£
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        Office of Inspector General
        Report of Audit
         ACQUISITION MANAGEMENT

           OMB REQUESTED REVIEW OF
               EPA CONTRACTING
      Audit Report Number E1SKF7-04-0037-7100301

                September 30,1997

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Inspector General Division         Southern Audit Division
Conducting the Audit:            Atlanta, Georgia
Program Offices Involved:         Office of Administration and
                                Resources Management

                                Office of Solid Waste and
                                Emergency Response

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                                   September 30, 1997

MEMORANDUM

SUBJECT:    Audit Report E1SKF7-04-0037-7100301
              OMB Requested Review of EPA Contracting

FROM:       Elissa R. Karpf
              Deputy Assistant Inspector General
                for External Audits

TO:           Alvin M. Pesachowitz
              Acting Assistant Administrator
                for Administration and Resources Management

       Attached is the final report concerning an audit of certain Environmental Protection
Agency (EPA) contracting activities as requested by the Office of Management and Budget
(OMB). The primary objective of this audit was to determine EPA's current use of available
contract types and the Agency's capability to increase its use of completion form, fixed-price,
and performance-based contracting mechanisms. We wish to express our appreciation for the
assistance provided by the Office of Acquisition Management (OAM) during the audit;
especially the two contract managers provided for the audit team. Their contributions were
invaluable to the audit effort.

       This report contains findings that describe problems the Office of Inspector General
(OIG) has identified and corrective actions the OIG recommends. It 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.

Action Required

       In accordance with EPA Order 2750, you are required to provide a written response to the
audit report within 90 days of the final audit report  date.  As the action official for this report,
you should coordinate preparation of the response with other appropriate Agency senior officials.
Your response to the final report should identify any completed or planned actions related to the
report's recommendations. For corrective actions planned but not completed by the response
date, reference to specific milestone dates will assist in deciding whether to close this report.

       We have no objections to the further release of this report to the public. Should you or
your staff have any questions, please call Mary Boyer, Divisional Inspector General for Audit, at
(404) 562-9830.

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Attachment

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                             EXECUTIVE SUMMARY
PURPOSE

In the fiscal year (FY) 1998 Pass Back Decisions for the President's Budget, the Office of
Management and Budget (OMB) requested the following:

       Agency Contract Issues - The Office of Inspector General, working with the
       Office of Acquisition Management and appropriate program offices, is requested
       to review contracting procedures and implementation for Superfund and other
       agency contracts relating to: 1) use of fixed price contracts; 2) accuracy of
       independent government cost estimates; 3) contract capacity; 4) use of award and
       incentive fees; 5) use of completion vs. term forms; 6) length of base and option
       periods; and 7) other items at the discretion of the review team. A preliminary
       draft of the report is requested to be forwarded to OMB with submission of the
       FY 1999 budget request in September of 1997.

At a February 5,  1997 meeting, OMB further requested that the Office of the Inspector General
(OIG) review the adequacy of Response Action Contract (RAC) management procedures and
practices, competition of task orders, and use of performance-based service contracting.

BACKGROUND
As reflected in the chart to the right, the vast majority of EPA's
contract dollars continue to be awarded under cost-reimbursable,
level of effort (LOE) type contracts. This type of contract places
more of the risk for cost and performance on the Government and
requires the highest level of Government oversight to ensure the
receipt of quality services at a reasonable cost. Under LOE
contracts, contractors are only required to give their best effort
and all reasonable and allowable costs are reimbursed within the
limits of the contract.
                                                                   Cost vs Fixed Price
Comrads|
                                                                      23
                                                                   ±  15
                                                                                       • FP
                                                                                       DGcst
                                                                          FY92
                                                                               FY96
                                                                            Fiscal Year
Past audits and reviews of EPA contracting have questioned the
Agency's predominant use of cost-type LOE contracts. The many
years of experience and historical information from previous contracts should have allowed the
Agency to define its contracting needs and related costs and, thereby, progress to more
completion form, fixed-price, and performance-based contracting. In April 1991, OMB's Office
of Federal Procurement Policy (OFPP) issued Policy Letter 91-2 requiring Government
procurement offices to use, to the maximum extent practicable, performance-based service
contracting (PBSC) when acquiring services. This form of contracting requires that the
Government tell the contractor what services it requires, not how to provide them.  The basic
premise of PBSC is that when the Government limits the amount of mandated requirements in
process and staffing, the contractor can provide more cost effective, efficient services.  In a
PBSC, the Government must clearly define its needs and the methodology it will use to

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determine when the services requested have been received at the desired level of quality.
Because positive and negative incentives to induce the desired level of performance must also be
in a PBSC, the Government must communicate the work objectives and quality assurance plan to
the contractor during the preaward phase. This permits the contractor to factor the cost for
achieving the desired level of performance in the proposal. Past audits and reviews have shown
that EPA had not effectively used incentive fees to achieve quality performance from its
contractors.

RESULTS IN BRIEF

EPA has made some progress in correcting past problems related to independent government cost
estimates (IGCE) and management of award fee contracts, such as issuing IGCE guidance,
requiring IGCEs for all significant contract actions, and limiting award fees to above satisfactory
performance. However, improvements are still needed. EPA has also initiated projects for the
award of completion form and performance-based contracts. However, the Agency has many
barriers to overcome, including  a cultural dependence on LOE contracts, in order to significantly
change its contracting practices.

Substantial opportunities exist for EPA to lessen its dependence on cost-reimbursable LOE
contracts and move toward more efficient, results oriented contracting. To make such a
transition in contract actions, EPA needs to better define its needs and goals,  adequately estimate
the cost of contracted services, and properly use positive and negative incentives to obtain high
quality contractor performance.

PRINCIPAL FINDINGS

Independent Government Cost Estimates Not Always Properly Prepared or Effectively
Used for Negotiating Contract Costs

IGCEs were not always adequately prepared, effectively used to analyze proposed cost, or to
establish prenegotiation objectives. The quality of the IGCEs reviewed also varied, depending
on the specificity of the work requirements and the experience of the responsible program
officials.  EPA program offices  had no processes for reviewing past IGCEs for deficiencies or
accumulating historical cost information for preparation of current and future IGCEs.  In
addition, program staff that oversee contracts had not always received adequate training on IGCE
preparation.  As a result, program staffs relied heavily on contractors' estimates, often choosing
to award contracts and related work at amounts closer to that proposed by contractors rather than
EPA estimates.

EPA Has Not Made Optimal Use of More Efficient Contract Types

The Agency continues to rely extensively on cost-reimbursable, LOE contracts that essentially
buy labor hours, not results, and places the burden of cost control on the Government. EPA has
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made some progress toward completion form, performance-based contracting; however,
substantial opportunities exist for the Agency to award more completion, fixed-priced, and
performance-based contracts and related work assignments (WA).  The Agency's cultural
preference for LOE contracts, lack of understanding of alternative contracting mechanisms,
inability to define its needs, and broad statements of work (SOW) that include multitudes of
varying tasks have prevented a more complete transition from LOE cost-type contracts to more
efficient, cost-effective contract mechanisms.

Award Fee Contracts Generally Provided Limited Incentive for Superior Performance

A majority of the contracts reviewed permitted the award of fees for satisfactory performance.
The percentage of fees awarded for satisfactory versus outstanding performance generally varied
but the difference provided little incentive for superior performance. EPA revised its award fee
policy in November 1995 to restrict award fees to above satisfactory ratings.  However, the
number of award fee contracts awarded in the last few years has declined dramatically, limiting
the effect of the policy change on contractor performance.

Although current OMB initiatives stress reduced Agency dependence on cost reimbursable
contracts, situations exist where requirements can not be defined and cost type contracts are the
only option available.  Therefore, this decline in cost-plus-award-fee (CPAF) contracts causes
some concern. Award fee contracts incorporate  one of the basic tenants of performance-based
contracting, i.e., financial incentives for good performance, and represent one mechanism by
which EPA could increase its use of PBSC where cost type contracts are the only reasonable
option.

Contract Performance Periods and Capacity Did Not Prevent Competition

Contract capacity and length of base and option periods did not have a discernable impact on
competition for the 26 contracts in our sample. The largest contracts with the longest
performance periods received the most proposals.  All competitively awarded contracts in our
sample were determined to have received adequate competition.

OMB Concerns Specific to RACs

OMB had questions regarding (1) indirect rates for RACs prime and team subcontractors, (2) the
use of regional crossover authority in RACs to increase WA competition, (3) limitations on the
RACs subcontract pool, (4) the absence of a contract base for completion form WAs, and (5) the
award of RACs as Architectural and Engineering (A&E) contracts.  Within the time constraints
for this audit, we tried to answer OMB's concerns  in Chapter 6 of this report.
RECOMMENDATIONS
                                           in

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The Acting Assistant Administrator for Administration and Resources Management, in
coordination with other appropriate senior Agency managers, should: (1) provide program
personnel with proper training in cost estimation and alternative contract types; (2) require that
IGCEs contain estimated costs for each WA task and be effectively used for contract cost
negotiations; (3) develop processes to evaluate the quality of IGCEs and create historical cost
databases for use in preparing IGCEs; (4) establish program goals for award of completion form,
fixed-price, and performance-based contracts; (5) require Senior Resource Officials to implement
OMB's requirement to justify contract awards that do not comply with PBSC requirements; (6)
develop a strategy for meeting OMB's contract reform goals; and  (7) where appropriate, modify
award fee plans for current contracts to limit awards to above satisfactory ratings.

AGENCY COMMENTS AND OIG EVALUATION

In a memorandum dated September 12, 1997, the Acting Assistant Administrator for
Administration and Resources Management (OARM) responded to our draft report. The Acting
Assistant Administrator agreed with most of the findings and recommendations presented in the
report.  However, the response did present disagreements with certain audit conclusions and
recommendations. Where appropriate, changes were made in the  final report to address
OARM's concerns.

O ARM's comments were incorporated into appropriate sections of the final report along with our
evaluation of these comments. OARM's response in its entirety is included as Appendix I and
our evaluation of OARM's comments on specific findings and recommendations is included as
Appendix II.
                             TABLE OF CONTENTS
                                          IV

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EXECUTIVE SUMMARY	   i

CHAPTERS

1    INTRODUCTION	   1

     PURPOSE	   1

     BACKGROUND	   1

     SCOPE AND METHODOLOGY	   2

2    INDEPENDENT GOVERNMENT COST ESTIMATES NOT ALWAYS
     PROPERLY PREPARED OR EFFECTIVELY USED FOR NEGOTIATING
     CONTRACT COSTS	  7

     BACKGROUND	   7

     IGCEs WERE NOT USED AS A NEGOTIATING TOOL	   8

     IGCEs LACKED DETAIL NECESSARY FOR EFFECTIVE COST
     ANALYSIS	  10

     RACsIGCE PROCESS NEEDS IMPROVEMENT	   11

     NO PROCESS FOR ACCUMULATING HISTORICAL CONTRACT
     COSTS OR EVALUATING IGCEs	   13

     BETTER SOWs RESULT IN BETTER IGCEs	   14

     RECOMMENDATIONS	  15

     AGENCY COMMENTS AND OIG EVALUATION	  16

3    EPA HAS NOT MADE OPTIMAL USE OF MORE EFFICIENT
     CONTRACT TYPES	  17

     BACKGROUND	   17

     TASKS CONDUCTED UNDER COST-REIMBURSABLE LOE
     CONTRACTS COULD BE AWARDED UNDER CONTRACT TYPES
     MORE FAVORABLE TO THE GOVERNMENT	  19
     BARRIERS/LIMITATIONS AFFECTING THE USE OF OTHER
     CONTRACT TYPES	  27

