and Procedures Manual, dated January
1988, will be necessary to prohibit such practice ORD-wide.  The
current manual permits PO preparation of CA decision memorandums.
We need to know whether ORD intends to change its manual to
preclude PO involvement in decision memorandums before resolving
this recommendation.

3ILD-7  Establish policies which allows cooperators the maximum
involvement and control possible in their research projects.

Response: Concur               ;

Corrective Action: The Laboratory will establish policy that will
clearly put the cooperator in charge of the research being
proposed under the CA.  Federal POs will not be permitted to
unilaterally change the scope or direction of the research.  The
policy will be issued by April 30, 1993.

3ILD-8  Review and terminate XAGs with NASA that are being used
to fund FTE travel and circumvent Agency fund controls.

Response: Concur                  .           "*":'•

Corrective Action: The Director of ORD's ORPM has already
requested assistance from OGC in determining the propriety of
accepting NASA funds for EPA travel usage.  We will submit any
other evidence we find in this matter to OGC for appropriate
determination as soon as we can assemble the documents.  We

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                                                       Appendix Z
expect to have all the documents by April 30, 1993.  Further
actions will be determined by the outcome of the review.  If this
review indicates that funds are being improperly used for travel,
then the IAG will be modified or terminated as appropriate.

3ILD-9  Require and ensure proper documentation of authority,
rationale, and justifications in IAG decision memorandums and
preclude prospective POs from preparing IAG decision memorandums.

Response: Concur

Corrective Action: The Director of ORD's ORPM will develop and
issue new ORD-wide policies on required controls relative to lAGs
by September 30, 1993.

3IIAA  Recommend the AA/ORD ensure significant improvements are
made in assistance agreements awards that increase competition
and assure a fair and equitable proposal review process.

Response: Concur

Corrective Action: As indicated in response to an earlier
recommendation, the Director of ORD's ORPM has undertaken a
comprehensive policy development process to make significant
improvements in the CA and IAG processes, including methods to
increase competition,  policy will be effective when issued and
incorporated in the ORD Policy and Procedures Manual during FY
1994.

3IIOD-1  Ensure that ORD personnel are included on ERL-Athens
proposal review panels for competitive CAs as required by ORD
policies and procedures.

Response: Concur

Corrective Action: The Director of OEPER will reissue the policy
with respect to membership of HQ personnel on review panels for
CAs to be awarded by Athens and other laboratories.  The Office
Director or his Deputy will select and deputize personnel in
laboratories other than the proposing laboratory to represent the
Office's interest in these review panels as necessary.  This
redefined policy will be issued by May 1, 1993.  CAs greater than
$500 thousand will require the use of an OEPER HQ peer review
mechanism or the OER standing peer review panels in arranging for
peer reviews of the proposals.

3IIOD-2  Provide training and/or guidance to ORD and ERL-Athens
managers and POs, in collaboration with GAD, to enhance ORD

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                                                       Appendix I
awareness of potential COls or the appearance of COIs in the
review and award of assistance agreements.

Response: Concur

Corrective Action: Written guidance on conflicts of interest in
panel selection or award of assistance requirements will be
developed and issued by OEPER by September 30, 1993.  GAD will be
asked to assist.  All CAs larger than $500 thousand will be
required to use the OEPER HQ peer review mechanism or the OER
standing peer review panels for arranging for peer reviews of the
proposals.

3IIOD-3  Comply with prior audit recommendations to fully enforce
existing CA procedures or develop new procedures to ensure that
POs or prospective POs are removed from selecting external
reviewers, preparing in-house reviews, and preparing decision
memorandums covering CA applications.

Response: Concur                                ..   -

Correction Action: The Director of OEPER will issue guidance
removing POs from selection of panels, preparing in-house
reviews, and preparing decision memoranda covering CAs for all
OEPER laboratories effective April 1, 1993.  The guidance will
also prohibit Laboratory Directors or the Office Director from
acting as a PO without the written approval of his or her
supervisor.

The Director of ORD's ORPM will develop and promulgate ORD~wide
policy to assure compliance with this recommendation and issue it
by September 30, 1993.

                         OIG Evaluation

ORD indicates that the OEPER Director will issue guidance by
April 1, 1993, eliminating POs from selection panels, in-house
reviews, and preparation of decision memorandums; however, these
practices are currently authorized in the ORD Policy and
Procedures Manual, dated January 1988, and a manual revision will
be required to permanently change these practices.   Therefore, we
need a specific commitment from ORD to a revision of its current
policy and procedures manual before resolving this
recommendation:            •                  '

3IIOD-4  Evaluate the justifications for ERL-Athens noncom-  .
petitive CA awards to ensure that they comply with ORD guidance,
especially repetitive awards at or near the threshold for ORD

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                                                       Appendix I
review and approval.

Response: Concur

Corrective Action: The Deputy Director of OEPER with a small team
will review all active CAs at Athens that were not audited by the
DIG.  This review will begin by April 30 and be completed no
later than September 30, 1993.  All new CAs will be approved by
the OEPER Office Director for the next year.  For the longer
term, the Director of OEPER, working with ORPM, will put in place
an annual review system to provide the appropriate oversight to
insure compliance with ORD and OEPER guidance.

3IIOD-5   Establish for ERL-Athens and other ORD laboratories
stringent controls over noncompetitive awards to assure fair and
equitable awards, eliminate the appearance of favoritism, and the
effective use of Agency resources.

Response: Concur

Corrective Action: The Director of OEPER will reissue to the
OEPER laboratories and emphasize the established ORD policy that
competition is the preferred way of doing ORD business and that
all noncompetitive awards must be approved by HQ.  This guidance
will be distributed by April 15, 1993.  The Director of ORD's
ORPM will issue similar guidance to all ORD Offices and
Laboratories by September 30, 1993.

3IIOD-6  Emphasize to ERL-Athens managers ORD's goal to compete
CAs awards.

Response: Concur

Corrective Action: The Director of OEPER will send a memorandum
to all OEPER Laboratory Directors and to all managers in
ERL-Athens reemphasizing ORD's goal of competition.  The Director
will emphasize that the degree of competition achieved will be an
element in OEPER's management reviews and performance agreements
and assessments.  The memorandum will also cite the need to avoid
favoritism of any kind in any non-competitive awards that may be
proposed.  The memorandum will be promulgated by April 15, 1993.

3IIOD-7  Instruct ERL-A managers that favoritism in
noncompetitive CA awards cannot be tolerated without clear,
sound, and legal justifications for such awards.
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                                                       Appendix I
Response: Concur

Corrective Action: The Director of OEPER will send a memorandum
to all OEPER Laboratory Directors and to all managers in
ERL-Athens reemphasizing ORD's goal of competition.  The Director
will emphasize that the degree of competition achieved will be an
element in OEPER's management reviews and performance agreements
and assessments.  The memorandum will also cite the need to avoid
favoritism of any kind in any non-competitive awards that may be
proposed.  The memorandum will be promulgated by April 15, 1993.

3IIOD-8  Require complete and accurate justifications in CA
decision memorandums for non-competitive awards including those
awarded by ORD headquarters.   Review decision memorandums for all
non-competitive awards by ERL-A for inaccurate and/or unsupported
justifications.

Response: Concur

Corrective Action: The Director of OEPER will establish a process
to review all non-competitive awards by ERL-Athens and implement
the process by April.1, 1993.

The Director of ORPM will reissue and emphasize ORD policy
requiring complete and accurate justifications in CA decision
memorandums by September 30,  1993.

3IIOD-9  Closely review any follow-on competitive CA awards to
UGA to ensure competition procedures were unbiased and equitable.

Response: Concur

Corrective Action: The Director of OEPER will closely review any
follow-on awards to UGA to ensure competition.

3IIOD-10  Require the ERL-Athens director to ensure* that CA
proposals are reviewed by scientists who are knowledgeable about
the projects but who have no close ties with ERL-Athens or the
prospective PO.  If CA applicant has close ties to ERL-Athens,
require competitive award procedures.

Response: Concur

Corrective Action: The Director of OEPER will send a memorandum
to all OEPER Laboratory Directors reemphasizing ORD's goal of
competition.  The Director will also emphasize that the degree of
competition achieved will be an element in management reviews and
performance agreements.  The memorandum will cite the need to

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                                                       Appendix I
avoid favoritism of any kind in any non-competitive awards that
may be proposed.  The memorandum will be sent by April 15, 1993.

All Athens CAs will be reviewed for the next year for issues of
competitiveness, favoritism, and conflict of interests.

3IIOD-11  Review adequacy of ORD corrective action on the prior
OIG audit findings related to CA review panel COIs and the
influence of the prospective PO over panel selections and panel
recommendations.  Ensure proper implementation of prior audit
corrective actions by ORD laboratories.

3IIIOD-1 Review adequacy of corrective action taken on prior 1983
OIG audit finding related to infrequent and inadequate PO site
visits and determine whether ORD laboratories properly
implemented ORD's actions in this area.

Response: Concur

Corrective Action: The Director of OEPER will work with ORPM and
GAD to determine and ensure proper implementation of the measures
necessary to provide the corrective actions called for in the
1983 OIG audit.  OEPER will send a report of findings and
additional corrective actions to ORPM by April 30, 1993.

As part of ORPM's audit follow-up activities, an ORD-wide review
of actions promised in response to the 1983 will be conducted.
The review will be completed by August 30, so that any findings
can be incorporated in ORD's annual FMFIA assurance letter
process.

                         OIG Evaluation

As stated in response to ORD's planned actions on recommendation
3IIOD-3, implementation of corrective action on prior OIG audit
will require a change in ORD's current policy and procedures
manual and, therefore, we need an ORD commitment to an
appropriate manual revision before resolving this recommendation.

3IIIAA  Recommend the AA/ORD ensure significant improvements are
made in assistance agreement management to assure compliance with
agreement terms and that Agency 'resources are being effectively
used and safeguarded against waste and abuse.

Response: Concur

Corrective Action: The AA/ORD established an ORD-wide work group
to implement a series of management improvements.  The group is

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                                                       Appendix I
charged with developing guidance on how to conduct internal
control reviews on ORD's highly vulnerable areas, including
assistance management.  The group's final report is due September
30, 1993.

3IIIOD  Review adequacy of corrective action taken on prior DIG
audit finding related to infrequent and inadequate -PO site visits
and determine .whether ORD laboratories properly implemented ORD's
actions in this'area.

Response: Concur

Corrective Action: The Director of OEPER will work with ORPM and
GAD to determine and ensure proper implementation of the measures
necessary to provide the corrective actions called for in the
1983 OIG audit.  OEPER will send a report of findings and
additional corrective actions to ORPM by April 30, 1993.  See
response to 3IIOD-11.

3IIILD-1  Require that CA POs obtain quarterly progress reports
from cooperators, in compliance with CA special conditions and
Agency policies, to assist them in monitoring the status,
progress, problems, and expenditures under CAs.  CA special
conditions should require written progress reports to document
laboratory review and oversight of cooperator activities.

Response: Concur

Corrective Action: On June 6, 1992, the ERL-A Director issued
LOPs 5330-6, requiring POs to maintain a comprehensive file of CA
activities including quarterly/other progress reports.  LOP 5330-
8, effective September 28, 1992, requires all POs to conduct and
document site visits to ensure, inter alia, compliance with CA
Special Conditions.  On February 9, 1993, a Quality Action Team
was established to review, enhance or modify existing policies
and procedures, or to propose new ones if required, for all
phases of CA pre-award and post-award management.  This team is
charged to consider reporting, monitoring, and documentation
among the issues.  Finally, and in compliance with LOP 5330-8,
all POs have had their performance standards updated since
November 30, 1992, to reflect increased and specific emphasis on
management and documentation of CA oversight.  Laboratory
management will use these standards in evaluating performance at
the end of the current performance period.

3IIILD-2  Ensure that CA POs comply with all Lab Operating
Procedures and Assistance Administration Manual requirements in
the management of CAs.

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                                                       Appendix I
Response: Concur

Corrective Action: Effective November 30, 1992, all PO's
performance agreements were modified with an additional standard
requiring specific accountability for CA management.  Branch
Chief agreements were also modified to focus more attention on
this element of supervision.  On February 9, 1993, a Quality
Action Team was formed to review current practices and to propose
additional actions by April 15, 1993.  In addition, the
Laboratory will establish an internal review and audit system for
each level of management to determine performance.  The new
procedures will be in place by June 1, 1993.

The Director of OEPER will rely upon the Athens experience to
assure that similar review systems are adopted in other OEPER
laboratories for FY 1994.

3IIILD-3  Require frequent site visits by CA POs and allocate
sufficient travel resources to accomplish this critical control
technique-.

Response: Concur

Corrective Action: Effective September 28, 1992, LOP 5330-8, on
"Site Visits," was issued to establish policy and procedures for
PO site visits.  This LOP, requiring a minimum of one site visit
per year coupled with one to two visits, to ERL-A per year, will
dramatically improve oversight.  Additional management oversight
will be through the performance agreement process.  Compliance
with this policy will be checked as part of OEPER's annual
management review process cited in the preceding responses.

3IIILD-4  Require management review of PO trip reports for CA/IAG
site visits and that the reports, in particular, adequately
document PO oversight of expenditures under extramural
agreements.

Response: Concur

Corrective Action: Effective September 28, 1992, ERL-A LOP 5330-8
was issued requiring site visits, specifically noting that the
visit should verify to the extent feasible that resources
(personnel, equipment, facilities, etc.) charged to the project
are actually used thereon.  In the quarterly ERL-A management
reviews, each Branch Chief will report the progress of CAs and
document and review the trip report files.  The LOP 5330-8 also
requires that trip reports be forwarded to GAD for their official
records file.  Management control for this action will be through

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                                                       Appendix I
the newly implemented performance standards effective November
30, 1993, and the management review and audit process.

3IIILD-5  Remind CA POs of their financial management responsi-
bilities as delineated in EPA's Assistance Administration Manual
and request that GAD provide FSRs to POs for their use in
monitoring cooperator financial transactions.

Re spons e: Concur

Corrective Action: ORD will work with OARM to ensure that FSRs
are sent to the POs for review.  The Laboratory Director will
issue written guidance to ERL-A POs by June 1, 1993.

3IIILD-6  Ensure that CA POs receive copies of FSRs from GAD as
required by the Assistance Administration Manual and that they
review the FSRs and report any discrepancies to GAD.

Response: Concur

Corrective Action: As part of the ongoing project-by—project
review of CAs and lAGs, we will request that all relevant FSRs.be
forwarded to the POs-from GAD or FMD, as OARM prefers.  We would
prefer that FMD use FAX service to send copies of FSRs to the
POs.  Any discrepancies noted upon PO review of those FSRs will
be reported to GAD.

3IIILD-7  Ensure that POs maintain adequate written records .to
document their management and oversight of CAs, including but not
limited to all ERL-A and recipient correspondence relating to the
award, performance, and closeout of assistance agreements.

Response: Concur

Corrective Action: LOP 5330-6, Project Officers' Files, was -
issued on June 6, 1992, requiring that POs organize and complete
their project (CA, IAG) files.  The LOP requires, inter alia,  .
that the following will be included in the PO files: letters,
memos, ROCs, phone calls, trip reports, deviations, close-out
memos, equipment, disposition memos, etc.  Additional management
control will be provided through additions to the PO performance
standards (completed November 30, 1992) and soon to be
established management review and audit procedures for laboratory
and HQ management.

3IIILD-8  Require and ensure that cooperatprs submit QA plans and
that ERL-A staff properly perform QA audits of cooperator,
projects and document these audits in ERL-A files.

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                                                       Appendix Z
Response: Concur

Corrective Action: QA plans are required for all CAs and lAGs
that make environmental measurements.  Their existence and a
review of their adequacy are required upon funding (LOP 5330-5,
Documentation Requirements for Preparation of Cooperative
Agreement Funding Packages, 8-28-91).  Effective September 28,
1992, LOP 5330-8, Site Visits, requires POs to conduct QA audits
as a major element of site visits.  For current CAs and lAGs that
require QA plans, POs conducted site visits and performed QA
audits.  All QA plans and their recent audits on file with both
the Laboratory QA Officer and each PO file will be forwarded to
the GAD files by May 1, 1993.

                   CHAPTER 4 - RECOMMENDATIONS

4IAA-1  Consider decreasing scopes of laboratory contract awards
to award contracts to more expert firms in each technical area
and to increase competition for technical support contracts.

Response: Concur

Corrective Action: All Technical Support contracts require OEPER
Director's review and approval prior to formal request for
procurement being sent to 0AM.  As part of the review process,
the scopes of work are carefully evaluated to enhance
competition.  The Director of OEPER will examine the types of
technical expertise required for on-site support at the Athens
Laboratory and issue a report by September 30, 1993.   A copy of
the report will be provided to OIG.

4IAA-2  Create an extramural resource management position at
remote laboratories, independent of laboratory management, to
oversee the management of extramural resources.

Response: The AA-ORD previously directed that an extramural
management expert position be created in every ORD Laboratory
this year.

Corrective Action: The Director of ORD's ORPM has developed and
distributed model position descriptions for the extramural
management expert positions.  ORPM is now assisting the
Laboratory Directors in the recruitment and hiring of qualified
personnel for these positions.

4IAA-3  Ensure that ORD managers' performance standards and
evaluations clearly establish accountability for compliance with
procurement regulations and Agency's acquisition policies.

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                                                       Appendix I
Response: Concur

Corrective Action: The Director of ORD's ORPM will reissue policy
by April 30 to insure that performance standards include proper
accountability for extramural management.  ORPM will require a
report from each office and Laboratory Director certifying that
this has been done.

4IOD-1  Evaluate ERL-Athens research mission focusing on core
programs.  Establish what research activities should be performed
on-site by FTEs or on-site off-site via contracts and other
extramural agreements.

Response: Concur

Corrective Action: This evaluation will be completed as part of
the plan that will be developed and completed by September 1,
1993 in response to recommendation 2AA.5.  All technical support
contracts must be approved by OEPER HQ, and part of this review
focuses on the on-site/off-site nature of the work.

41OD-2  Review ERL-Athens on-site contractor tasks to determine
whether the work should be eliminated, moved off-site, or
retained under strict controls.  This should include an
evaluation of existing and future contract activities that
provide long-term on-site support to determine if ERL-Athens is
continuing to improperly award such contracts or using its
contracts for prohibited contract activities.  Particular
attention should be given to repetitive awards to the same
contractor.

Response: Concur

Corrective action: The Deputy Director of OEPER in conjunction
with ORPM and OAM will conduct a review of existing work
assignments to determine if work should be eliminated.  Review
will be completed by June 15, 1993.  All future technical support
contracts require OEPER HQ review and approval so that
competition is enhanced and that there is no potential for
personal services and inherently governmental functions.

41OD-3  Revise laboratory managers' performance evaluations to
increase the criticality and weight of proper procurement of
extramural resources.

Response: Concur     .  "

Corrective Action: The Director of OEPER will rewrite the

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                                                       Appendix I
performance standards for the OEPER Laboratory Directors to give
the needed emphasis to management of extramural resources.  This
effort will be completed by May 1, 1993.

4IOD-4  Provide adequate guidance, in coordination with OGC and
CMD, to ensure that laboratory managers understand their
extramural limitations and provide close oversight over
extramural operations to include:

*    The review of an annual Acquisition Plan prepared by
     ERL-Athens and other OED laboratories to demonstrate
     laboratory compliance with ORD policy and procurement
     regulations during the coming fiscal years.

*    Systematic reviews of laboratory operations, in conjunction
     with CMD, to assure adherence with required contract
     acquisition and management regulations, including applicable
     EPA/ORD policies.  Also, to ensure that ERL-Athens is in
     compliance with its acquisition and contract management
     plans.
                                                   t*^.
*  .  Requiring more technical evaluation members from
     organizations other than the laboratory procuring the
     contract panels for competitive procurement to reduce the
     potential for biased procurement.

*    Eliminate requirement for employee commitment letters that
     may bias contract awards in favor of incumbents.

Response: Concur

Corrective Action: The Director for OEPER will review the current
schedule, format, and approval process for annual acquisition
plans and research workplans for the laboratories.  By June 1,
1993, he will issue guidance for the development, submission and
approval of both documents by the Office of the Director prior to
September 30, 1993. (The Athens strategic study due September 1,
1993, is needed to complete the plan.)

The OD will carry out annual reviews and audits to comply with
this recommendation as described in our response to
Recommendation 3HOD.4.

OEPER already has a requirement for one member of the TEP to be
external to the Laboratory.  OEPER will issue new guidance that
in panels with more than 4 or 5 members, the number of outsiders
must be two.  Guidance will be issued by April 15, 1993.