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     AGENCY PROGRESS IN AWARDING OTHER TYPES OF
     CONTRACTS	   30

     CONCLUSION	   31

     RECOMMENDATIONS	   31

     AGENCY COMMENTS AND OIG EVALUATION	   32

4    AWARD FEE CONTRACTS GENERALLY PROVIDED LIMITED
     INCENTIVE FOR SUPERIOR PERFORMANCE	   33

     BACKGROUND	   34

     SAMPLED CONTRACTS AWARDED FEES FOR SATISFACTORY
     PERFORMANCE	   34

     LIMITED IMPLEMENTATION OF REVISED AWARD FEE GUIDELINES..  35

     CONCLUSION	   37

     RECOMMENDATIONS	   38

     AGENCY COMMENTS AND OIG EVALUATION	   38

5    CONTRACT PERFORMANCE PERIODS AND CAPACITY DID NOT
     PREVENT COMPETITION	   39

     BACKGROUND	   39

     ADEQUATE COMPETITION OCCURRED FOR CONTRACTS REVIEWED  40

     BASE PERIODS WERE GENERALLY LIMITED TO ONE YEAR	   41

     INTERNAL EPA REVIEWS QUESTIONED POSSIBLE IMPACT OF
     CAPACITY	   42

     CAPACITY OF EPA CONTRACTS MAY BE EXCESSIVE	   42

     CONCLUSION	   43

     AGENCY COMMENTS	  43
6    OMB CONCERNS SPECIFIC TO RACs	   45

     BACKGROUND	   45

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     INDIRECT RATES FOR RACs WERE NOT EFFECTIVELY
     NEGOTIATED	   47

     RACS DO NOT PROVIDE FOR ROUTINE USE OF REGIONAL
     CROSSOVER AUTHORITY AND SUCH USE MAY NOT BE BENEFICIAL
     TO EPA	   50

     SUBCONTRACT POOL HAS NO PERCENTAGE LIMITATION AND
     CAN BE USED FOR COMPLETION FORM WAs	   51

     A CONTRACT FLOOR FOR COMPLETION FORM NOT DEEMED
     APPROPRIATE BY AGENCY OFFICIALS	   52

     USE OF A&E CONTRACTS FOR RAC AWARDS REQUIRED
     BY STATUTE	   52

     RECOMMENDATIONS	   54

     AGENCY COMMENTS AND  OIG EVALUATION	    55

APPENDICES

     APPENDIX I:  AGENCY RESPONSE	   57

     APPENDIX II:  OIG EVALUATION OF AGENCY COMMENTS	   85

     APPENDIX III:  SAMPLING METHODOLOGY	   97

     APPENDIXIV:  CONTRACTS REVIEWED	   99

     APPENDIX V:   SCHEDULE OF WORK ASSIGNMENTS REVIEWED	   103

     APPENDIX VI:  RACs INDIRECT RATES	   107

     APPENDIXVII:  ABBREVIATIONS	   Ill

     APPENDIX VIII: DISTRIBUTION	   113

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                                     CHAPTER 1

                                  INTRODUCTION

PURPOSE

In the fiscal year (FY) 1998 Pass Back Decisions for the President's Budget, the Office of
Management and Budget (OMB) requested the following:

       Agency Contract Issues - The Office of Inspector General, working with the
       Office of Acquisition Management and appropriate program offices, is requested
       to review contracting procedures and implementation for Superfund and other
       agency contracts relating to: 1) use of fixed price contracts; 2) accuracy of
       independent government cost estimates; 3) contract capacity; 4) use of award and
       incentive fees; 5) use of completion vs. term forms; 6) length of base and option
       periods; and 7) other items at the discretion of the review team. A preliminary
       draft of the report is requested to be forwarded to OMB with submission of the
       FY 1999 budget request in September of 1997.

At a February 5,  1997 meeting, OMB further requested that the Office of the Inspector General
(OIG) review the adequacy of Response Action Contract (RAC) management procedures and
practices, competition of task orders, and use of performance-based service contracting.

BACKGROUND

Contractors continue to play a significant role in helping EPA accomplish its mission.  As of
January 1997, the Agency had approximately 845 active contracts with a maximum potential
value of about $13  billion.  Historically, EPA's  largest contracts have been cost-reimbursable,
level of effort (LOE) type contracts.  The chart to the right
illustrates EPA's heavy dependence on cost-reimbursable         Dollar Value By Contracl Type (Billions)
contracts as of the end of FY 1996. Superfund contracts,              flasl	
valued in the hundreds of millions, historically have been               ,/        \^
cost-reimbursable award fee contracts. Superfund officials
have indicated that it is impossible to predict site
conditions and cleanup needs with sufficient accuracy to
award fixed-price contracts. This form of contracting
places more  of the risk for  cost and performance on the
„             ,.,,.,,,  r,               I  I Cost Plus Award Fes   f~| Cost Plus Fixed Fee
Government and requires the highest level of               fl otherCostTypes     B FixedPrice
Governmental oversight to ensure the receipt of quality      D Fi»" *«*>
services at a reasonable cost. Contractors are only
required to give their best effort and all reasonable and allowable costs are reimbursed within the
limits of the  contract.

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In prior years, OIG, General Accounting Office (GAO) and EPA internal reviews have identified
longstanding contract deficiencies. From 1992 to 1994, the Agency reported contract
management as a Presidential level weakness in its yearly Federal Managers' Financial Integrity
Act (FMFIA) reports. In 1995, EPA downgraded contract management to an Agency level
weakness. OIG, GAO, OMB and EPA internal reviews have questioned why the Agency has not
gained sufficient experience and historical information from previous contracts to better define
its future contracting needs and related costs and, thereby, progress to more completion form,
fixed-price, and performance-based contracting.  The EPA Standing Committee on Contract
Management recommended in December 1992 that EPA use contract types  other than cost-
reimbursement contracts, where appropriate.

In 1991, OMB issued a policy letter requiring Government procurement offices to use, to the
maximum practicable extent, performance based contracting (PBSC) when  acquiring services.
This policy was subsequently incorporated into the Federal Acquisition Regulation (FAR) on
August 22, 1997. Performance based contracting requires that the Government tell the contractor
what services it requires, not how to provide them. The basic premise of PBSC  is that when the
Government limits mandated requirements in process and staffing, the contractor can provide
more cost effective, efficient services.  In a PBSC, the Government must clearly define its needs
and the methodologies it will use to determine when the services requested  have been received at
the desired level of quality. Because positive and negative incentives to induce the desired level
of performance must also be in a PBSC, the Government must communicate the work objectives
and quality assurance plan to the contractor during the preaward phase. This permits the
contractor to factor the cost for achieving the desired level of performance in the proposal. Past
audits and reviews have shown that EPA had not effectively used incentive  fees to achieve
quality performance from its contractors.

Performance-based method of contracting also assumes the Government can reasonably estimate
the cost of the services to be procured  and can define what end result or product it desires.
Numerous OIG and GAO reports have documented serious problems in past years with EPA's
ability to define its needs and estimate related costs.

SCOPE AND METHODOLOGY

Our audit was designed to address OMB's concerns related to current EPA  contracting practices.
The primary audit objectives were to review EPA contracting operations in  general and RACs
program implementation in particular to determine:

•      if EPA program staff prepare accurate IGCEs that assist in contract negotiations and
       promote cost effective contracts;

•      EPA's current use of fixed-price, completion form, and performance-based contracting
       mechanisms and the feasibility of EPA increasing the use of these type contracts;

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•      whether EPA is effectively utilizing award and incentive fees to obtain the highest quality
       contractor services at the best price; and

•      whether contract capacity and the length of base and option periods in EPA contracts
       negatively impacted competition.

OMB also requested that we evaluate (1) indirect rates for RACs prime and team subcontractors,
(2) the use of regional crossover authority in RACs to increase WA competition, (3) limitations
on the RACs subcontract pool, (4) the absence of a contract base for completion form WAs, and
(5) the award of RACs as Architectural and Engineering (A&E) contracts.

Our audit fieldwork was conducted during the period February 5 through June 30, 1997.  We
were assisted by OAM who provided two contract managers for the audit team.  Audit fieldwork
was performed at EPA contracting offices in Research Triangle Park (RTF), North Carolina;
Cincinnati, Ohio; and Washington, D.C. We also performed fieldwork at EPA Regions 1
through 9. We reviewed contracting files,  applicable EPA contracting policies and procedures,
and the FAR. We obtained legal advice from the Office of General Counsel (OGC), Inspector
General Division (IGD), for certain issues. We interviewed EPA contracting officials, project
officers (PO), and work assignment managers (WAM).  In addition, we interviewed contracting
officials and reviewed documents at several other Federal agencies that award contracts for
services and materials similar to EPA.

Our specific audit approach and methodologies were designed to assess EPA contracting
practices in relation to (1) all EPA contracts in general and (2) the  award and administration of
RACs.

Methodology for Overall Review of EPA Contracting

To evaluate EPA's  current use of fixed-price  contracts, we obtained a listing of all contracts
identified as fixed-price from EPA's Contract Information System (CIS) as of September 30,
1996. We performed limited tests to determine whether these contracts were actually firm-fixed-
price or some other type of contract  mechanism.   We also obtained a listing of all EPA cost-
reimbursable-type contracts to compare the number and dollar value to that of fixed-price
contracts.  We further compared the number and value of current fixed-price and cost contracts to
the number and value of fixed-price  and cost  contracts that were active in 1992. This was done
to assess EPA's progress in reducing the number of cost-type contracts and awarding more fixed-
price contracts during this four and one-half year period.

To accomplish the audit objectives related  to  evaluating the effect  of contract capacity and length
of base and option periods on competition, adequacy of IGCEs, use of contract type, and
administration of award fees, a total  sample of 26 cost-type contracts and a sub-sample of 86

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WAs1 issued under these contracts were reviewed (Appendices IV and V list the contracts and
WAs in our samples). We randomly selected a sample of 20 cost-reimbursable contracts
(maximum potential value (MPV) $1 billion) and a judgmental sample of six RACS (MPV $1.8
billion). In addition to these 26 contracts, a separate random sample of five cost-plus-award-fee
contracts (MPV $224 million) was selected to supplement our initial sample to ensure adequate
coverage of the award fee process (Appendix IV lists award fee contracts selected). The random
samples were selected from separate universes of cost-reimbursable and  award fee contracts that
were active during FYs  1994 through 1996. The methodology used for each sample selection
and the related contract universe is explained in Appendix III.

To evaluate the effect of contract capacity and length of base and option  periods on competition,
we determined how many competitive proposals were received for each  of the 26 contracts in our
samples.  We defined a competitive proposal as one that was scored within the competitive
range. For the purpose of this review,  we established a benchmark for adequate competition as
two competitive proposals.  This criterion is more restrictive than the Competition in Contracting
Act which defines open and full competition as all responsible sources having an opportunity to
compete for the award.  The Act does not establish a quantitative definition of competition.  For
those contracts that received only one competitive proposal, we reviewed contract files and
interviewed prospective offerers to determine whether the contract capacity and length of base
and option periods limited competition.

To evaluate the adequacy of IGCEs, we determined whether a detailed IGCE was prepared for
the contracts and WAs in our sample as required by EPA policy.  We also compared the initial
IGCE to the following: the contractor's initial cost proposal for the contract or WA; the EPA
negotiating position; the final award amount; and the final incurred cost, where possible.  We
also interviewed WAMs, POs, and contracting officials concerning the preparation and use of
IGCEs.

We reviewed the statement of work (SOW) for our sample of cost-reimbursable contracts and
related WAs to determine whether the  tasks included in these SOWs could have been awarded
under completion form,  fixed-price, or performance-based (cost or fixed) contract mechanisms in
lieu of cost-reimbursable. For each SOW, we completed a detailed data  sheet answering a series
of questions designed to determine whether any of these contract types could have been used to
accomplish the tasks under the SOW.  We also interviewed WAMs, POs, and contracting
officials to obtain their opinions as to whether alternative contact types could have been used or
why they believed other types could not have been used.

To assist us in determining whether EPA could award more performance-based contracts, we
       1 Several types of instruments were used under the sample contracts to assign work to
contractors.  These included WAs, delivery orders (DO), and task orders (TO). We recognize
there are technical differences between these instruments. However, for purposes of this audit,
we refer to all of these instruments as WAs unless we are referring to a specific instrument.

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contacted other Federal agencies to obtain information on their use of performance-based
contracts.  We interviewed contracting officials and reviewed performance-based contract
information from the United States Air Force (USAF), Army Corps of Engineers (COE),
National Aeronautics and Space Administration (NASA), and Department of Energy (DOE) .
We also interviewed officials from the OMB, GAO, and DOE OIG to obtain information related
to use of performance-based contracting within the Federal government.

To determine whether EPA paid award fees to  contractors only for outstanding performance, we
reviewed award fee determinations and award fee plans for six RACs contracts and 13 other
award fee contracts included in our two random samples of cost-type contracts.  We also
reviewed EPA's Contract Management Manual to identify EPA's current award fee policy. In
addition, we interviewed EPA contracting officials to identify current trends in the use of award
fee contacts and reasons for these trends.

Methodology for Review of RACs Activities

To determine the number of completion form WAs issued under RACs, we performed a review
of all WAs issued under active RACs contracts at the time of our audit.  To assess whether RAC
WA tasks could be issued as completion form or performance based WAs, we reviewed tasks
included in WAs issued under six RACs and interviewed regional POs and applicable
contracting officers (CO).  We also sought guidance from Agency management and
representatives from the OGC-IGD on funding rules applicable to completion form WAs.

In order to address OMB's concerns related to RACs contractors' indirect rates, we interviewed
the RACs Placement Contracting Officer (PCO), conferred with OIG contract audit staff on
generic and contractor  specific indirect rate issues, and reviewed contract preaward files for rate
evaluations performed  by the Defense Contract Audit Agency (DCAA), the EPA OIG, and/or the
EPA Washington Cost Advisory office for both prime and subcontractors. We also reviewed
Pre/Post Negotiation Memorandums in preaward files to evaluate EPA's negotiation of indirect
rates.

To determine why RACs were awarded as A&E contracts, we obtained information from OAM,
reviewed Superfund statutory and FAR regulatory requirements.  We also obtained legal advice
from OGC-IGD related to applicable Superfund statutory requirements.  We further determined
whether other Federal agencies were contracting for similar work, as that obtained under RACs,
using other contracting mechanisms.

To determine if RACs  contained: (1) a subcontract ceiling and (2) a limitation on use of
completion form WAs  for subcontract work, we interviewed the PCO and reviewed relevant
contract language pertaining to subcontract pool requirements and limitations.  We also reviewed
the RACs User's Guide, an EPA guidance document for RACs management.

To assess the feasibility of using contract regional crossover authority as a means of increasing

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competition, we reviewed the RACs User's Guide,  interviewed knowledgeable Agency
personnel at the EPA Headquarters and regional levels, obtained advice from the OGC-IGD, and
reviewed any pertinent contract file documentation relative to the advantages, disadvantages, and
costs of regional crossovers.

Our audit was conducted in accordance with Government Auditing Standards (1994 Revision),
issued by the  Comptroller General of the United States.  Our audit samples were selected from
CIS contract information provided to us by OAM. In addition, we analyzed information from the
CIS database  to identify certain trends in EPA contracting.  We did not evaluate the controls over
CIS or the quality and integrity of data within this system. As a result, we cannot attest to the
accuracy of the data in the system.  However, the Agency uses this data to report contracting
accomplishments and, as such, the data was relied upon for sample selection and analysis of
contract types.

Although specific internal controls may have been addressed during this review of EPA
contracting, an evaluation of internal controls over EPA contracting activities was not an
objective of this audit. The audit scope was limited to OMB's concerns relative to EPA
contracting and any control deficiencies identified were incidental to this purpose. One other
issue related to potential excess contract capacity in EPA contracts came to our attention during
the audit which we believe warrants further audit work but which could not be addressed during
this review due to time constraints.  This issue has been proposed for future audit work.

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                                   CHAPTER 2

   INDEPENDENT GOVERNMENT COST ESTIMATES NOT ALWAYS
          PROPERLY PREPARED OR EFFECTIVELY USED FOR
                     NEGOTIATING CONTRACT COSTS

EPA has made some progress in correcting past problems related to IGCEs by issuing IGCE
guidance and requiring IGCEs for significant contract actions; but, improvements are still
needed. For the 26 contracts and 86 WAs reviewed, IGCEs generally were prepared where
required by EPA policy.  However, IGCEs were not always adequately prepared, effectively used
to analyze proposed contract costs, or to establish prenegotiation objectives. For some LOE
contracts reviewed, the IGCEs seemed to be based on available funding rather than an actual
estimated cost to perform the specified WA tasks. In two contract Divisions, EPA provided the
contractor with the estimated total labor hours and the contractor prepared its proposal based  on
these hours. Officials believed that, when buying LOE, furnishing contractors with total labor
hours did not compromise cost negotiations. EPA subsequently negotiated the labor mix with
each contractor. In our opinion, these practices reduced the effectiveness of the IGCE as a cost
analysis mechanism.

The quality of the IGCEs reviewed also varied, depending on the specificity of the work
requirements and the experience of the WAMs and POs. In some instances, usually involving
LOE contracts, IGCEs were not costed out by WA task. Also, WAs were often amended or tasks
were carried over from one WA to another or from one contract to another.  These conditions
prevented meaningful comparisons of contractors' proposals to IGCEs, accumulation of
historical cost data, and evaluation of IGCEs to final WA costs.  EPA program offices have not
evaluated past IGCEs to identify needed improvements or created a database of historical
contract workloads and related costs for the preparation of current and future IGCEs. In addition,
some POs and other program staff that oversee contracts had not received adequate training on
IGCE preparation.  As a result, program staffs continue to rely too heavily on contractors'
estimates, often choosing to award contracts and  issue WAs at amounts proposed by contractors
rather than at EPA estimated amounts.

BACKGROUND

An IGCE is a detailed estimate of the cost to the  Government for services and/or supplies to be
acquired.  In the past, both internal and  external groups criticized the Agency for poor cost
estimating practices and procedures. The Administrator's 1992  Standing Committee on Contract
Management recommended that EPA pursue a more structured approach to IGCE development.
OMB stated in a February 1997 meeting that EPA's high use of cost-reimbursable, LOE type
contracts caused them to question EPA's ability to estimate its needs.  In a March 3, 1993
memorandum, EPA's Acting Director, OAM, required that IGCEs be prepared and submitted
with all contract actions greater than $25,000. Contract actions were defined as new contract
awards, modifications to increase the scope of work of contracts, work assignments  and delivery

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orders.

In June 1994, EPA issued specific guidance for preparation of IGCEs. The guidance provided for
two major types of cost estimates, but stated that the Agency "wants the bottoms up type or
detailed IGCE for all work assignments and delivery orders." This type of estimate presumes the
total effort can be separated into a work breakdown structure (WBS), and pricing can be applied
to each element such as direct labor, overhead, travel, equipment, other direct costs and general
and administrative expenses. A WBS identifies each major task and divides them into small
subtasks.  This division into small subtasks makes it easier to identify the work required, to
determine required staffing needs, to schedule the work and to estimate the initial cost for the
desired output. It permits the cost estimator to assign quantities such as staff-hours, disciplines,
labor category levels, number of trips, duration of trips, equipment, etc. The WBS is described
as an important tool not only for identifying activities, deliverables, and milestones but also for
providing a baseline to track actual versus estimated costs and identify potential cost overruns
and underruns.

The guide emphasizes that WAMs/POs should be careful about letting external forces, such as
time constraints or funding limits influence IGCEs. A good IGCE can be used to prepare the
budget, prioritize areas of concern and monitor work in progress. IGCEs  should be used as a
negotiating tool toward achieving the best priced work for the Government.

IGCES WERE NOT ALWAYS USED AS A NEGOTIATING TOOL

The Standing Committee's 1992 report stated that cost negotiations were  critical at the WA
level. The committee stated that EPA should use IGCEs to analyze contractor costs and that the
effectiveness of IGCEs would be dependent, in part, on their usefulness in negotiations and cost
analysis.

At each of the four EPA contracting offices visited [Cincinnati, RTF, and Washington (two
offices)], IGCEs for non-Superfund, LOE type contracts were not always  used to negotiate WA
costs. For LOE contracts, IGCEs seemed to be used to project available funding for the fiscal
period rather than to actually estimate the costs to complete tasks in the SOWs. In such cases
IGCEs serve little purpose.  WAMs indicated that LOE WAs were principally a purchase of labor
hours. As a result, little effort was made to develop detailed IGCEs from which contract costs
could be negotiated. LOE hours were provided to contractors with the labor categories and labor
mix determined during contract negotiations. In some instances, WAMs relied more heavily on
contractor proposals than their own estimates. Of the 87 contract actions  reviewed at four
offices, the contractors' proposals equaled the contract action amounts in  62 instances (80
percent).  In contrast, the Washington awarded RACs Superfund contracts and other regionally
administered Superfund contract files, contained evidence that WA costs were generally
negotiated.

At Cincinnati, there were no indications from the files, or discussions with WAMs and POs,  that

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EPA negotiated WAs with contractors. In all cases, the amounts proposed by the contractor were
accepted by EPA. In 13 of 20 contract actions reviewed at Cincinnati, the dollar value of the
issued WA/DOs was higher than the related IGCE.  The difference between the IGCE and the
amounts for these 13 actions ranged from one to 224 percent.  In ten instances, the difference
exceeded 10 percent or more2.

For three of five Cincinnati contracts reviewed, final progress reports  for WAs contained
statements that". . .  all tasks will be completed under subsequent WA."  This statement
indicated that the IGCE was prepared to fund a particular period or fiscal year, not the tasks
themselves. In another WA, the labor hours ordered were almost identical to hours included in
the previous WA (860 hours versus 870 in the current).  This suggested that labor hours and
available funding were the basis of the IGCE, not the tasks to be performed.  IGCEs based on
available funding rather than work to be performed defeats the purpose of the estimates as a cost
analysis tool.

The usual practice at RTF was for program staff to provide the contractor with the number of
estimated labor hours used in preparing the IGCE. The contractor then prepared his proposal
based upon EPA's estimate of labor needed. In our opinion, this practice compromises the IGCE
as an independent estimate since the contractor is essentially provided information on fund
availability. As a result, contractor proposals tended to be based on available funding rather than
the actual cost to perform the tasks in the  SOW. Contracting officials stated that since the
vehicle type was LOE, where essentially the Agency is just buying hours, they believed it was
appropriate to provide the hours to the contractor. RTF contract officials would then negotiate
the required labor mix that would result in the hours budgeted. In 14  of 24 contract actions
reviewed, the contractor's proposed amounts were accepted without negotiation. In ten of the 14
cases, the contractor's proposal and the WA amounts exceeded the IGCE.  The differences for
these ten contract actions ranged from 1 percent to 197 percent.  For four of the ten, the
difference substantially exceeded 10 percent.