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                                                       Appendix I
OEPER has eliminated the need for prospective bidders to submit-
commitment letters from prospective employees on a case-by-case
basis for new recompetes of contracts.  OEPER will issue general
policy by April 15, 1993.

4ILD.1  Develop, as part of the annual planning process, a
detailed Acquisition Plan, documenting ERL-A's planned
acquisitions, the justification for these acquisitions, and how
competition will be increased.  Also, for each on-site support
contract, a contract management plan describing procedures and
controls to ensure that contracts are properly used and managed
in accordance with the FAR and existing Agency policies.  Both
documents should be reviewed and approved by ORD and CMD.

Response: Concur

Corrective Action: ERL-Athens will prepare an annual plan
describing all planned extramural activity, including contracts,
CAs, and lAGs.  This plan will be submitted to OEPER for review,
as part of OEPER *s review of all Athens extramural activity.
                                                    ,-~
CMD, in conjunction with ORD, issued new guidance in FY92 that
required a detailed plan in FY93 for acquisitions valued at
$25,000 or more.  To assist in acquisition planning, general
guidance was provided that requires an extensive justification
and HQ approval for all new on-site contracts.  Further, 8 (a)
contractors that are about to graduate from the 8 (a) program will
compete for any new or follow-on work.  All other contracts also
will be recommended for competition,

A draft LOP was prepared on January 15, 1993, to establish
policy, procedures, and guidance for the management of on-site
level-of-effort, research support contracts.  It is being
reviewed by HQ and CMD.  On February 12, 1993, an Athens
Management Control Enhancements Tracking System for Contracts was
established to ensure implementation of various control measures.
We have also developed a new strategy that dramatically downsizes
on-site contractor support in FY94.  We are moving ahead with
plans to have this strategy implemented by October 1, 1993.
Also, the FY93 Management. Review focused entirely on extramural
management with emphasis on progress made in implementing the
recommendation of the joint ORD/CMD Acquisition Management
Improvement Review.

4IIAA  Through ORD managers' performance standards and
evaluations, establish strict accountability for contract
management in compliance with regulations and contract terms.
This .should include accountability for proper oversight and

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                                                       Appendix Z
control of laboratory extramural operations.

Response: Concur

Corrective Action: The Director of ORD's ORPM will reissue policy
by April 30, 1993, to insure that performance standards include
proper accountability for extramural management.   ORPM will
require a report from each Office and Laboratory Director
certifying that this has been done.

4IIOD-1  Instruct ERL-Athens director to refrain from using
on-site contractors for directed subcontracting of consultants.

Response: Concur

Corrective Action: The OEPER Director has admonished the ERL-A
Director to refrain from any and all directed subcontracting.

4IIOD-2  Take necessary action to ensure that ERL-Athens
contracts are managed in accordance with regulations and Agency
policies.  Specifically, the Director should:

*    Require ERL-Athens to submit a contract management plan
     describing how contracts retained for on-site support will
     be controlled to prevent improper contract activities i.e.,
     personal service relationships, directed subcontracting, and
     contractor performance of inherently governmental
     activities.

*    Direct ERL-Athens to place available FTEs into the most
     critical technical support positions currently performed by
     contractors which are determined to be essential for
     retention of Agency expertise or are inherently governmental
     or personal services in nature.  If sufficient FTEs can not
     be obtained to replace contractors, either through staffing
     increases or conversion of extramural funds, or the work can
     not be moved off-site or performed on-site without a
     personal services relationship, these positions and related
     tasks should be eliminated.

Response: Concur

Corrective Action: The Laboratory has submitted a draft LOP for
approval.  OEPER will review and approve or provide comments- by
April 15, 1993.

The FTE issue will be addressed by the on-site review by the
Deputy Director of OEPER cited in Recommendation 2AA.4.  The

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                                                       Appendix I
Deputy Director will report his actions or his recommendations by
June 30, 1993.  Proper controls will be established for any
remaining on-site work.

4IIOD-3  Perform periodic, on-site reviews, in conjunction with
CMD, to independently evaluate ERL-Athens on-going use and
management of contracts.  This should include a review of the
overall utilization of on-site contracts to eliminate contractor
performance of inherently governmental or personal services which
creates an over-dependence on incumbent contractors.

Response: Concur

Corrective Action: The revised management review policy and
procedures to be prepared in response to Recommendation 2AA.6
will satisfy this recommendation.

                   CHAPTER 5 - RECOMMENDATIONS

5AA-1  Provide guidance to ERL-Athens concerning appropriation
law, proper uses of funds, and appropriation restrictions related
to funds ERL-Athens receives.

Response: Concur

Corrective Action: ORD understands the need for clear guidance
and agrees that each Office and Laboratory should know these
items.  The Director of ORD's.ORPM will request assistance from
OGC and OARM in defining the limits of Agency policy in these
areas.  ORPM will issue new, strengthened ORD-wide guidance on
these matters by September 30, 1993,
                                             >
5AA-2  Obtain formal, written OGC legal opinions concerning:  (1)
potential appropriation law violations related to ERL-Athens use
of S&E and Superfund monies to purchase and construct a modular
building; and (2) use of R&D funds to pay for development of a
day-care center for ERL-Athens staff (see Chapter '3).  If any
violations in occurred, report any resulting Anti-deficiency Act
violations in accordance with applicable law.

Response: Concur

Corrective Action: The Director of ORD's ORPM has already
requested OGC legal opinion relative to these issues.

5AA-3  Instruct ERL-A to refrain from using purchase orders to
circumvent maximum per diem rates and strictly comply with
Federal travel regulations in the authorization and payment of

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                                                       Appendix I
all travel costs.

Response: Concur

Corrective Action:. The OEPER Director will so instruct ERL-Athens
and other OEPER Laboratories by April 30, 1993.  The Director of
ORD's ORPM will issue appropriate ORD-wide policy to all ORD
Offices and Laboratories by June 30, 1993.

5AA-4  Instruct ERL-A to hold future conferences in locations
that offer suitable accommodations at the least cost to the
government and that comply with current EPA guidance on
restricting EPA meetings at resort areas.

Response: Concur

Corrective Action: The OEPER Director will so instruct ERL-Athens
and other OEPER Laboratories by April 30, 1993.  The Director of
ORD's ORPM will issue appropriate ORD-wide policy to all ORD
Offices and Laboratories by June 30, 1993.

5AA-5  Require ERL-A to provide supporting documentation and
justification for the unidentified $3,146 charge on the purchase
order for the Galloway Gardens conference.  Instruct ERL-A that
future purchase order costs should be fully justified in the
purchase.request and properly supported by file documentation and
invoices.

Response: Concur
Corrective Action: The OEPER Director will request the supporting
documentation from ERL-A, analyze it, and report the results of
his analysis to the Director of ORD's ORPM by April 30, 1993.

Concerning purchase order costs, the OEPER Director will so
instruct ERL-Athens and other OEPER Laboratories by April 30,
1993.  The Director of ORD's ORPM will issue appropriate ORD-wide
policy to all ORD Offices and Laboratories by June 30, 1993.

                   CHAPTER 6 - RECOMMENDATIONS

6AA  Recommend the AA/ORD require proper implementation of
ERL-Athens FMFIA internal control process to ensure material
weaknesses are properly identified and adequate controls are
established for extramural resource management and administrative
process.
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                                                       Appendix Z
Response: Concur

Corrective Action: The Director of ORD's ORPM is directed to
implement an ORD-wide FMFIA improvement effort, including all
five elements listed.  The first round of this project will be
completed by September 30, 1993.  The Director of OEPER will
include an assessment of Athens' FMFIA process in the Laboratory
Director's FY 1993 performance evaluation.

60D.1  Instruct the ERL-Athens director in the importance of
proper implementation of the FMFIA and establishment of effective
internal control systems over every critical phase of laboratory
operations.

Response: Concur

Corrective Action: The Director of OEPER will issue a memorandum
to all OEPER Laboratory Directors emphasizing the importance of
proper implementation of the FMFIA.  In that memorandum he will
indicate that OEPER will use the Athens Laboratory as a pilot for
structuring and completing a detailed FMFIA review and
evaluation.  The Athens FMFIA effort will be completed by July 1,
1993, and will be used as the basis for action by other
laboratories and for reviews and approvals of FMFIA evaluations
by OEPER.

60D.2  Ensure that the ERL-Athens director's, as well as all
other laboratory directors' performance standards contain a
critical element for FMFIA implementation.

60D.3  Establish more effective oversight of all laboratory FMFIA
documentation and implementation to ensure that laboratory
directors properly implement FMFIA requirements in compliance
with statutory and Agency procedures and establish effective
controls that can be readily identified, tested and evaluated.

60D.4  Ensure that laboratory directors are held accountable for
any future deficiencies in their FMFIA processes, documentation,
and control systems.

60D.5  Include in any future on-site reviews at ERL-Athens or
other ORD laboratories an evaluation of FMFIA documentation and
effectiveness of related control systems to ensure compliance
with applicable laws, regulations and policies.
                          •.                     4-

Response: Concur with 60D.2 through SOD.5

Corrective Action: As part of the Athens pilot, develop guidance

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                                                       Appendix 1
and procedures for the FMFIA development, review and evaluation
process for all OEPER laboratories.  The new process will be
implemented in FY 1994.

6LD.1: Report extramural management as an ERL-A material weakness
for the FY93 FMFIA report.

Response: Concur

Corrective Action: Extramural management will be reported as a
material weakness for the FY1993 FMFIA report for ERL-Athens.  As
part of that process, an action plan will be developed listing
corrective measures to be undertaken and the schedule for doing
so.

6LD.2  Review current FMFIA processes and documentation at ERL-A
and ensure that:

*    All critical event cycles for extramural management and
     administrative processes are identified with specific
     control objectives and control techniques.  Detailed control
     objectives and techniques are identified for all critical
     event cycles and are tailored to ERL-A operations including
     IA6 and CA activities (not merely references to
     all-inclusive ORD reports).

*    Control objectives and techniques are documented in
     sufficient detail to permit testing and evaluation of
     control implementation.

*    Reviews and tests are performed on established controls to
     ensure adequacy and proper implementation.