RACs and other Washington Superfund contract awards reflected more evidence of negotiation
of WA amounts than found at Cincinnati and RTF.  However, for the Washington contracts, the
contractors' proposed amounts were relied upon more often than EPA cost estimates.  The issued
amounts for Washington WAs and WA amendments, were almost always the same as the
amount estimated in the contractor's work plan. The contractor's proposed amounts were
accepted in 28 of 39 contract actions reviewed. We were able to locate the IGCEs for 21 of the
28 contract actions.  EPA personnel did not  know whether the IGCEs  had been prepared for the
other seven WAs. For the 21 IGCEs that were available, the contractors' proposals were greater
than EPA's estimates in nine instances, lower in 11  instances and equal in one instance. The
differences for the nine WAs that exceeded EPA's estimates ranged from 12 to 89 percent.  Eight
       2  Some contract offices had an unwritten policy that a 10 percent difference between the
IGCE and WA amount was significant and required a written justification. However, no
justifications were found for many of the significant differences identified in this review.

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of the WAs substantially exceeded the IGCE.

The true measure of the quality of an IGCE would be final actual costs.  Matching the work
completed for a WA and all cost associated with a project was not possible, in part, because
projects may be started under one WA and continued under a subsequent WA.  For one
Washington contract reviewed, the contractor performed tasks such as updating reports,
preparing speakers' kits and briefing packages, database maintenance and planning conferences.
For three WAs reviewed under this contract, the SOWs did not specify any estimated quantities
of deliverables and represented a continuation of work started under three predecessor WAs. For
one WA, two predecessor WAs were found. Amendments were used to add additional dollars to
the WAs.  The dollar value of each of the amendments coincided with the amounts proposed by
the contractor in the work plans.

Only three of the RACs WAs were issued at the  same amount as the contractor's proposal.
Contract files generally demonstrated PO/WAM negotiation of WA costs for work to be
performed. Isolated instances were identified where contractors' estimates were evidently valued
more heavily than the IGCE.  One RACs IGCE stated, as an explanation for accepting the
contractor's proposed costs: "The basic difference is that the IGCE  did not consider [the
contractor's] experience over the past eight years on the ARCS [Alternative Remedial Contract
Services] contract in developing the estimate for this task." Based on their technical review, the
PO and WAM recommended acceptance of the contractor's proposed cost without negotiation.
RAC contract managers stated that the IGCE process was inherently flawed because of the lack
of historical cost information.

IGCES LACKED DETAIL NECESSARY FOR EFFECTIVE COST ANALYSIS

In 1992, the Standing Committee concluded that EPA's contract negotiations often appeared to
be mathematical calculations rather than detailed justifications of specific costs by activity.
Section 3-2 of EPA's June 1994 Guide for Preparing Independent Government Cost Estimates
states: "The Agency wants the bottoms-up  type of detailed IGCE for all  work assignments and
delivery orders." OSWER Directive 9202.1-12 further states: "...[cost] estimates must, at a
minimum, be broken out by task and subtask as outlined in the  statement of work (SOW)."

Detailed IGCEs were prepared for only 27  of 45  WAs reviewed that were issued under the RACs
and Washington Superfund contracts in our sample. Also, WA IGCEs for the four non-
Superfund Washington contracts reviewed did not clearly define tasks or the estimated cost for
each task.  The WAs  under these contracts were generally for the purchase of a wide variety of
tasks at a set amount of labor hours without any correlation of the labor  hours to specific tasks.
Program officials believed that such detail was unnecessary for LOE contract actions. Without
clearly defined tasks and related cost estimates, the IGCE is rendered useless for evaluating
contractor proposals, identifying specific cost differences for negotiation purposes, and
subsequently tracking contractor progress on individual tasks. It also prevents any accumulation
of individual task costs for historical purposes. Program officials perceived that an LOE contract
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for the purchase of labor hours, rather than complete tasks, did not require a detailed cost analysis
in the IGCE.

The files for only one contract reviewed at RTF included detailed IGCEs for WAs. IGCEs
prepared for WAs issued under the other five RTF contracts did not break out costs by WA task.
In some cases, documentation in the files indicated that more detailed information may have been
used to develop the estimates; however, we did not find file documentation showing the
estimated hours necessary to complete each WA task.  The IGCEs only included information
such as the estimated hours by labor category and other direct costs. This lack of detailed cost
information made it impossible for us, or a CO attempting negotiations, to evaluate reasons for
differences between the contractor proposed costs and the IGCE. Differences between IGCEs
reviewed and the dollar value of related WAs varied from as little as 1 percent to as much as 197
percent more than the Government's estimate.

Cincinnati IGCEs were also generally not costed out by task.  Instead, as  found at RTF, the
IGCEs were based upon total labor hours needed and other direct costs (ODC). In some cases, a
detailed breakdown was provided for ODCs. However, in other cases, the ODC amount in the
IGCE was simply a percentage of total labor dollars.

For Washington contracts, 9 of 27 WAs reviewed had IGCEs that costed individual tasks. On
four  of nine Washington contracts, it appeared EPA was simply funding hours to complete tasks
already started or to start future tasks. This practice increases the potential for contractors to
continuously bill for hours without being held accountable for completion of individual tasks, or
providing an end product.  Also, the lack of detail in the IGCEs created the appearance that EPA
program staff, while complying with EPA requirements to prepare IGCEs, gave little
consideration to the purpose and useability of the IGCEs.  When properly prepared and
effectively used, IGCEs are a tool that contract and program officials can use to negotiate costs
and monitor contractor work and related charges. Further, better definition of tasks and
estimation of costs will permit greater use of more efficient contract mechanisms such as
completion form, fixed-price, or PBSC.

RACS IGCE PROCESS NEEDS IMPROVEMENT

RAC files  documented significant efforts by program and contract management personnel to
estimate costs and use the results in contract and WA negotiations;  however, improvements are
still needed in the RACs IGCE process.  Significant variances existed between some
contract/WA IGCEs and contractor estimates and final contract dollar values.  Some of the
variances were due to underestimating the tasks required to cleanup sites. Other variances were
attributed to a lack of firm negotiation of contract costs. In addition, a contractor substantially
prepared a WA cost estimate for the Government in one region and an inexperienced summer
employee prepared an IGCE in another region.

RACs had been awarded in six regions at the time of this review.  Each region prepared a single
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IGCE for multiple contract awards that included all the regions' needs for remediation services.
Regions 1, 6, and 7 had awarded all of their RACs at the time of this review. Cumulative
contract MPVs for these three regions exceeded their IGCEs by 26 to 32 percent. Regions 3, 5,
and 8 had not awarded all of their planned contracts and, therefore, we could not effectively
evaluate the regional IGCEs in relation to total contract award amounts.  However, Region 5 had
already awarded two RACs that exceeded the Region's IGCE by 12 percent with a third contract
in the preaward phase. Because OAM officials indicated that they had worked to reduce the
capacity of the RACs awarded thus far, we attributed the variance, in part, to EPA's emphasis on
the technical proposals for the contracts and less emphasis on negotiating the contract costs. The
Brooks Act requires EPA to consider technical qualifications over costs when awarding A&E
contracts such as the RACs. However, once the highest qualified proposals have been identified,
price reasonableness must be addressed in the negotiation process.

Of 18 WAs reviewed under six RACs, the final dollar value for ten WAs were substantially
higher than the applicable IGCE.  For instance, in Region 6, two WAs were issued for amounts
226 percent and 253  percent higher than the initial estimates. Regional officials stated that the
differences between IGCEs and WA amounts were due to inadequate consideration of site
complexities and all tasks that would need to be performed to clean up the sites.

IGCEs for five of 18 WAs could not be evaluated. The WAs had been issued for work plan
development and the final WA costs had not been negotiated. The dollar amount for the four
remaining WAs reviewed were negotiated close to amounts in the IGCEs.

In two instances, regions allowed persons to prepare IGCEs that were not qualified due to a
potential conflict of interest and a lack of experience.  In one region, an ARCS contractor
prepared an IGCE for a river study which was subsequently used in an IGCE for a RACs WA.
The ARCS contractor prepared the cost estimate for follow on work as part  of an ARCS WA
requirement. Subsequently, the PO used the ARCS's cost estimate as the IGCE for a health and
ecological risk assessment under a RACs WA. The PO only modified the ARCS contractor's
estimate for additional tasks not included in the contractor's original estimate. We were told by
EPA contract managers that it was common for development of an IGCE to be included in WA
tasks such as remedial design; however, these tasks were not design related. We do not believe it
is in the best interest of the Government to have contractors preparing the Government's cost
estimate for contracted services. Contractors would not have the same interest in cost control  as
a Government representative.  In addition, this situation fosters a continuing dependence on
contractor involvement in development of SOWs and related costs at EPA.

Another region permitted an inexperienced temporary summer employee to  prepare an IGCE for
a RACs WA related to EPA's Brownsfield initiative. The employee was not familiar with the
Brownsfield program and had no related historical costs to rely upon. As a result, differences
between the IGCE and the contractor's proposals for individual tasks within the WA ranged from
122 to 900 percent. The overall estimate was $23,265 as compared to the WA maximum value
of $75,841; 226 percent higher than the IGCE.  Both the PO and WAM reviewed and approved
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the IGCE without detecting any problems in the cost analysis. However, when we discussed this
with Regional personnel, they stated that the summer employee did not consider several items
necessary for completion of the WA tasks. They further stated that the availability of historical
cost data would have prevented some of the problems.

NO PROCESS FOR ACCUMULATING HISTORICAL CONTRACT COSTS OR
EVALUATING IGCES

In 1992, the Standing Committee stated that the absence of good supportive data and guidance,
including pricing techniques and current market costs, and a lack of qualified personnel caused
the Agency's difficulties in preparing IGCEs. EPA has still not developed historical data for
contract services and related costs and has no procedure for evaluating prior IGCEs to identify
deficiencies and needed improvements.  Historical contract workloads and related cost data were
not available or were not used to develop IGCEs at any of the EPA contracting offices or regions
visited.  IGCEs had been prepared for the expiring ARCS and Enforcement Support Services
(ESS) Superfund contracts; however, we identified very little documentation that the estimates
were being evaluated and actual cost data accumulated, as part of a centralized or regional
database, for future use in preparing IGCEs for similar or follow-on contracts.  Most WAMs and
POs interviewed stated that current IGCEs were primarily based on the experience of the
individual preparing the estimate.  The Standing Committee documented the inherent danger in
this practice in 1992. The Committee warned that an inexperienced WAM could easily accept
whatever costs are offered by the contractor.  As previously shown, EPA WAMs frequently
accepted the contractors' proposed costs in spite of what their estimates may have reflected.  The
Standing Committee reported that the evaluation of IGCEs and accumulation of historical
workload and cost data was a program responsibility and should be done on a program specific
basis.

At the regional level, we received a variety of comments from RACs  contract managers
concerning creation, existence and use of database information for IGCEs. One PO said the
disparity in IGCEs is due to EPA not taking everything into consideration or not taking history
into account.  A lot of emphasis was placed on the LOE aspect of the contracts.  One RACs CO
stated:

       These are basically LOE contracts because of the changing nature of our work.
       As work progresses in a project, additional data and information are obtained
       which may not have been known prior to the start of work.  It is not possible to
       know exactly what will be involved in step 20 before  step one begins.

The CO further stated that WAMs have a difficult job to do, and do not have adequate training or
the necessary tools to do cost estimates.

       EPA has not made the type of commitment, as other Federal agencies, to develop,
       hire, and train estimating people. Apparently, other Agencies have cost
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       estimators, and provide them resources, databases of historical data, libraries of
       information, etc. to do their job. EPA WAMs do not have that type of
       information, because EPA has not made that type of commitment.

This same sentiment was expressed by another CO in a different region.  He said, WAMs have
some historical data, such as "scoper notes and information from the Corps of Engineers;
however, there is not enough information available to produce high quality IGCEs."