Response: Concur

Corrective Action: The Athens Laboratory Director will develop an
improved FMFIA process.  Current FMFIA processes and
documentation will be carefully reviewed.  Specific control
objectives and techniques will be identified for extramural
management and administrative processes in event cycle
documentation.  Detailed, ERL-A specific control objectives and
techniques will be identified for all critical event cycles
including IAG and CA activities.  Control objectives and
techniques will be documented in sufficient detail to permit
testing and evaluation of control implementation.  Established
controls will be reviewed and tested to ensure adequacy and
proper implementation.


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                                                       Appendix I
6LD.3  Document specific FMFIA requirements and responsibilities
in the performance, standards of all ERL-A staff with contractor
or cooperator oversight functions and managers who supervise
employees with oversight responsibilities.

Response: Concur

Corrective Action: Performance standards documenting specific
FMFIA requirements and responsibilities will be instituted by
April 30, 1993, for all ERL-A staff having contract, IAG or CA
oversight functions and for managers who supervise employees who
have such oversight responsibilities.  Inclusion of the standards
will be verified and emphasized during mid-year reviews.

6LD.4  Ensure that ERL-A staff with FMFIA responsibilities are
held accountable for proper implementation of controls over their
extramural management activities.

Response: Concur

Corrective Action: ERL-A staff with FMFIA responsibilities will
be held accountable for proper implementation of controls over
their extramural management activities.  The laboratory FMFIA
processes will include measures to check compliance with FMFIA
responsibilities.  Performance evaluations conducted at the end
of FY 1993 will include such considerations.

                   CHAPTER 7 - RECOMMENDATIONS

7OD-1  Ensure that ERL-Athens managers and staff receive ethics
training regarding their responsibilities as Federal officials
for the ethical conduct of government business and Federal
programs.

Response: Concur

Corrective Action: A special ethics course tailored to ERL-Athens
issues will be developed by OEPER and Athens staff in
consultation with OGC by July 15, 1993.  Training given at
ERL-Athens by September 30, 1993.

7OD-2  Instruct ERL-Athens staff, contractors, and on-site
cooperators that deliberate obstruction of a Federal audit or
destruction of Federal records without proper approval is a crime
punishable under 18 U.S.C.

7OD-3  Inform ERL-Athens staff, contractors, and cooperators of
requirements of the IG Act and their obligation under the Act to

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                                                       Appendix I
furnish full and accurate information to any interrogatories by
DIG auditors in the conduct of an official inquiry.

Response: Concur

Corrective Action: All OEPER staff, contractors, and cooperators
will be notified in a memo from the Office Director of the
requirements to full cooperate with IG Act.  Memo will be
distributed by April 15, 1993.

7OD-4  Require ERL-Athens to establish record retention policies
and procedures in accordance with EPA's Records Management Manual
and ensure that records documenting day-today management of
contracts and extramural agreements are maintained for the proper
retention period and for easy access by any potential reviewers
of this information.

Response: Concur

Corrective Action: All OEPER units will be informed of the record
retention policies and procedures in accordance with EPA's
Records Management Manual including the proper procedures for
acquiring additional storage space by May 1, 1993.
                               218       Audit NO. E1JBF2-04-0300

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                                                       Appendix Z
          GRANTS ADMINISTRATION DIVISION (GAD) COMMENTS

Response to Recommendations

     Although GAD takes significant issue with many of the audit
findings, particularly its use of inflammatory language, we
generally believe the recommendations are reasonable.  Our
concurrence or non-concurrence for each of the recommendations
applicable to GAD are as follows:

\                          Agency  CoTn'ment

     0    Page 36: "Provide definitive written policies and
procedures on the award and administration of assistance
agreements, to include the specific eligible purposes of
assistance agreements under the 1977 FGCA Act, and provide this
guidance to ERL-A managers and POs, as well as to POs EPA-wide."

          We concur with this recommendation, but we believe the
beginning of the recommendation should•say "Update, clarify, and
communicate...",

                          OIG 'Evaluation

GAD concurred with recommendation but did not cite corrective
action taken or planned or milestones for completion of any
planned corrective actions.  We have changed the recommendation
to reflect the word changes requested by GAD.

                          Agency  comment

     0    Page 37: "Establish Agency-wide policy on competition
in award of assistance agreements that complies with the intent
of the 1977 FGCA Act."

          We concur.  We plan to develop EPA-wide criteria on
when programs should compete grants and cooperative agreements.

                          OIG Evaluation

GAD concurred with the recommendation and identified planned
corrective actions.  However, a milestone date for completion of
corrective actions will be needed to resolve this recommendation.
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                                                       Appendix I
                          Agency Comment

     0    Page 37:  "Strengthen oversight and review of proposed
CAs and lAGs to ensure their compliance with applicable laws,
regulations, and Agency policies before official approval of
these assistance agreements."

          We concur.  We  intend to review GAD's application
review process to assure  that proposed cooperative agreements and.
interagency agreements comply with applicable laws, regulations,
and Agency policies.  Based on this review we will develop a plan
on how best to strengthen the process, e.g., additional training
for grants specialists, shifting of resources, etc.

                          OIG Evaluation

GAD concurred with  recommendation and included planned corrective
actions.  However,  milestone dates for completion of actions will
be needed to resolve  this recommendation.

                          Agency comment

     0    Page 37:  "Provide increased oversight of PO and
recipient management, both technical and financial, to ensure
proper PO compliance  with their oversight responsibilities and to
ensure recipient compliance with terms of their agreements.  In
addition, GAD should  aggressively enforce its reguirements on
program operations  and ensure that it is complying with its own
reguirements to include obtaining PO trip reports and submitting
FSRs to POs for review."

          We concur.   We intend to  develop a plan to  meet this
recommendation by efficiently focusing available Agency resources
on  front-end efforts to  assure that  reguirements are  clearly
understood  (e.g.,   training  and  communication)  and  implemented
(e.g., program office certification of compliance) and by selected
post-award monitoring with the resources available.

                          OIG Evaluation

GAD concurred with recommendation and included planned corrective
actions. However, more specific information on the actions planned
and milestone dates for completion of actions will be  needed to
resolve, this recommendation.

                          Acrepcy Comment

     0    Page  37,   "Review  the  adeguacy  and  applicability  of

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                                                       Appendix I
current PO training and require such for all CA and IAG POs."

          We concur.   A new  3-day PO training  course currently
under development will be required training for all POs.  This new
course will  be more current  and  up-to-date than the  current PO
training course.   We  have scheduled pilot testing of  this new
course in late FY 93. "We will conduct the training for  all EPA POs
(approximately  1,900),  using  existing Agency  resources over  a
three-year period.

                         QIC  Evaluation

GAD concurred with recommendation and included planned corrective
actions.   However, milestone dates for completion of actions will
be needed to resolve this recommendation.

                         Agency Comment      (
                  • .                          }
     0    Page 37: "Compile and maintain the names and locations of
all current IAG and CA POs for consultation,  when- needed,  and to
ensure they are provided written guidance and training materials in
a timely manner."

          GAD already has  a computerized data base that includes
the names,  phone numbers and addresses of the EPA Project Officers.
We  agree  that  it is  valuable to  send  POs  appropriate written
guidance in a timely manner and will employ the existing data base
for that purpose.                    -

                         OIG  Evaluation

The recommendation has been changed to reflect the existence of the
PO data base in accordance with GAD's response.  The draft report's
statement that GAD did not have  such a data base was  based upon
interviews with GAD managers  who were apparently unaware  of the
existence of a PO data base.

GAD generally  concurred  with  the intent  of  the recommendation.
However,  specific corrective  actions with milestone dates for
completion  of  these   actions will  be  needed   to  resolve  the
recommendation.
     0    Page 37: "Review the  qualifications of all prospective
POs  and ensure  the  individuals have  the  proper training  and
experience required.   A certification program for CA and IAG POs,
similar to the certification of contract POs is recommended.11

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                                                       Appendix I
          We  believe  the program  offices  are  responsible  for
reviewing the  qualifications  of  all  prospective  POs and ensuring
individuals have the proper experience.

          We concur with the need for PO certification.  We plan to
phase in implementation of a  certification program between FY 94
and FY  97 working  within existing resources.   In the interim, we
plan to issue provisional certification to all current POs with the
requirement that they must take and pass the three-day PO training
course and meet any other established requirements within the next
three years  (consistent with  our ability  to provide the training
courses)-

                          OIG  Evaluation

We have changed the recommendation  to indicate that  GAD should
perform a secondary review of  the qualifications of POs designated
by program offices.  If GAD is going to maintain the data base of
certified POsf  there should be some  review by GAD to ensure that
POs designated by  program offices have had the required training
and are properly certified.

GAD concurred with the recommendation to establish a assistance PO
certification program.
     0    Page 37; "Establish jointly with ORD, periodic/ cyclical
on-site reviews of laboratory management of assistance agreements."

          We  concur.   We  intend  to work with ORD to  develop a
practical plan  on how to best address this  recommendation within
existing resources.

                          OIG Evaluation

GAD  concurred with  the recommendation;  however,  more specific
planned corrective actions and milestone dates for completion of
these actions are needed to resolve this recommendation.

                          Aen
     0    Page 70:  "Provide guidance to ORD managers and CA POs on
the differences between acquisition and assistance and appropriate
uses of contracts and assistance agreements with illustrations and
definitive examples."

          We concur.  We  are  currently  updating our guidance for

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                                                       Appendix I
distinguishing between  grants and contracts to  include numerous
illustrations and case studies.

                          OIG Evaluation
              •     *   V

GAD concurred with recommendation and included planned corrective
actions.  However, milestone dates for completion of actions will
be needed to resolve this recommendation. '               '  '

                          Agency comment

     0    Page 70: "Assist ORD in preparing guidance on the proper
uses of R&D funds as  relates to the  specific types of activities
that are eligible for funding under CAs."

                            We concur.

                          OIG Evaluation

GAD  concurred with recommendation;  however, planned corrective
actions and milestone  dates  for completion of these  actions will be
needed to resolve this recommendation.

                          Agency Comment

     0    Page 70:  "Assign  responsibility  for  EEL-A extramural
agreements to one  grants  specialist to  improve  controls  over
extramural resources through increased familiarity with laboratory
operations/staff.     Currently   ERL-A agreements   are  assigned
haphazardly  to  whichever  specialist  can  take  another  case.
Therefore, ERL-A's agreements are scattered among many specialists
with no  one  person seeing  the whole picture of ERL-A agreement
awards.   If. one  specialist had  seen all of  the  NASA  lAGs for
exchange of extramural funds for FTE travel,  the GAD specialist may
have detected the improper use and disapproved the agreements."