The COE is a Federal agency that contracts for hazardous waste remediation. In a visit to COE
Headquarters, we learned that the COE's dominant concern in management of remediation
contracts was cost control. All COs at the COE are required to be cost negotiators before they
can be a CO.  The COE also maintains a historical database on contract services and costs. This
database, which is available to other Agencies, contains project costs that are continually created
and updated by COE field contract managers.  Even though EPA has contracted for similar
Superfund work since 1981,  little of this data has been maintained in a format that would make it
useful for future contract actions. The Agency's ability to accumulate such costs is  also adversely
impacted by the manner in which work is ordered under EPA's Superfund contracts.  EPA uses
WAs, where multiple amendments make the WA a long-term contract vehicle, for a multitude of
tasks and where multiple WAs may be used to order tasks for one project. By contrast, the COE
uses completion form delivery orders where tasks are tied to specific projects with specific
deliverables.

EPA officials reported that a database has been started for the RACs contracts.  Contractors are
required to submit actual cost data to EPA Headquarters that will be accumulated in the database
along with workload statistics. We were also told that the Superfund program has a database for
its emergency response contract users and one region reported using an Interagency Agreement
with the Bureau of Reclamation for assistance in preparation of IGCEs for complex remedial
designs. WAMs and POs  did not report use of a database or historical workload information in
preparing any of the IGCEs for the 86 WAs we reviewed.

BETTER SOWS RESULT IN BETTER IGCES

Generally, where even informal historical information was used, or SOWs were well defined, the
IGCEs were more detailed and more apt to be used as negotiating tools.  For example, the WAs
for one RTF contract were written in completion form, with defined deliverables and an  end
product. Although the contractor's proposal was significantly greater than EPA's IGCE, the final
WA amount was close to the Agency's cost estimate.  At Cincinnati, the IGCEs were better for
two of the contracts that had more defined tasks and related end products. The first, a Superfund
contract, involved multi-year funding that permitted the WAM to  estimate costs for the entire
project. The second, a peer review contract, involved tasks such as reviews and meetings that
were started and completed within a one year period.  Washington awarded ARCS  and
Enforcement Support Services (ESS) contracts also tended to have a greater level of detail in
their IGCEs and documented evidence of negotiations with the contractors.  WA tasks under
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Superfund contracts, in general, seemed to be more defined than other program WAs and the cost
estimates were usually based on work to be done rather than the purchase of labor hours.

A member of the EPA task force that developed the 1994 IGCE guidance stated that well defined
SOWs were necessary for the preparation of good IGCEs. This means defining tasks and
estimating costs at the task level regardless of whether or not the contract is cost-reimbursable.
While EPA has recognized the need for IGCEs, improvements in the process are necessary to
ensure that IGCEs are properly prepared and  serve as a meaningful cost analysis tool.

RECOMMENDATIONS

We recommend that the Acting Assistant  Administrator for Administration and Resources
Management in coordination with other appropriate senior Agency managers:

2-1    Obtain cost estimator training for POs and WAMs similar to that received by COE
       contract managers.  Require CO training related to the evaluation and effective use of
       IGCEs in contract negotiations.

2-2    Emphasize to program staff that IGCEs should, include a detailed cost analysis of each
       task and/or subtask to be performed under a contract or WA; be used as a basis for
       effective cost negotiations;  and, be used as a mechanism for tracking actual costs for
       specific work for all contract types, including LOE.

2-3    Instruct POs and COs not to accept IGCEs that do not include estimated costs for
       individual contract or WA tasks. Emphasize to COs that IGCEs are a cost analysis tool
       that should be effectively utilized during contract  and WA  negotiations.

2-4    Develop processes to evaluate IGCEs and accumulate historical contract workload and
       related cost information in a database format. Form focus groups, that include program
       staff, to identify existing impediments to developing historical cost databases on an
       individual program basis.

2-5    Instruct program staff to seek available cost information from other Federal agencies,
       such as the COE, or private entities that are contracting for similar work when preparing
       IGCEs.

2-6    Develop model SOWs to determine if ranges can be established for contingencies, or
       information gathered to clarify and define contract tasks to resolve uncertainties involved
       in work currently performed under LOE contracts.

2-7    Instruct POs and WAMs not to use contractors and inexperienced employees to prepare
       Government cost estimates. Require that program personnel preparing IGCEs have the
       necessary experience and training  to ensure that accurate, detailed cost estimates are
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       developed.

AGENCY COMMENTS AND OIG EVALUATION

OARM believes EPA has come a long way in improving the use of IGCEs over several years ago
when IGCEs were rarely done. However, OARM agreed that improvements were still needed to
ensure the development of good, realistic IGCEs.

O ARM's response did not clearly address many of the overall conclusions and recommendations
presented in Chapter 2. OARM did express disagreement with several specific statements or
conclusions and partially disagreed with one recommendation. To resolve the recommendations
presented in the final report, OARM needs to provide specific actions to be taken on each
recommendation with projected milestone dates for completion.

A summary of OARM's comments on Chapter 2's findings and recommendations, along with our
evaluation of these comments, are presented in Appendix II.
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                                    CHAPTER 3

                   EPA HAS NOT MADE OPTIMAL USE  OF
                    MORE EFFICIENT CONTRACT TYPES

EPA has not made optimal use of contract types that are results-oriented and provide better cost
control. Instead, the Agency continues to rely extensively on cost-reimbursable LOE contracts
that essentially buy labor hours, not results, and places the burden of cost control on the
Government. While we recognize that LOE cost type contracts may be the most appropriate
contracting mechanism in certain situations, this review identified substantial opportunities for
the Agency to issue more completion,  fixed-priced, and performance-based contracts and WAs3.
EPA has made some progress toward completion form, performance-based contracting.
However, the Agency's cultural preference for LOE contracts, lack of understanding of
alternative contracting mechanisms, inability to define its needs, and broad SOWs that include
multitudes of varying tasks, has prevented a more complete transition from LOE cost-type
contracts to more efficient, cost-effective contract mechanisms. As a result, the Agency's
contracts were not always oriented toward obtaining an end-product or result and place the
majority of risk for performance on the Agency.  The Agency may also be paying excessive costs
for services that could be procured at less cost under firmer contract pricing arrangements.

BACKGROUND

Contract types are grouped into two broad categories, fixed-price and cost-reimbursement.
Under FAR requirements, fixed-price contracts are preferred over cost-reimbursable contracts
because of the cost control and less performance risk assumed by the Government. Under a firm-
fixed-price  contract, the contractor has full responsibility for performance, cost control, and
profit. However, under a cost-reimbursable contract, the contractor is paid for all allowable costs
within the limit specified in the contract. The contractor assumes limited risk for performance
and has little incentive to control cost.  For these reasons, the FAR provides that cost-
reimbursable contracts should only be  used when uncertainties involved with performance do not
permit costs to be estimated with sufficient accuracy to use any of the fixed-price type contracts.

The vast majority of EPA's contract dollars are awarded as cost-reimbursable, LOE contracts.
These contracts are generally one of two types, cost-plus-fixed-fee (CPFF) or cost-plus-award
fee (CPAF). In FY 1996, these two types of cost-reimbursable contracts represented 86 percent
($11.2 billion) of the total value of all EPA contracts.  Cost-reimbursable contracts can also be
one of two forms, completion or term.  Completion form contracts describe the scope of work as
       3 Our audit included reviews of varying types of instruments used to assign tasks to
contractors in our samples. These included WAs, DOs, and TOs. We recognize there are
technical differences between these instruments; however, for the purposes of this audit we refer
to all of these instruments as WAs unless we are specifically addressing one type.

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a clearly defined task or job, with a specific end product required.  If the contractor does not
complete the work within the estimated cost, the Government may require more effort without an
increase in fee, provided the Government increases the estimated cost. Term form (or LOE)
describes the work in general terms and obligates the contractor to devote a specified level of
effort for a stated period of time.  At the completion of the performance period, the contractor is
paid cost and fee if performance is considered satisfactory.  Additional work is considered a new
acquisition.

Another type of contract available to the Government is the indefinite delivery/indefinite quantity
(IDIQ) contract. These contracts are appropriate when the Government cannot specify, above an
established minimum, an exact quantity of supplies or services that will be needed. Orders
(referred to as delivery or task orders) are placed against the contract after the award. These
individual orders may be priced on a fixed-price, fixed-rate per item or service, fixed-rate per
labor hour, or on a cost-reimbursable basis.

                         Policy on Performance-Based Contracting

Because of shrinking Federal resources, OMB has been emphasizing to Federal agencies the need
to move from cost-reimbursable contracts to firmer priced, more performance oriented
contracting that better ensures the receipt of quality goods and services at the best price. As a
result, OMB's Office of Federal Procurement Policy (OFPP) Policy Letter 91-2, issued April 9,
1991, required the use of performance-based contracting  methods to the maximum practicable
extent when acquiring services. The requirements of this letter were subsequently incorporated
into the FAR on August 22, 1997, as the policy for the Government's acquisition of services
through the use of performance-based contracting methods.

In April 1996, OMB/OFPP issued an interim guidebook to assist agencies in implementing
performance-based service contracts (PBSC). According to the Guide, a PBSC "emphasizes that
all aspects of an acquisition be structured around the purpose of the work to be performed as
opposed to the manner in which the work is to be performed ..."  Further, a PBSC must have
three essential elements:  (1) a performance work statement (PWS) which describes the work in
terms of objective, measurable performance standards; (2) a quality assurance plan (QAP) which
measures contractor performance in accordance with established performance measures; and (3)
positive and/or negative incentives which are directly related to the results of the QAP
measurements. The OFPP Guide encourages the use of fixed-price PBSCs; however the use of
cost-reimbursable and other contract types, using PBSC criteria, is not precluded.   Based on our
conversations with OFPP officials, a PBSC may contain subjective performance measures when
objective measures cannot be developed.  Such a contract would be considered PBSC if it also
contained a QAP and incentives/disincentives.
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TASKS CONDUCTED UNDER COST-REIMBURSABLE LOE CONTRACTS COULD
BE AWARDED UNDER CONTRACT TYPES MORE FAVORABLE TO THE
GOVERNMENT

We reviewed 264 cost-reimbursable contracts (MPV $2.8 billion) and 86 WAs (MPV $39
million) issued under these contracts to determine whether the tasks specified in the SOWs could
be awarded under cost-reimbursable completion, fixed-price, and/or performance-based (cost or
fixed-price) arrangements. Generally, the contract SOWs were written in general terms and
covered such a wide array of services that they could not be awarded in their entirety and current
form as completion or fixed-priced contracts. However, many tasks performed under these
contracts could be well defined and performed under completion form and fixed-price
mechanisms. The way EPA wrote the contracts in broad terms to cover a smorgasbord of services
precluded the use of completion form or other alternative mechanisms for the contract as a
whole.  EPA must better define its needs in the  SOWs and break down SOWs into related tasks
and services to facilitate the award of entire contracts as completion or fixed-price.

Almost all WAs we reviewed contained one  or more tasks that were suited to issuance as
completion, fixed-price, or performance-based efforts.  Some of the WAs we reviewed already
included well-defined SOWs and the entire WA could have been issued as completion or fixed-
price if those options were available. However,  except for RACs, the LOE contracts we
reviewed essentially required that WAs be issued as LOE. Of the 86 WAs reviewed, we
identified specific tasks or subtasks in (see Appendix IV for a list of WAs reviewed):

•      70s WAs that could be issued, at a minimum, as completion form efforts, if procured
       under contracts that permitted this type contract action.

•      74 WAs that were suited for issuance under fixed-price arrangements.