          We  non-concur  with the statement that projects  are
assigned  haphazardly. Grants, cooperative agreements  and lAGs are
assigned  systematically using, a log.   Projects  are reassigned
periodically to even out the workload between specialists.

          We also non-concur with the recommendation to assign all
of the ERL-A projects  to  one  specialist.   This  recommendation
requires further  review.   We are concerned  that it would create
uneven  workloads  among  specialists and would   slow  down  the
processing of new  applications.  Also, we do not  agree  that
assigning all projects to one grants  specialist would prevent the
abuses alleged in the audit report.   As noted in the report, each

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                                                       Appendix I
specialist has  150 projects.   Each  one is a  different project,
administratively separate  from all others, with  different start
dates, different end dates, varying project  officers,  different
scopes of work, etc.  Specialists administer cooperative agreements
project-by-project, rather than on a laboratory-wide basis.

     We  are,  however,  considering  specific   laboratory  liaison
arrangements that deal with the concerns raised in the report.

                         OIG Evaluation

We removed the word "haphazardly"  and inserted "systematically."
GAD  non-concurred  with assigning  all ERL-A projects  to  one
specialist; however, GAD agreed to perform further review of this
proposal.  One  of  GAD'S objections  to this method  of assigning
cases is that it may result in an uneven distribution of workload
and that each assistance agreement  is  administratively separate
with  different  start  dates,   different   scopes  of  work,  etc.
However, a GAD manager told us that if one grant specialist had
been assigned the NASA lAGs for instance,  the specialist may have
detected the misuse of the  lAGs to launder R&D fund_s into travel
funds for FTEs.  The GAD manager also  said under the current method
of assigning  cases, this misuse of multiple lAGs would never be
detected.   Therefore,  if   cases  could be more  or  less  evenly
distributed by location rather than next available specialist, we
continue to believe that better oversight of the propriety and use
of assistance agreements and lAGs could be obtained.

                         Agency Comment

     0    Page 70:   "Provide guidance to POs that prohibit the use
of lAGs  for the purpose of  reprogranoaing  appropriated  funds and
awarding research funds to foreign countries unless proper approval
or statutory authority is obtained."

                            We  concur.

                         OIG Evaluation

GAD concurred with  recommendation;  however,   planned corrective
actions and milestone dates for completion of these actions will be
needed to resolve this recommendation.
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                                                       Appendix x
         OFFICE OF ACQUISITION MANAGEMENT (QAM) COMMENTS

                    CHAPTER 2 RECOMMENDATIONS

The draft audit report recommends that the Assistant
Administrator for Administration and Resources Management require
the Director of the CCMD to:

Strengthen CCMD's .contract review process to ensure that contract
proposals are thoroughly reviewed and that all questionable
actions are quickly resolved.  Any procurement, requests for
sole-source contractor including noncompetitive 8' (a) contract
proposals should be closely scrutinized as to need for
sole-source contracts and contract cost estimation to avoid
competitive thresholds.

We agree with the OIG's recommendation.  The CCMD review process
has been strengthened in the following areas:

     a.  As the result of Total Quality" Management (TQM)
findings, a team approach in now used to review all major
procurement request documents.  The team consists of the assigned
CS for solicitation/award; the Cincinnati Acquisition Management
Branch (CAMB) Chief and/or PA; the Cincinnati Contract Management
Branch (CCMB) Team Leader and the CS on the incumbent contract
(for follow-on); and, after the first strategy meeting, program
personnel.  Concerted efforts are made to limit and restrict SOW
services, identify the potential for Conflict of Interest (COI),
sensitive activities, personal services and inherently
governmental  functions, and take appropriate measures. . Major
issues are escalated to division directors, office directors and
the Senior Resource Official for the program office.  Although it
is recognized that all problems cannot be corrected in one year,
improvements have been achieved relative to FY 93 follow-on
solicitations to ORD on-site support contracts, including
reducing the emphasis for personnel qualifications and the number
of positions to be evaluated.

     b.  In FY 93 CCMD's internal control report identified the
TEP proposal evaluations as a weakness in the acquisition
process.  More sample evaluations and instructive materials are
being developed for TEPs (see Attachment 8) and emphasis has been
placed on the TEP briefing conducted by the CS (see Attachment
9).  This area will continue to be assessed for improvements.

     c.  Revised 8(a) procedures have been developed to ensure
that programs review qualification statements for more than one
8 (a) firm before selecting one for negotiation and that they

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                                                       Appendix I
provide written documentation to CCMD which establishes their
rationale for selection  (see Attachment 2).  Part of the
documentation includes statements about whether the program has
other contracts, or plans to have other contracts, with the
selected 8(a) firm.  Program estimates are more closely
scrutinized.  If any are close to $3 million; CCMD submits a
competitive request to the SBA and revises the estimate to more
than $3 million based on recent historical experience with
Program estimates versus 8(a) proposals.

These reviews have proven to be excellent control techniques
since they provide for the identification, elevation and
resolution of potential regulatory or legal vulnerabilities in a
proactive fashion.

                          QIGEvaluation

OAM generally concurred with the recommendation and identified
planned corrective actions.  However, the response does not
identify what specific procedures and guidance were
institutionalized to correct deficiencies in OAM's procurement
process.  In order to determine the adequacy of OAM's corrective
actions, OAM will have to provide examples of specific procedures
and guidance which were implemented.

                           OAM Comment

     Instruct Contracting Officers (COs) to immediately notify
     CCMD's director of any potential violation of contract laws
     and regulations or any unsound contract management practices
     identified.  Also, ensure that the director of CCMD
     expeditiously resolves any potential violations or unsound
     practices.

We agree with the intent of this recommendation but not with the
idea that every problem be elevated to the director's level.
This would soon result in gridlock.  In December 1992 the Office
of Acquisition Management (OAM) issued Procurement Policy Notice
(PPN) No. 93-01 (see Attachment 10} which instructed COs to
elevate any and all irregularities and established the chain of  .
command for expedited resolution of such matters.  Team leaders
have been designated in CCMB to oversee work processes and
identify such irregularities so that they will be expeditiously
elevated to the appropriate level.

                          OJG Evaluation

OAM generally concurred with the intent of the recommendation,

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                                                       Appendix Z
but disagreed that every potential violation of the law and
unsound management practice be evaluated to the director level.
The December 1992 PPN No. 93-01 mentioned by OAM seems to
adequately address procedures for the escalation up the chain of
command any identified irregularities.  Corrective actions
proposed by ORD are responsive to our recommendations and appear
to fulfill the acceptable action criteria of EPA Order 2750.

                           OAM Comment

     Emphasize to COs that their primary obligation is to ensure
     compliance with contract laws and regulations and to protect
     the interests of the government while providing timely
     service to programs.  Establish controls to ensure that CSs
     consistently comply with contract laws, regulations, Agency
     policy and sound contract management practices in all of
     their contract actions.

We agree with the recommendation.  Team meetings are used to
emphasize CO responsibilities.  Solicitation review boards have
been reinstituted to ensure that decision documents are well
supported; personal accountability has been increased by granting
warrants up to $5,000,000 to qualified CSs.  In addition, CCMD
reorganized its CCMB into Teams to support the various POs.  Team
leaders have been appointed to track workload and serve as
mentors to contract specialists assigned to the Teams.

A single Specialist has been assigned to manage all contracts
originating from a given Program Office (PO) such as ERL-A.  This
specialist now works closely with the CO in the CAMS on any
follow-on contract to ensure that any lessons learned on the
current contract are incorporated into the follow-on.  Also, by
being actively involved in the acquisition process, the contract
specialist assigned to manage the contract is aware of different
issues that occurred during the award phase and is better
prepared to manage the contract.

TOM principles have been applied to CCMD's voucher review process
and responsibilities as well as the development of new Work
Assignment Forms and Checklist which must be completed by each
Work Assignment Manager and Project officer for each Work
Assignment.  The Checklist specifically addresses all issues
raised in the OIG report (e.g., work outside the SOW, personal
services, subcontract consent).  The contract specialists have
been instructed to prioritize their efforts, with careful review
and approval of the Work Assignments and the .contractor's Monthly
Progress Report which supports the monthly voucher submission
being the top priorities.  The Specialists' Performance Plans

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                                                       Appendix I
have been changed to reflect this emphasis.

Special letters of instruction have been provided to all
cost-type contractors and Project Offices1 addressing the subject
of subcontractors and consultants (see Attachment 11) .  Special
letters of instruction have also been provided to all contractors
and Project officers addressing the subject of Inherently
Governmental Functions and providing copies of Office of Federal
Procurement Policy (OFPP) Policy Letter 92-1 and EPA Order 1900.2
(See Attachments 12 & 13) .

                          OIG Evaluation

OAM generally concurred with the recommendation and identified
planned corrective actions.  However, the response does not
identify what specific procedures and guidance have been
institutionalized to correct the past failure of COs and CSs to
adhere to laws and regulations.  In order to determine the
adequacy of OAM's corrective actions, OAM will have to provide
examples of specific procedures and guidance which were
impl emented.

                           OAM
     Examine CCMD's or EPA's competitive contracting process and
     streamline where possible to eliminate unnecessary
     administrative burdens delays and incumbent bias (i.e.,
     personnel commitments) and to overcome program management's
     resistance to competitive process awards.

We agree with the recommendation with one exception.  As stated
previously, TQM teams are used to examine and streamline the
competitive process.  Special care is being taken to
review/revise procurement request documents to restrict
vulnerabilities and enhance competition.  Technical evaluation
criteria are scrutinized and revised to reduce emphasis on
personnel qualifications to 25% - 30% of the total weight with no
more than 15%. of total number of personnel evaluated.  Market
surveys, public meetings and preproposal conferences (where
travel dollars are available) are used to encourage competition.
For some major on-site procurements, arrangements are made to
have a PO TEP Chair other than the one on the incumbent contract.
CCHD has been working diligently with programs to overcome any
program management resistance to the new contract management
paradigm.  We are making progress but with the result of greatly
increased leadtimes and numerous extension to existing contracts
as a result of the learning process involved.  We believe that
these delays in the short term are worthwhile in order to achieve

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                                                       Appendix I
long term contract management improvements.

A number of quality actions teams from EPA's Standing Committee
on Contracts Management are exploring options to streamline the
procurement process.  We anticipate implementation of their
recommended initiatives beginning this fall.