•      84 WAs that could be issued as performance-based efforts. This includes tasks that
       would require the use of subjective performance measures under OMB's expanded
       definition of PBSC.
Potential for Completion Form Contracting
       4 Consists of a judgmental sample of six RACs and a random sample of 20 other contracts
including 16 cost-reimbursable LOE, two IDIQ delivery order, one IDIQ task order, and one
IDIQ time and materials type contracts.

       5 This does not include 14 of the total 86 WAs reviewed that were actually issued as
completion form DOs.

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                               Response Action Contracts

RACs were awarded with the potential for 25 to 36 percent of the maximum potential value of
the regional contracts to be issued under completion form WAs; however, regional COs have not
made widespread use of WAs in this form. Although the mechanism was included in the
contracts, the RACs structure contained little incentive to induce program staff to use this more
efficient contract mechanism. Neither the contract documents nor the RACs management
guidance required minimum usage of the completion form. All base contract use was tied to
term form dollars. Regional contract managers believed the nature of Superfund work did not
always permit them to define their needs in the format necessary for completion form. Also,
completion form WAs had to be fully funded upon issuance and contract managers were
concerned that program budgets would not permit widespread issuance of large dollar, fully
funded WAs. As a result, only eight of 148 WAs, or $843,323 out of $33,892,890 in total dollar
value, had been issued as completion form on ten RACs nationwide.

Our initial review  of 18 randomly selected WAs, issued under our sample of six RACs, indicated
that eight of the WAs included activities identified by RACs COs/POs as the type of activities
with potential for completion form contracting. We subsequently concluded that all  18 of the
WAs contained some tasks which could be issued as completion form. This conclusion was
primarily based on extensive EPA experience in the work performed, the recurring nature of the
work, and the fact that the SOWs for some term WAs reviewed included well-defined
requirements/specifications, for specific end-products, that met completion form criteria. For
example, a Region 6 remedial action WA included the task to develop and update the site plans.
The WA SOW clearly defined the end products including the site plans, gave exact specifications
for installation and development often wells and construction of a 6-foot fence topped with barb
wire, and included a requirement for 48 hours of continuous testing of the well pumps.

Four of six regions (5, 6, 7, and 8) with active RACs had issued completion form WAs.  With the
exception of Region 7, all had been for contractor mobilization.  Some regional  COs and POs
also believed completion form WAs could be effectively utilized for activities such as remedial
actions, remedial designs, remedial investigation/feasibility studies and Brownfield projects;
however, none of the regions had issued completion form WAs for these tasks.

In addition to the completion form mobilization WA, the Region 7 CO had also  issued a site-
specific, risk assessment completion form WA for $293,710. According to the CO, the decision
to issue this WA as completion form was based upon the WAM's belief that the work was
sufficiently well defined to develop a good estimate and scope of work and effectively price the
project and deliverables.  Regions 1  and 8 had also issued risk assessment WAs, but these WAs
were issued as term form or LOE. According to the Region 8 CO, they had originally issued an
ecological risk assessment WA as completion form, but the WAM believed that all the tasks
except the contractor's work plan should be term form. The WA was  subsequently revised to
term form to prevent having a WA with components of both term and completion form.  The
WAM stated, that  at the time, he did not believe he could sufficiently define the WA scope of
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work to meet completion form requirements.  However, he said he did not understand the
completion form mechanism as well then as he does now. The Region 8 CO stated the difficulty
with completion form is the requirement for a well-defined scope and an identifiable end
product. Other COs also stated that the potential for numerous change orders under completion
form can become an administrative burden. Therefore, many contract managers may be reluctant
to issue completion form WAs. However, Region 7 has proven that there are some RACs
technical support tasks that can be sufficiently well defined and cost estimated, to make
completion form an appropriate contracting mechanism for such efforts.

Although encouraged by RACs guidance to use the completion form mechanism for at least
contractor mobilization, Regions 1 and 3 had not issued any completion form WAs.  When
questioned why the Region 1 mobilization WAs had not been issued as completion form,  the
Region 1 CO stated the former RACs PCO in EPA Headquarters had issued their mobilization
WA as part of the contract award.  According to the current RACs PCO, Region 1 funded the
contract for the first year, totally as term form. OAM and Region 1 personnel subsequently
decided it would be too time consuming to re-allocate such a small amount of funds to the
completion form segment of the contracts.  Region 3 awarded its RACs through a regional PCO.
The Region 3 CO told us that at the time he did not think it mattered which contract mechanisms
were used for WAs.

Regional COs and POs for RACs believed events, such as Potential Responsible Party (PRP)
actions and site uncertainties, in some instances, would not allow for well-defined SOWs  and
reasonably accurate cost estimates.  However, for the selected RACs WAs reviewed, the SOWs
were usually well defined. Further, many of the tasks being performed under RACs were
previously performed under ARCS and its predecessor, the Remedial Engineering and
Management (REM) contracts, which were initially awarded in  1981. These contracts represent
16 years of EPA experience in contracting for Superfund remedial actions. The  historical,
recurring nature of this work should permit Agency personnel to define task requirements and
reasonably estimate costs despite potential uncertainties. Therefore, the Superfund program
should provide EPA with maximum opportunities to utilize completion form, as well as fixed-
price type  contracts.

Based on our file reviews and discussions with RACs contract managers and program staff,
Agency personnel are opting not to utilize completion form WAs, in part, because of the comfort
level they have obtained with purchasing hours, rather than products or results, under the more
familiar term form WAs. Also, there is a lack of understanding of the completion form
mechanism among program and contract managers. For instance, a file communication from one
regional CO stated, "I don't like completion form work assignments because I don't understand
them. However, it sounds like the benefit is the same as term form if used correctly." This
statement emphasizes the need to train contract and program managers in alternative contracting
forms and initiate regional performance goals designed to increase completion form usage.

In response to requests from OMB to increase performance-based contracting, Agency
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management extolled the completion form component of RACs as demonstrating its commitment
to OMB's performance-based contracting strategy. Further, in documents provided to OMB,
EPA acknowledged that completion form offers advantages to the Government. However, EPA
management has not actively pursued issuance of more completion form WAs under RACs to
support its commitment claim or ensure advantages are realized.

                                  Other EPA Contracts

All 20 of the other contracts we reviewed contained individual tasks that we concluded could be
awarded as completion efforts.  Specifically, of the 68 randomly selected WAs reviewed under
these contracts, 14 were actually awarded as completion form DOs. An additional 52 LOE WAs
either could have been issued in their entirety as completion form or contained some tasks that
were suitable for completion form contracting. In our opinion, these WA tasks would produce
measurable results or end-products for which costs could be reasonably estimated. In some cases
these tasks were phases of work related to long term projects such as regulation development.
Tasks we believe could be completion include: revising guidance documents, drafting guidance
documents, evaluating and drafting responses to public comments, preparing draft Federal
Register notices, audits of laboratories and other entities, special studies and evaluations, PRP
searches, remedial designs, and remedial actions. In many instances contracting and program
officials agreed that these tasks could be completion form at the WA level; however, since these
tasks were issued under LOE contracts, this  option was not available.

The amount of detail in the SOWs for the WAs we reviewed varied. Some WAs were already
written in a completion type format with end products and due dates specified;  however, the
WAs were issued as LOE. For example, we reviewed a $1,588,682 WA for remedial design
issued under an LOE ARCS contract.  Although issued as an LOE WA, the WA was written and
negotiated like a completion effort with end-products specified in the SOW. In our opinion, this
type of WA can be  issued as completion form as long as this type of WA is permitted by the
contract.  Where unknowns existed in these  WAs, such as the number of meetings a contractor
would need to attend, an estimated number was provided for cost estimation.  Others WA SOWs
were not well defined and would need to be  better written to enable the tasks to be issued as
completion.  For example, some WA SOWs covered a specific type of task such as  public
outreach, but were written in general terms with specific orders to be provided through EPA
technical direction for individual projects. If WAs for this type task were issued for each
individual project as it was needed, these WAs could be issued (if allowed by the contract) as
completion form.  Ideally, if the program office had historical workload data to estimate the total
number of outreach projects expected over a period, one completion WA or contract could be
issued to  cover these needs.  In the particular instance cited above, this was a new program
requirement and such data was not available. However, as reported in Chapter 2, EPA generally
did not have historical workload data on recurring activities which would enable them to award
more defined contracts.

As previously stated,  14 contract actions we reviewed were actually issued as completion form
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DOs.  These WA tasks were issued as delivery or task orders under various types of IDIQ
contracts.  These tasks included, emergency cleanups, database conversions, software
development, drafting Federal Register notices, and analyzing public comments to Federal
Register notices. Similar types of tasks, e.g., software development and summarizing public
comments, were included in the contract SOWs for LOE contracts we reviewed.
Potential for Fixed-Price Procurements

OMB requested in the 1998 Pass Back Decisions for the President's Budget that we analyze
EPA's current use of fixed-price contracting to determine EPA's progress in awarding more of
these contract types. To determine EPA's progress in awarding fixed-price contracts, we
analyzed CIS data for types of contracts active in FYs 1992 and 1996.  Our analysis showed that
the number of fixed-price contracts, as a percentage of all EPA contracts, had increased slightly
between 1992 and 1996. However, the dollar value in relation to other contract types had
remained almost the same at about 8.6 percent of the value of all EPA contracts. Cost-
reimbursable contracts, as a percentage of EPA's total contract value, increased slightly between
1992 and 1996 and still dominated EPA's contract dollars at about 86.7 percent of the total
value. The chart below demonstrates that cost-reimbursable contracts continue to dominate
EPA's contract inventory.
Contract
Type 6
FP
FPIF
CPAF
CPFF
CR
CS
1992
Number
502
1
154
379
16
5
%of
Total No.
44.90%
0.09%
13.77%
33.90%
1.43%
0.45%
$ Value
(Billions)
$1.31
$0.13
$11.68
$2.22
$0.11
$0.04
%of
Total $
7.81%
0.76%
69.39%
13.17%
0.65%
0.22%
1996
Number
434
1
86
254
9
8
%of
Total No.
51.36%
0.12%
10.18%
30.06%
1.07%
0.95%
$ Value
(Billions)
$0.99
$0.13
$8.95
$2.28
$0.07
$0.024
%of
Total $
7.62%
0.98%
68.59%
17.45%
0.43%
0.19%
The chart above is based on CIS information that is not totally accurate. An analysis of fixed-
price contract data disclosed that fixed-rate, IDIQ contracts were coded into CIS as fixed-price.
We were told that no category for IDIQ contracts exists in the CIS so fixed-rate, IDIQ contracts
often get coded as fixed-price. EPA personnel at two contract divisions were able to separate the
       6  Contract types are fixed-price (FP), fixed-price plus incentive fee (FPIF), cost-plus-
award-fee (CPAF), cost-plus-fixed-fee (CPFF), cost-reimbursement (CR), and cost-sharing (CS).
Chart does not include fixed-rate, IDIQ contracts such as labor hour and time and materials.
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IDIQ from the fixed-price contracts based on a separate contract database; however, the
Washington divisions had to manually identify the IDIQ contracts.  The CIS is currently being
phased out and the new Integrated Contract Management System (ICMS) will soon replace the
CIS. OAM officials indicated that the ICMS includes a contract category for IDIQ contracts.

In our sample of 86 WAs, we identified one or more tasks in 14 RACs and 60 other contract
WAs that we believe did not contain significant performance uncertainties and could have been
issued under fixed-price arrangements. However, these WAs were issued under LOE contracts
that did not permit fixed-price contract actions. The tasks included some Superfund remedial
actions, peer reviews, laboratory analysis of samples,  logistical support for various types of
meetings, graphical support, report preparation, training development, quality assurance audits of
contract laboratories, data entry, and maintaining public dockets.