                         OIG Evaluation

OAM generally concurred with the recommendation and identified
planned corrective actions, except that they believe that some
delays in the short term are worthwhile in order to achieve long
term contract management improvements.  We agree that those
processes which are essential to the integrity of EPA's    .•
procurement process should not be overly influenced by time
considerations.  But the response does not identify what specific
procedures and guidance have been implemented by OAM to expedite
the procurement process, eliminate unnecessary bias, and overcome
program management's resistance to competitive process awards.
In order to determine the adequacy of OAM1 s corrective actions,
OAM will have to provide examples of specific procedures and
guidance which were implemented.

                           OAM Comment

     Establish-jointly with ORD, periodic/cyclical on-site
     reviews of laboratory management of contracts.

We agree with the recommendation.  We anticipated conducting
follow-up reviews during FY 93 but budgetary and workload
constraints prevented our conduct of these reviews.  The FY 94
and FY 95 budget submissions will include funds, and FTE requests
to continue lab reviews on an annual basis.

                         OIG Evaluation

OAM generally concurred with the recommendation and identified
planned corrective • actions.  However, the response does-not
identify the establishment of a formalized review process and the
scope and timing of planned reviews.  In order to determine the
adequacy of OAM's corrective actions, OAM will have to provide a
specific information on their planned reviews.

                    CHAPTER 4 RECOMMENDATIONS -              .-  • •

The draft audit report recommends that the Assistant
Administrator for Administration and Resources Management require
the Director of the Office of Acquisition Management - to:

                               229       Audit NO. E1JBF2-04-0300

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                                                       Appendix Z
     Provide written  instructions to 0AM, ORD and ERL-A staffs
     describing the appropriate procurement, use and management
     of 8 (a) contracts under  CCMD's oversight,

We agree with this recommendation.  OAM has issued PPN 92-05 to
provide guidance  on use and management of 8 (a) procedures  (see
Attachment 17) which  includes additional controls on 8 (a)  set
asides.  Forms  (see Attachment 2) are provided to programs which
express an interest in awarding 8 (a) contracts.

                          PIG Evaluation

OAM concurred with the recommendation and identified planned
corrective actions.   OAM identified a September 1992, Procurement
Policy Notice  (PPN) 92-05 and Forms provided to program offices
as guidance on use and management of 8 (a) procedures.  Although
PPN 92-05 addresses the issue of underestimating and splitting 8
(a) contracts, additional guidance should be provided by OAM
addressing other  programmatic issues involving the 8 (a) program.
This guidance should  emphasize that EPA is committed to
correcting problems within the 8 (a) program, not eliminating the
use of 8 (a) contracts .  The guidance should also emphasize to the
program offices they  should maintain an arms-length relationship
with 8 (a) contractors, unlike past practices where their
operations were essentially utilized as extensions of the
program.  In addition, the guidance should emphasize that  the  •
purpose of the 8 (a) program is to develop 8 (a) contractors to
compete in the open marketplace, not to develop an unhealthy
dependence on EPA sole-source contracts.  This symbiptical
relationship between  8 (a)  contractors and program offices
resulted in abuses of the 8 (a) program such as, the
underestimation and splitting of contracts and extensive
modifications of  sole-source  contracts.

                           OAM
     Ensure that CCMD performs an in-depth review of all future
     8 (a) procurements  falling within close range of the
     threshold for competing 8 (a) contracts to assess if
     requested sole-source procurements are justified.

We agree with this recommendation.  CCMD's revised 8 (a)
procedures (see above) ,  require that Government estimates be
reviewed in depth by the SDBUO and the Chief, CAMB.  Although the
procedures do not so state, CCMD itself increases the estimate to
request a competitive 8 (a) acquisition if the program estimate is
near $3 million if historical experience leads us to believe that
the final negotiated price will be over $3 million,

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                                                       Appendix Z
                          OIG Evaluation

OAM concurred with the recoflunendation and identified planned
corrective actions.  However, a milestone date for completion of
corrective actions will be needed to resolve this recommendation.

                           QAM Comment

The OIG also recommends that CCMD should not routinely allow a
sole-source procurement when contractors are currently performing
work under an existing contract for that location.  We agree with
the intent of this recommendation as well.  Under CMD's new 8 (a)
procedures, program offices are required to fill out a
questionnaire which identifies any other 8(a) contracts the
requested contractor holds for the initiating program office and
any intention by the program office to request other contracts
for the firm.  The questionnaires are retained by the SDBUO for
later reference as a. control measure.  This will enable the SDBUO
to better manage the 8 (a) program and keep any one firm from
monopolizing any location (see attachment 2).

                          OIG Evaluation

OAM concurred with the recommendation and identified planned
corrective actions.  However, a milestone date for completion of
corrective actions will be needed to resolve this recommendation.

                           OAM Comment

The OIG additionally recommends that CCMD should not routinely
allow a sole-source procurement when the contractor has
demonstrated its ability to successfully compete for similar
contracts at other EPA locations.  We disagree with this
recommendation.  The decision relative to noncompetitive or
competitive is based on applicable statutes and thresholds
established thereunder.  Beginning in FY 90, those statutes have
included the requirement for 8 (a) firms which have been in the
program for 4.5 years' to participate in a certain percentage of
competitive procurements while continuing.to receive a certain
percentage of noncompetitive awards.  The number of
noncompetitive and competitive solicitations in which any given
firm participates is monitored by SBA, not by individual user
agencies, since 8(a) contractors receive awards from numerous
other Federal Agencies, each with several contracting offices,
neither EPA nor any Agency other than SBA has the information
which would enable it to determine when a firm should be
competing and when it should receive a noncompetitive award.
That is why Congress has assigned to SBA the responsibility for

                               231       Audit No. E1JBF2-04-0300

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                                                       Appendix I
determining whether an individual contractor should compete any
given requirement. Furthermore, since competition is an expensive
process (costing offerers up to $100,000 per solicitation), and
these firms are still in the developmental stage (as shown by
their 8(a), status), Congress has wisely decreed that competition
shall be conducted only above a certain level ($3,000,000 for
services; $5,000,000 for supplies).

As an additional control, in accordance with FAR 19.806(b), if a
noncompetitive 8(a) proposal in deemed unreasonable and cannot be
negotiated down to a fair and reasonable price, SBA is notified
of the intention to withdraw the solicitation from the 8(a)
program and resolicit under full and open competitive procedures
(see Attachment 18).

                         OIG Evaluation

OAM's response is inaccurate because it makes assumptions based
on past management practices under the 8 (a) program, not legally
imposed requirements.  Nowhere in the Small Business Act does it
state that SBA dictates to the Agency the method o£. procurement.
FAR 48 Section 19.809-1(b)  states:

     The Agency shall prepare the contract that the SBA will
     award to its contractor in accordance with agency
     procedures, as if the agency were awarding the contract
     directly to the SBA's contractor.

SBA's role is of oversight of the 8 (a) procurement process to
promote the development of 8 (a) companies, not determination of
the Agency's method of procurement.  The Agency, not SBA, is
often in the best position to determine whether a contract should
be awarded sole-source or competitively.  OAM's first
responsibility should be to assure the integrity of EPA's
procurement process, and then meet requirements of the 8 (a)
program,   otherwise, continued abuses in the procurement process
such as occurred in the awarding of the AScI and TAX contracts
may continue.

The statutes OAM refers to on competition in the 8 (a) program are
minimum requirements and do not prohibit the Agency from
requiring competition in procurements under the $3 million dollar
threshold. In addition, OAM implies that determination of
competition within the 8 (a) program is the responsibility of SBA
and that they don't have the information to determine when a firm
should be competing and when it should receive a noncompetitive
award.  The award of the AScI contracts is in direct
contradiction to this statement.  AScI was awarded .numerous sole-

                               232       Audit No.  E1JBF2-04-0300

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                                                       Appendix I
source awards at EPA and essentially did not have contracts
outside of EPA.  At ERL-A we were informed that AScI would have
had a commanding position in any recompete of the contract.
Given the primary purpose of the 8 (a) program was to develop
minority firms to compete in full and open competition, it would
seem self evident these contracts should have been competed.
Again, OAM has the primary responsibility to assure the integrity
of EPA's procurement process, not SBA.

                           OAM
The DIG recommends that CCMD should not routinely allow a
sole-source procurement when contract modifications would
significantly increase the contracts value over the competitive
threshold or extend the contract performance past expiration of
the contractor's 8 (a)  eligibility.  We agree with this recommen-
dation.  Last minute sole source contract extensions are no
longer granted when the 8 (a) contractor is ready to graduate from
the program.  No modifications have ever been issued by CCMD that
take an 8 (a) contract issued under noncompetitive procedures over
the competitive threshold.                           ••-           •

                         . OIG Evaluation

OAM concurred with the recommendation and identified planned
corrective actions.  However, a milestone date for completion of
corrective actions will be needed to resolve this recommendation.

                           OAM Comment

     Establish definitive guidelines for justifying removal of
     contracts from 8 (a) participation.

We agree with this recommendation. CCMD's 8 (a) procedures include
careful deliberation on whether to remove a contract from the
8 (a) program.   The decision on whether or not to retain a
contract in the 8 (a) program past the date of the incumbent
contractor's graduation is based on relevant factors; such as
availability of qualified 8 (a)  firms within the applicable
Standard Industrial Classification (SIC)  manual code and results
of an SBA Impact Study [if the graduated 8 (a) firm is still a
small business] .

                         OIG Evaluation

OAM concurred with the recommendation and identified planned
corrective actions.  However, a milestone date for completion of
corrective actions will be needed to resolve this recommendation.

                               233       Audit NO. E1JBF2-04-0300

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                                                       Appendix I
                           OAH Comment
     Establish a maximum potential value or percentage increase
     for all contracts that will automatically trigger a re-
     compete .

We disagree with this recommendation.  Arbitrary dollar amounts
or percentages cannot be substituted for good management
decisions.  Each decision must stand on its own merits.  We agree
that significant modifications that increase LOE or the scope of
contracts should not be approved unless specific statutory
authority exists to support the increase.

                          OIG 'Evaluation

At a minimum, OAM should consider establishing a maximum
potential value or percentage increase which would automatically
trigger a review by higher levels of management to determine
whether program offices are avoiding competitive procedures.  OAM
is correct that arbitrary dollar amounts or percentages cannot be
substituted for good management decisions, but these good
management decisions were not always evident in the " past.
Therefore, we have changed the recommendation to require
"consideration of recompete" when a certain percentage increase
of maximum potential value is reached.