These types of services were often procured by other agencies, industry, EPA prime contractors,
and, in some cases, by EPA under fixed-price contracts. For example, we found that the Army
COE and the DOE contracted for some environmental cleanups under fixed-price contracts. We
were informed by regional Superfund officials that PRPs  conduct some of their Superfund site
cleanups under fixed-price contracts.  We noted that EPA has fixed-rate (by task), IDIQ contracts
with laboratories to provide chemical analyses of Superfund site samples at fixed-rates. Similar
types of analyses were performed at regional laboratories under LOE cost-reimbursable contracts.
 One ORD (Office of Research  and Development)  office in Cincinnati started procuring logistical
support for meetings under fixed-price small purchases while many of the contracts we reviewed
procured this support under cost-reimbursable LOE contracts.  We noted at least one instance
where an EPA region entered into a fixed-rate IDIQ contract to cleanup a Superfund site.

                              Times Beach Dioxin Removal

Region 7 awarded a fixed-rate contract for hazardous waste removal and disposal in Times
Beach, Missouri.  The purpose of the contract was  excavation,  removal, transportation and
incineration of dioxin-contaminated soil and materials. The SOW estimated the approximate
amount of soil that needed to be removed.  It also estimated the approximate quantity and
distance of materials to be transported from the 21  locations that comprised the Times Beach site.
Many EPA program staff would consider this project as having too many uncertainties to award
as a fixed-price contract. The SOW included with the solicitation outlined some  of the
uncertainties, through inclusion of information such as, "...some additional excavation may be
required at the storage sites based on EPA sampling." Prior to the conclusion of the solicitation
period, EPA staff took the potential bidders to some of the sites so they could get first hand
knowledge of the work requirements.  This practice is consistent with COE contractor initiatives,
where the COE gets the contractor involved in the  preaward process so that the contractor gains
sufficient knowledge to reach agreement on work to be done and a realistic estimate of associated
costs. EPA's IGCE estimated the cost for the work at $8.7 million. The lowest sealed bid and
contract award amount was $3.1 million.  A Region 7 official stated that this contract was part of
the Region's effort to move away from cost-reimbursable contracts. The official  further stated
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that it is possible that the contract awarded on a term basis would have cost $8 million. They
decided to go with sealed bids and award to the lowest responsive bidder. The contract was
awarded in April 1996 and the work was completed for about $2 million by December 1996.

Opportunities for Performance-Based Service Contracts

Any tasks we identified as adaptable to completion form or fixed-price could be awarded under
PBSC requirements. In addition, any of the 14 DO work assignments that were awarded as
completion form could be issued as PBSCs.  Therefore, 84 of the 86 WAs reviewed contained
tasks suited for PBSC. The amount of effort required to convert these tasks to PBSC would vary
greatly. The least difficult tasks to convert to PBSC would be those tasks that could be awarded
fixed-price and lend themselves to the establishment of objective performance measures.  Some
Superfund cleanups and logistical support for meetings would fall into this category.  Technical
work for which objective performance measures could be established, such as Superfund
remedial designs and software development, could also be awarded PBSC. Presenting a greater
challenge in converting to PBSC, would be those technical tasks conducted under cost-
reimbursable contracts for which objective performance measures cannot be easily established.
For example, the various data analyses and resulting reports that contractors prepare in support of
regulatory and policy development would fall into this category. In order to convert these tasks
to PBSC, the Agency would need to develop subjective performance measures and use an award
fee type contract to provide the necessary performance incentives.

The area with the highest dollar impact where PBSCs could be used was in the Superfund
program. For example, we reviewed a delivery order, valued at $2,842,405, issued under a
CPAF emergency removal contract which was suited to PBSC requirements.  The delivery order
SOW already contained some objective performance requirements. For example, one SOW task
instructed the contractor to "...remove all solid wastes (scrap metal, wood, dilapidated structures)
from the site...."  Another task instructed the contractor to ". . . remove  all soil contaminated
with CERCLA hazardous substances above the proposed removal action levels . . . contaminated
soil shall be treated until it no longer exhibits a RCRA hazardous characteristic, allowing
disposal as a solid waste."

We also noted that LOE contracts included routine recurring tasks that could  be procured under
fixed-price (either fixed-rate IDIQ or firm-fixed-price) arrangements and as performance-based
contracts using objective performance measures.  Administrative support functions such as
logistical support for meetings, data entry, and maintaining public dockets, were examples of
these types of tasks.  These types of tasks could be removed from the LOE contracts and
procured under separate PBSCs for each particular type of service.  Although the individual cost
of these tasks per WA was not large, if these tasks were broken out and rolled into separate
contracts we believe they could result in significant dollar value PBSCs.

We identified some technical tasks that were awarded as completion delivery orders or written in
a completion format, and lent themselves to evaluation through objective performance measures.
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In our opinion, these types of tasks were suited to PBSC.  For example, we reviewed one
delivery order with a final amended award amount of $3,981,581. This delivery order included
the tasks of a database conversion and a system development.  Both the database conversion and
the system development would lend themselves to the establishment of objective performance
measures and the evaluation of these measures through a quality assurance plan. In fact, the
delivery order, as written, contained acceptance criteria which generally fit within the PBSC
requirements for performance standards.

A significant number of the technical tasks included in the contracts we reviewed did not lend
themselves to fixed-pricing arrangements  or evaluation based entirely on objective performance
measures.  Examples include technical studies and evaluations and analytical work provided in
support of EPA policies and regulations. In addition, although these tasks were recurring in that
the same general processes were used in performing the tasks, the individual circumstances
associated with each task could vary greatly, e.g., the amount of data to be analyzed, the number
of public comments received, etc.. Although some objective measures could be established for
timeliness and  report formats, evaluations of performance quality would require some
subjectivity. For example, a performance measurement may be that a study's conclusions are
adequately supported by the data presented. This determination would be based on an
experienced reviewer's judgement and would constitute a subjective measurement.  An
evaluation of the quality of the contractor's work for these tasks would require the use of some
subjective performance measures.  In order to conduct these services under a PBSC
arrangement, EPA  would most likely have to award an IDIQ contract and develop generic
performance-based SOWs for each type of task.  The generic performance work statement could
be modified to fit the individual circumstances of each DO.

RACs Represent Best Opportunity for Transition Into Other Contract Types

The RACs provide the greatest opportunity for more rapid transition into completion form, fixed-
price and PBSC forms of contracting. Services provided in RACs have been performed under
other EPA contracts for over 16 years. EPA has reported completion of hazardous waste
cleanups at 428 sites;  remedial design construction in process at 492 sites; remedial designs
being prepared for 144 sites; and feasibility studies underway at 196 sites.  The same general
tasks are performed at all Superfund sites, though differing site conditions impact the effort
required. Designers of the RACs program stated that this degree of experience is one reason they
incorporated a  completion form component into the contracts. Much of the RACs work is
product or goal oriented, i.e., completion of feasibility studies and remedial designs. The COE,
who oversees many of EPA's largest remedial construction projects, usually procures these
services under  completion form contracts.  Further, EPA prime contractors generally award
fixed-price subcontracts for remedial construction. Since 1982, EPA has used CPAF contracts to
perform remedial work at Superfund sites. These incentive fee contracts require that the
contractor's performance be evaluated, a basic tenant of PBSC.  EPA has experienced problems
in both contract cost estimation and use of award fees. However, the Agency is making progress
in these areas with the recent actions to accumulate cost data under RACs and revise award fee
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procedures, as discussed in Chapters 2 and 4.

EPA officials indicated that faulty site assessment data from prior contract work has often
resulted in the need for unanticipated sampling or other work during the construction phase.
These uncertainties make them cautious in awarding fixed-price, completion form or
performance-based contracts for this type work.  However, lessons learned from such
experiences should diminish these uncertainties as a factor relative to the 196 sites currently in
the remedial investigation stage. This situation presents substantial opportunities for use of
alternative contract forms.

BARRIERS/LIMITATIONS AFFECTING THE USE OF OTHER CONTRACT TYPES

Several barriers were identified that limit EPA's ability to fully use other types of contracts.
These barriers include program officials' desires to retain their LOE contracts because of their
flexibility, the resulting general and broad SOWs, lack of knowledge of alternative contract
types, funding allocations and limitations, lack of historical cost data, and absence of program
commitments to use other contract types.

Program Culture

A prior Agency analysis7 of EPA contracting practices discussed the Agency's heavy reliance on
LOE contracts and reported that "... the complexity and diversity of the Agency's mission have
fostered an Agency belief that it needs the most flexible contract vehicle available." This desire
for flexible contract vehicles is still prevalent.  POs we spoke to often cited the need for
flexibility as to why they did not believe other contracting mechanism could be used. Agency
contracting officials also confirmed that this belief still existed. For example, contracting
officials indicated that the greatest barrier to moving toward other types of contracts is the culture
of the program offices. These officials indicated that in order for the Office of Administration
and Resources Management (OARM) to be successful in its promotion  of the use of fixed-price,
completion form, and performance-based contracts, senior program officials need to support
OARM's efforts.  Other Government agency officials we spoke to indicated that conversion to
PBSC was not easy or quick and that obtaining both program and contracting officials buy-in  to
the concept of PBSC was the most difficult obstacle to overcome.

PO's and WAMs we interviewed cited several reasons why they believed they need the flexibility
of an LOE WA  contract. These include the unpredictable timing of certain tasks, changes in
work direction due to influences beyond EPA's control, e.g., political or interest group concerns,
and cost and completion uncertainties associated with the technical nature of some work.
However, we still contend that many of these tasks, with consideration for contingencies, could
be fixed-rate based on EPA's extensive experience in contracting for this work and, at a
minimum, awarded under completion form  PBSC requirements.
       7 Staff Report of the Standing Committee on Contracts Management, June 1992.

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Knowledge of Other Contract Types

The program office's desire to retain their LOE contracts may be due, in part, to a lack of
understanding of other contract types.  We found that some program officials did not know about
or understand the various types of contracting instruments that were available to them. This lack
of knowledge was especially true for PBSC and completion form contracts. Program and
contracting officials indicated that they envisioned PBSCs  as fixed-price contracts for recurring,
routine services for which objective performance measures could be established.8  In addition,
some POs and WAMs believed that completion contracts could only be fixed-price.  Program
officials also had very little experience or knowledge of the use of small procurements. When
we discussed specific WA tasks with the WAMs and the possibility of using other contracting
mechanisms, they agreed that in some cases, fixed-price or completion form contracts could be
used. Other WAMs stated that they believed their programs could and should use other contract
mechanisms.

General Contract SOWs

Many of the non-Superfund contract SOWs we reviewed contained a variety of tasks including
both technical and administrative tasks. These included large umbrella contracts that provide a
wide-range of support services to a particular program office.  The SOWs described the tasks in
general terms in anticipation of what specific work would be required over the  life of the
contract.  Consequently, the contract SOWs did not specify exact deliverables and dates for these
deliverables. This detailed information was included in the WA SOWs (or in some cases
technical directives that supplemented the WA) when the need for a specific type of task became
known.  The inclusion of several different types of tasks makes it difficult to award the entire
contract as either completion or fixed-price.

Correspondingly, we believe the inclusion of a variety of tasks under one contract could make it
more difficult to develop a PBSC.9 One of the features to look for in deciding whether to
develop a PBSC is recurring tasks. Task repetition allows  the development of  standardized
performance measures and QAPs to evaluate these measures.  When the SOW  contains many
different tasks it is more difficult to write a PBSC. Several different sets of performance
measures and QAPs would need to be developed to cover the range of services performed under
these contracts.
       8 Other Government agency officials we spoke to indicated that differing interpretations
and definitions of PBSC were encountered in other agencies as well.