                           OAM
     Ensure that ERL-A does not bias procurements by specifically
     ensuring that competitive procurements do not deny short
     extensions of solicitation periods where such extensions are
     justified; that competitive procurements do not place an
     unreasonable amount of technical evaluation ranking points
     on the strengths of an incumbent contractor and that
     competitive procurements do not require commitment letters,

We agree with the OIG recommendations with the exception of the
requirement for commitment letters.  CCMD oversight of ERL-A and
other client programs has increased.  The following measures are
in effect:

     (i)  Requests for extensions of proposal periods are granted
when they are reasonable and when they promote competition.  As
in the case of the ERL-A RFP, a reduced extension may be granted
if the full time requested is not deemed to be needed.

     (ii)  Technical evaluation criteria and weights are reviewed
and revised to develop an equitable plan to ensure that the

                               234       Audit Mo. E1JBF2-04-0300

-------
                                                       Appendix I
Government receives the quality of goods and services it requires
without unduly restricting competition.

      (iii)  Commitment letters for key personnel are required in
order to preclude "bait and switch" tactics by unscrupulous
offerers.  However, CCMD is working to decrease the number of key
personnel and thus the number of commitment letters required
while retaining safeguards for the Government's interests.

                          OIG Evaluation

OAM generally concurred with the recommendation- and identified
planned corrective actions, except for the elimination of
commitment letters.  If the commitment letters are used as OAM
states to retain key personnel in order to preclude "bait and
switch" tactics, we do not disagree with their use.  In the past
at ERL-A they were utilized to assure the retention'of all 37
contractor employees under the TAI contract.  This resulted in an
overwhelming competitive advantage to the incumbent contractor in
obtaining the commitment letters.  A milestone date for
completion of corrective actions will be needed to resolve this
recommendation.
The draft report recommends that the Assistant Administrator for
Administration and Resource Management direct the Office of
Acquisition management Director to ensure CCMD adequately reviews
ERL-A contracts for inappropriate contract activities and
compliance with contract provisions.

We agree with the recommendation.  PPN 93-01 was promulgated by
OAM to instruct COs to notify the appropriate management official
of any and all irregularities, and to establish the chain of
command for expedited resolution of such matters. Team leaders
have been designated in CCMB to oversee work processes and
identify irregularities so that they will be expeditiously
elevated through the chain of command.  The team leaders also
track workload and serve as mentors to contract specialists
assigned to the teams.  A single specialist has been assigned to
manage all contracts originating from a given program office such
as ERL-A.  This specialist now works closely with the Contracting
Officer in the AMB on any follow-on contract to ensure that any
lessons learned an the current contract are incorporated into the
follow-on.  Also, by being actively involved in the acquisition
process, the contract specialist assigned to administer the
contract is aware of different issues that occurred during the
award phase and is better prepared to manage the contract.

                               235       Audit No. E1JBF2-04-0300

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                                                       Appendix I
In an effort by CCMD to provide increased controls, oversight,
and review of ERL-A contracting activities, CCMD conducted a
joint on-site contract management review of all ERL-A contracts
with ORD.  We agree with the OIG that this type of on-site review
and follow-up should continue in the future as a part of CCMD's
on-going monitoring of ERL-A's contract management activities,
resources and travel funds permitting.

TQM principles have been applied to CCMD's voucher review process
and responsibilities as well an the development of new Work
Assignment Forms and Checklist which must be completed by each
Work Assignment Manager and Project Officer for each Work
Assignment.  The Checklist specifically addresses all issues
raised in the OIG report (e.g., work outside the SOW, personal
services, subcontract consent).  The contract specialists have
been instructed to prioritize their efforts, with careful review
and approval of the Work Assignments and the contractor's monthly
progress report which supports the monthly voucher submission
being the top priorities.  Their Performance Plans have been
changed to reflect this emphasis.

Special letters of instruction have been provided to all cost
type contractors and project offices addressing the subject of
subcontractors and consultants.  Special letters of instruction
have been provided to all contractors and project officers
addressing the subject of Inherently Governmental Functions and
provided copies of OFPP Policy Letter 92-1 and EPA Order 1900.2.

The OIG draft report also recommends, in particular that CO
approval should be required for certain expenditures under
contracts and CCMD should be required to establish a policy of
not authorizing after-the-fact payments.  Under this policy, the
contractors should ensure that proper approval in obtained from
ERL-A and CMD before expenditures are made.

Current policy and procedures already exist in the contract (FAR
52.244-2). and regulations (FAR 1.602-3,.EPAAR 1501.602-3 and EPA
Contracts Management Manual Chapter 12) regarding the need for
advance approvals and subsequent ratifications.  These policies
and procedures have been stressed in recent Branch meetings with
the contract specialists assigned to CCMB to manage post-award
contract actions.

                         OJG Evaluation

OAM concurred with the recommendation and identified planned
corrective actions.  Based on OAM's response this recommendation
was rewritten.-

                               236       Audit No. E1JBF2-04-0300

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                                                       Appendix II
              GLOSSARY OF ACRONYMS AND ABBREVIATIONS
 AAU   -   Assistance Administration Unit
 AEcoS -   Aquatic Ecosystem Simulator            .  .
 AFB   -   Air Force Base
 AScI  -   American Scientific International .
 BOREAS-   Boreal Ecosystems Atmosphere Study
 CA    -   Cooperative Agreement
 CEAM  -   Center for Assessment Modelling
 CFR   -   Code of Federal Regulations
 CMD   -   Contracts Management Division
 COI   -   Conflict of Interest
 CPFF  -   Cost-Plus-Fixed-Fee
 CSC   -   Computer Sciences Corporation
 CSU   -   Colorado State University
 EMAP  -   Environmental Monitoring and Assessment Program
 EPA   -   Environmental Protection Agency  '   '
 EPAAR -   EPA Acquisition Regulations
 ERL-A -   Environmental Research Laboratory '- Athens.
 ERL-N -   Environmental Research Laboratory - Narragansett
 FAR   -   Federal Acquisition Regulations
 FGCA  -   Federal Grant and Cooperative Agreement Act
 FMFIA -   Federal Managers Financial Integrity Act
 FSR   -   Financial Status Report
 FTE   -   Full-Time Equivalent
 FY    -   Fiscal Year
 GAD   -   Grants Administration Division
 GAIM  -   Global Analysis Interpretation and Modelling
 GAO   -   General Accounting Office  ,
 GIAB  -   Grants Information and Analysis Branch
 IAG   -   Interagency Agreement
 IG    -   Inspector General
 IGBP  -   International Geosphere/Biosphere Program
 IPA   -   Intergovernmental Personnel Act      .  .
 IVIC  -   Institute Venezolano de Investigaciones Cientificas
 LOE   -   Level of Effort
 MBL   -   Marine Biology Laboratory
 MPV   -   Maximum Potential Value
 MSU   -   Montana State University
 OARM  -   Office of Administration and Resources  Management
 OEPER -   Office of Environmental Processes and Effects Research
•OGC   -   Office of General Counsel
 OIA   -   Office of International Activities
 OIG   -   Office of Inspector General
 OMB   -   Office of Management and Budget
 ORD   -   Office of Research and Development
                                237
Audit NO. E1JBF2-04-0300

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                                                      Appendix  II
osw   -   Office of Solid Waste
PCMD  -   Procurement and Contracts Management Division
PI    -   Principal Investigator
PO    -   Project Officer
QA    -   Quality Assurance
QC    -   Quality Control
RFP   -   Request for Proposal
ROC   -   Record of Communication
RPM   -   Remedial Project Manager
S&E   -   Salaries and Expenses
SBA   -   Small Business Association
SDBUS -   Small and Disadvantaged Businesses Utilization
          Specialist
SPARC -   SPARC Performs Automated Reasoning in Chemistry
SUNY  -   State University of New York
TAI   -   Technology Applications, Incorporated
UBC   -   University of British Columbia
UGA   -   University of Georgia
UNH   -   University of New Hampshire
URI   -   University of Rhode Island
WAM   -   Work Assignment Manager
                               238
Audit NO. E1JBF2-04-0300

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                                                      Appendix III
           SAMPLE OF CONTRACTS, COOPERATIVE AGREEMENTS,
                AND INTERAGENCY AGREEMENTS AUDITED
Recipient
Contracts:
Technology Applications,  Inc.
American Scientific
          International  (AScI)
Cooperative Agreements:
Alaska, University of
   Number
Date
Awarded
Amount
 68-C1-0024
 68-03-3351
 68-03-3551
 68-CO-0054
 68-C1-0012
 CR817688
British Columbia, University of CR816778
Clemson University
Colorado State University
Georgia, University of
Mansoura University     {
Marine Biology -Laboratory
Menufiya University
Montana State University
New Hampshire, University of
Rhode Island, University of
Interagency Agreements;
Institute Venezolano de
     Investigaciones
     Cientificas
 CR817664
 CR818652
 CR819053
 CR816268
 CR817734
 CR816290
 CR816316
 CR816278
 CR817743
05/15/91 $16,833,253
05/05/86 $ 6,564,577
09/30/&7 $ 2,164,193
09/25/90 $ 3,291,044
03/21/91 $ 2,734,218
09/29/90  $  499,899
05/31/90  $  247,916
08/21/90  $  519,457
07/11/91  $  949,533
09/30/91  $5,261,512
09/30/89  $  248,750
09/05/90  $  607,713
09/29/89  $  262,500
08/24/89  $  279,234
09/11/89  $1,883,230
09/14/90  $  389,375
 DWVZ934787   07/31/9.0   $  401,250
239       Audit MO. E1JBF2-04-0300

-------
                                                      Appendix III
Recipient
NASA

NASA

NASA

NASA

U.S. Air Force  (Tyndall AFB)
  Number

DW80935084

DW80935165

RW80935320

RW80935444

RW57934704
Date '
Awarded
Amount
05/21/91  $  100,000

07/10/91  $  200,000

11/91     $  160,000

01/92     $   60,000

05/25/90  $  389.000

         $44.046.654
                               240
         Audit NO.  E1JBP2-04-0300

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                                                      Appendix IV
              PRIOR AUDITS  OF EXTRAMURAL MANAGEMENT
PIG Audits;

1983 Review of the Office  of Research and Developments Extramural
     Research Activities  (Audit No. ElgB2-ll-0019-30828), March
     31, 1983.

     ORD Locations: Office of Research and Development,
                    Washington DC

                    Various laboratories at Research Triangle
                    Park,  North Carolina and Cincinnati, Ohio.

1986 Contract ManagementPractices at Environmental Monitoring
     Systems Laboratory -  Las Vegas (Audit No. E1P25-09-0242-
     6000773), March 26, 1986.

     ORD Location:  Environmental Monitoring Systems Laboratory,
                    Las Vegas, NV.

1992 EPA/s Managementof Computer Sciences Corporation Contract
     Activities (Audit No. E1NME1-04-0169-2100295), March 31,
     1992'.

     ORD Locations: Office of Research Program Management

                    Atmospheric Research and Exposure Assessment
                    Laboratory, Research Triangle Park, North
                    Carolina. ,

                    Health Effects Research Laboratory, Research
                    Triangle Park, North Carolina.

                    Environmental Research Laboratory - Gulf
                    Breeze, Florida.

                    Environmental Research Laboratory -
                    Corvallis, Oregon.

1992 Contracting Activities at Environmental Research Laboratory
     Duluth (Audit No.  E1JBF1-05-0175-2100443), July 7, 1992.

     ORD Location:  Environmental Research Laboratory - Duluth,
                    Minnisota

                               241       Audit NO. E1JBP2-04-0300

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                                                      Appendix IV
GAPAudit Reports and Testimony:

1982 EPA/s Use of Management Support Services.  (GAO/CED-82-36),
     March 9, 1982.

1985 The Environmental Protection Agency Should Better Manage  Its
     Use of Contractors. (GAO/RCED-85-12), January 4, 1985.

1987 Status of EPA's Contract Management Improvement Program.
     (GAO/RCED-87-68FS), January 1987.

1989 GAO Testimony - The Environmental Protection Agency's Use of
     Consultants, (GAO/T-GGD-89-5),  Februarys, 1989.

1989 GAO Testimony - Sound Contract Management Needed at the
     Environmental Protection Agency, (GAO/T-RCED-89-8), February
     23, 1989.

1991 Government Contractors: Are Service Contractors Performing
     Inherently Governmental Functions?. (Audit No'.~ GAO/GGD-92-
     11),  November 1991.
                               242        Audit MO. E1JBF2-04-0300

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                                    SUMMARY OF DEFICIENCIES FOR COOPERATIVE AGREEMENTS REVIEWED
                                             ATHENS ENVIRONMENTAL RESEARCH LABORATORY
I
PI
DIRECT BENEFIT

CA (partially or fully)
Contributed To Direct Support
Of ERL-A Research Projects

RFP/Decision Memorandum
Indicated Importance Of
Research To ERL-A's Mission

QUALITY ASSURANCE PLANS

QA Plan Required Prior To
Start Of Research Activities

QA Plan Submitted By PI And
Filed in ERL-A Records
W
                                                    MANSOURIA&
                                    CLEMSON CSU  MENUFiYA   MBL  MSU   UAF   UBC   UGA   UNH   URI
Y
Y
Y
N1/
Y
Y
Y
N1/
Y
Y
Y
N
N
                                                                       N/A
      N
N
    1/ QA plans had not been submitted for Clemson and CSU at the time of our initial review of the CA files.
y     However, during the audit (12/92 and 09/92, respectively) QA plans were obtained by ERL-A.
o
w
o
o
      N
                                                                                                 Y
        N
N/A    N/A
Y
Y
Y
N




1
(0
pi
»J
p**
w

-------
^ aUMMAKI Ur IJliri^ltSIN^llla rU«..l-UC»riiKAIIV14 AUKJBBMlJiniO iUiVUBWIllJ m
•* ATHENS ENVIRONMENTAL RESEARCH LABORATORY Y
a • "»
5 o
g MANSOURIA& £
4 CLEMSON CSU MENUFIYA MBL MSU UAF UBC UGA UNH URI gj
b

PROGRESS REPORTS

Quarterly Progress Reports
Required


Quarterly Progess Reports
Received By PO
Progress Reports Recieved -
Oral or Written

REVIEW PANELS
COIs or Appearance Of COIs
ORD Headquarters Staff Included
On Competitive Review Panels
Prospective PO Recommended
Panel Members
Prospective PO Performed
In-House Review Of CA
Prospective PO Wrote Decision
Memorandum




Y



N

N/A


Y

N

UK

Y

N

.,


Y



Y

0


Y

N

Y

Y

N




Y



Y

O


Y

N/A

Y

N

N




Y



N

N/A


Y

N

UK

Y

N




Y



N

N/A


N

N/A

N*

N

N*




Y



N

N/A


Y

N

UK

N

N




N



N/A

N/A


Y

N/A

Y

N

N




Y



N

N/A


Y

N/A

Y

N*"

Y




Y



Y

O


Y

N/A

Y

N

N

,


Y



N

N/A


Y

N

Y

Y

N
H
M
*
£
_p
•H
"2
3



«*
(M










-------
                                    SUMMARY OF DEFICIENCIES FOR COOPERATIVE AGREEMENTS REVIEWED
                                              ATHENS ENVIRONMENTAL RESEARCH LABORATORY
to
    SITE VISITS

    PO Made Required Site Visits

    Dates Of Site Visits
    PO Prepared Trip Reports
    For Site Visits

    PO Submitted Copies Of Trip
    Reports To GAD As Required.
                                                    MANSOURIA&
                                    CLEMSON  C8.U MENUFiYA    MBL   MSU   UAF   UBC  UGA   UNH    URI
N
N/A


N/A
N/A
Y
10/91;
07/92

Y2/
N
Y
03/88;
01/92

N
N/A
Y
UK


?3/
N
Y
09/91


Y
N
Y
09/91


N
N/A
N
N/A


N/A
N/A
N/A***
N/A


N/A
N/A
Y
05/91;
09/91 ;
09/92
Y4/
N
Y
'90;
'91

N
N/A
H-
    21 CSU PO indicated thst site visits were made in 10/91 and 7/92; however, file only contained trip
     report for 10/92.

    31 MBL PO indicated site vists were made but dates unknown. PO also said trip reports prepared but
     none were found in CA files.
M   4/ CA files contained only one trip report for 09/92.
§    '                                                        '
S*   * ERL-A employee on IPA recommended panel members and wrote decision memorandum.
i
2   * * Co-PO for UGA CA performed in-house review.
i.
o
o
    * * * : Local university
                                                                                                                CL
                                                                                                                Sf

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                                         Appendix V
(This page intentionally left blank.)
                 246       Audit No. E1JBF2-04-0300

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             SUMMARY OF DEFICIENCIES RELATED TO INTERAGENCY AGREEMENTS REVIEWED
                           A THENS ENVIRONMENTAL RESEARCH LABORA TOR Y
                                  Institute                                                       U.S. Air
                                  Velnezola     NASA        NASA        NASA        NASA       Force
                                  DWVA934787  DW80935084  DW80935165  RW80935320  RW80935444 RW57934704
to
   USE OF INTERAGENCY
   AGREEMENTS

   lAGSs Used To Circumvent FTE
   Travel Ceilings/Restrictions

   lAGs Awarded Outside Statutory
   Authority

   lAGs Used To Circumvent FAR
   Procurement Restrictions/
   Requirements
**"  AWARD OF lAGs
g
•   IAG Decision Memorandums
w  Improperly Prepared
                                       N
                                       N
                                                    N
N
            N
N
            N
N
            N
N
                                                  N
            N
I
O
                                                                                                            •O
                                                                                                            ro
W
O
O
                                                                                                             H

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                                        Appendix VI
(This page intentionally left blank.)
                 248       Audit No. E1JBF2-04-0300

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                                                                 Appendix  VII
   SUMMARY OF DEFICIENCIES RELATED TO.SAMPLE CONTRACTS REVIEWED
             ATHENS ENVIRONMENTAL RESEARCH LABORATORY
USE OF CONTRACTS

Mission Critical/Potentially
Inherently Governmental Functions
Performed

Prohibited/Vulnerable Activities

Prohibited Personal Services

Prohibited Directed Subcontracting

PROCUREMENT OF CONTRACTS

Repetitive 8(a) Sole Source Awards

RFP and Technical Proposal Biased
To Favor Incumbant

Contracts Split To Avoid
Competition

Contract Costs Underestimated To
Avoid Competition

CONTRACT MANAGEMENT AND OVERSIGHT

Inadequately Defined Statements
of Work and Work Assignments

Inadequate CMD Oversight

Inadequate ORD Oversight
TAI AScl AScI
On-Site On-Site Off-Site
Y
Y
Y
Y
Y
Y
N
N
Y
Y
Y
Y
Y
Y
Y
Y
N/A
Y
Y
• Y
Y
Y
Y
Y
Y
Y
Y
N/A
Y
Y
Y
Y
Y
                                      249
Audit No.  E1JBF2-04-0300

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                                      Appendix VII
(This page intentionally left blank.)
                 250       Audit No.  E1JBF2-04-O300

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                                                      APPENDIX VIII
                        REPORT DISTRIBUTION
Office of Inspector General
      Inspector General (A-109)
EPA Headquarters
                              ,*••*! • •'
      Assistant  Administrator  for  Administration ,  and  Resources-
     Management (PM-208)           '-^-<"  v:>!  '
                                •»c''.*". *-'.''
     Assistant Administrator for" International Activities  (A-106)
                            ,1-    •». * . »  -*•
     Office of General Counsel (LE-13,Qr)v  **•••
                                *   W»*'*- * '* "•  v***t*                 ,  j
                                               .-f.
     Assistant Administrator for Research and Development (RD-672)
     Director,  Grants Administration Division  CPM-216)
     Director,  Office of. ^Research Program Management  (RD-674)
     Director,  Office of Environmental Process and Effects Research
     (RD-682)    ^    .... .  ^n   .            .r .;r
     Comptroller (PM-225)     ~&4'"
     Agency Follow-up Official (PM-208)
     Office of Congressional Liaison (A-103)
     Office of Public Affairs'(A-107)
cincinatti.  Ohio
     Director, Contracts Management Division (RM-266)
Athens. Georgia
     Director, Environmental Research Laboratory
External
     General Accounting  Office
                                          Audit No. E1JBF2-04-0300
                               251

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                                      APPENDIX VIII
fThis page intentionally left blank.)
                 252      Audit No.  B1JBF2-04-0300

-------