       9 This is not to imply that a PBSC cannot be written to cover a wide range of services.
Both Air Force and NASA officials indicated they had developed PBSCs for base support
covering a wide range of services. For example, Air Force officials told us that they developed a
PBSC for base support which covered service from cafeteria support to civil engineering.

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Funding

Both program and contracting officials mentioned the requirement to fund completion efforts up-
front as a barrier to more completion form contracts and WAs.  The services under LOE
contracts are generally considered severable and thus can be funded incrementally. That is, year
one's services can be funded with year one money and year two's services can be funded with
year two money. Our interpretation of 48 CFR (Code of Federal Regulations) 16.306, suggests
that the work performed under completion contracts and WAs are generally considered entire or
non-severable. Consequently, the cost of the entire contract/WA must be fully funded with
money available the year the contract or WA was executed unless the contract/WA is funded by
no year appropriations such as Superfund.  No year appropriations are  available until expended.
Therefore, a Superfund completion contract or WA could be incrementally funded even if the
work will be conducted in future years.

The Director, OAM, indicated that program offices did not have sufficient resources to fund all
WAs that could be issued as completion form.  Therefore, program offices are reluctant to
commit a significant portion of their budget to fund long-term completion projects at the expense
of starting and maintaining several projects.  A Region 9 PO expressed similar sentiments,
stating that Region 9 could not afford to fund WAs fully because some task orders are
multimillion dollar projects. If they were forced to fully fund one site, then work would have to
stop at another site.  Therefore, she stated she would encourage WAMs to "define WAs as LOE
even if they could be completion form unless there is  a compromise to the funding issue."

Program officials also mentioned that they receive final operating plans late in the fiscal year.
Thus, when planning their contract efforts, they cannot be certain as to how much funding their
office will receive. While the requirement of up-front funding could present a problem for very
large, long term activities, activities such as risk assessments, remedial designs, etc., still lend
themselves to completion form use.  However, regions and program offices must carefully
review performance goals and available funding to ensure optimal use of resources. Contracting
officials told us that they could award more completion contracts, both IDIQ contracts with
completion delivery orders, as well as entire completion contracts if not for the problems
associated with the up-front funding requirement.

Term Form Base Hours in RACs

According to the RACs PCO, regions may also be discouraged from using completion form
because its use does not count against the base hours in the term form of the contract.  RACs
have a separate completion form ceiling amount in the contract, but no base or minimum use
requirements. The contracts guarantee a certain number of LOE hours will be ordered in the base
period. Accordingly, the PCO believes, with RACs usage down nationwide, regions will be
reluctant to place completion form WAs when they foresee difficulty in utilizing their LOE base
hours.
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Lack of Historical Workload and Cost Data

As discussed in Chapter 2 of this report, the Agency did not have historical workload data needed
to develop accurate cost estimates. The availability of this data would improve EPA's ability to
award more completion and fixed-price contracts.  With this data, EPA could develop more
detailed SOWs which would allow contractors to better estimate their proposed costs.

Lack of Program Office Commitments for PBSC

OAM is the only EPA office tasked with implementing PBSC.  The Office of Emergency and
Remedial Response (OERR) currently has commitments to OMB to initiate pilot PBSCs in the
Superfund program.  However, these commitments were essentially mandated by OMB, not
EPA, by the FY 1998 Pass Back Decisions for the President's Budget. We could not identify any
other commitments by EPA program offices and regions to plan and propose more completion
form, fixed-price, and/or performance-based contracts.  In our opinion, implementation of PBSC
has to be a shared responsibility to be successful.  Therefore, all programs and regions need to
establish PBSC goals to emphasize the need for more efficient and results focused contracts and
de-emphasize the more flexible but less efficient cost-type contracts.

AGENCY PROGRESS IN AWARDING OTHER TYPES OF CONTRACTS

The agency has made some progress  in awarding PBSCs. RTF Contract Management Division
(RTP-CMD) had awarded two fixed-price PBSCs.  These contracts were for audio/visual
services and warehouse/mailroom services.  At the time of our fieldwork, a third PBSC contract
was in the process of being awarded for grounds maintenance/janitorial services.  Cincinnati
Contract Management Division (CCMD) had awarded one fixed-price PBSC for telephone
hotline services.  According to Superfund/RCRA Procurement Operations Division (SRRPOD)
officials, a PBSC  for administrative support services was recently awarded in Region 10. In
addition, the Headquarters Procurement Operations Division (HPOD) was planning to award
seven PBSCs at the time our fieldwork ended. This included four PBSCs for routine types of
services and three technical service contracts in which some of the individual WAs/DOs will be
performance-based.  EPA Superfund program officials, with assistance from OMB's OFPP,
currently plan to study one or more Superfund sites in order to develop model PBSC SOWs for
specific types of remedial actions.

In addition, the CCMD has taken the initiative to educate and inform its customers (Office of
Water (OW) and ORD) on the various types of contracts,  including small purchases, available to
them.  CCMD has held several meetings with the two programs, discussing both the advantages
and disadvantages of IDIQ and fixed-price contracts.  According to CCMD officials, the response
from program officials to CCMD's presentation on alternative contract types was generally
favorable

CONCLUSION
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EPA's predominant use of term form, LOE contracts place the risk of cost and performance on
the Government rather than the contractor. These contracts purchase labor hours with limited
assurance of quality and no guarantee of an end product. Effective use of completion form,
fixed-price, and performance-based contracts would move EPA toward more efficient,
accomplishment-oriented contracting.

In general, the Agency can procure more of its contracted work through completion form, fixed-
price, and/or performance-based contract types.  For some tasks, it is obvious that procurement
through more firm-priced contract type is feasible and appropriate. Many of these tasks lend
themselves to PBSC since their performance can be evaluated using objective performance
measurements. For other tasks, the transition to PBSC will be more difficult.  These tasks do not
lend themselves to objective measurement. However, through the development of subjective
performance measures and appropriately structured CPAF contracts, these tasks could also be
procured under PBSCs. For EPA to make the transition to these more defined contract types it
will take  a commitment from not just OAM but the Agency's senior program officials as well.

Through  our discussions with contracting and program officials we identified  several potential
approaches to helping EPA award a greater percentage of its contracted services through
completion, fixed-price, and/or performance-based contracts. These approaches include:  (1)
removing administrative tasks, such as logistical support for meetings, from the technical support
contracts and awarding Agency-wide fixed-price requirements contracts for these repetitive
services;  (2) awarding IDIQ contracts which allow DOs to be issued under whichever pricing
arrangement is appropriate; and (3) using fixed-price small purchases for infrequent and non-
recurring tasks.

RECOMMENDATIONS

We recommend that the Acting Assistant Administrator for Administration and Resources
Management in coordination with other appropriate senior Agency managers:

3-1    Establish goals for each Headquarters program office and each regional office for
       awarding more of its extramural funds under completion  form, performance-based and/or
       fixed-price contracts.

3-2    Require Senior Resource Officials (SRO) to implement the provisions of OFPP Policy
       Letter 91-2 that require documented justification of the use of contract mechanisms other
       than PBSC when acquiring services.

3-3    Establish work groups of both OAM and program officials to:

       a.     develop model performance statements of work for recurring services that would
             facilitate increased use of completion form, fixed-price, and performance-based
             contracts. At least one workgroup should address tasks of a technical support
                                          31

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             nature.

       b.     develop a strategy for meeting OMB's contract reform goals. This strategy should
             include identifying candidate services for conversion from LOE, and deciding on
             appropriate contract types for facilitating this conversion.

3-4    Provide training on completion form and PBSC to both contracting and program officials.

3-5    Establish incentives to increase regional use of completion form WAs under RACs by
       establishing either: (1) a contract minimum for completion form use through conversion
       of LOE base hours to completion form capacity or (2) regional goals for completion form
       use with strict accountability for meeting such goals.

3-6    In coordination with the Director, OAM, and the Director, Office of Emergency and
       Remedial Response (Superfund), perform bench marking to determine
       appropriate uses of completion form assignments for RACs activities other than
       mobilization.

AGENCY COMMENTS AND OIG EVALUATION

O ARM's response generally agreed with the findings and most of the recommendations
presented in Chapter 3. OARM did request clarification or correction of certain statements
presented in the chapter. Changes were made as considered appropriate. OARM also expressed
some disagreement with final report Recommendations 3-2 and 3-5.

During discussions with OARM officials prior to receipt of their response we agreed to drop two
draft report recommendations.  Draft report recommendation 3-5 requested the Agency to obtain
a Comptroller General waiver from the requirement to fully fund completion form contract
actions. OARM indicated that this was a statutory requirement that could not be waived. Draft
report recommendation 3-8 required the Agency to ensure that IDIQ contracts were properly
coded in the CIS. OARM informed us that the CIS was being phased out and replaced by ICMS
and that ICMS included a specific category and code for IDIQ contracts.

A summary of OARM's comments on Chapter 3's findings and recommendation along with the
OIG's evaluation of these comments are presented in Appendix II.

                                   CHAPTER 4

           AWARD FEE CONTRACTS GENERALLY PROVIDED
         LIMITED INCENTIVE FOR SUPERIOR PERFORMANCE

In November 1995, EPA modified award fee procedures to prohibit payment of award fees to
contractors for satisfactory or substandard performance. However, for the 13  CPAF LOE

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contracts reviewed, award fee plans still allowed fees to be paid for satisfactory performance.
Review of actual awards under these contracts indicated that a majority of the contractors
received award fees for performance elements rated satisfactory. Seven of the 13 contractors
received award fees ranging from 25 to 100 percent of available fees (an average of 62.5 percent)
for overall ratings of satisfactory. Contractors with exceeds satisfactory or outstanding
evaluations received from 44.9 to 91.8 percent of available fees (an average of 80.9 percent).  In
many cases, only small differences in the percentage of award fees paid existed between
satisfactory and above satisfactory performance. In a few instances, a higher percentage was paid
for satisfactory performance than paid for outstanding ratings. These variances occurred from
subjective decisions by various Performance Evaluation Boards (PEB) and differences in award
fee plans (especially older plans) that permitted the use of up  to 100 percent of available fees for
satisfactory performance10. As a result, we concluded that award fees paid under these contracts
provided only limited incentives for superior performance. In contrast, because award fees are
based on LOE hours delivered, contractors do have an incentive to maximize the labor hours
billed in order to increase the award fee amount.  In addition to the 13 CPAF contracts, we also
reviewed the use of award fees under the relatively new RACs program. These contracts provide
that fees would only be paid for  exceeds expectations or outstanding performance. Only two
RACs contractors had received award fees at the time of this review and these fees were paid
only for ratings of exceeds or outstanding.

EPA issued new award fee procedures on November 7, 1995, that restricted the payment of fees
to performance ratings that exceed the satisfactory level. However, the new guidance was not
applicable to active contracts or  new contracts where the solicitation process had occurred prior
to the effective date of the guidance.  All 13 of the CPAF contracts in our sample were awarded
prior to the new guidance. In fact, our contacts with EPA's three contracting divisions disclosed
no CPAF solicitations and subsequent awards after the effective date of the new guidance.
Unilateral contract modifications could have been made to bring the award fee plans for existing
contracts in line with the new procedure; however, none of the award fee plans for the CPAF
contracts in our sample were modified. We did identify three non-Superfund CPAF contracts
and 10 RACs (CPAF) that restricted  award fees to above satisfactory performance even though
the contract solicitations occurred prior to the revised award fee procedures. However, EPA's
award of CPAF contracts has decreased dramatically since the award fee procedures were
revised. Most non-Superfund cost-reimbursable contracts are now awarded as CPFF. A contract
manager indicated that the administrative burden of award fee contracts caused the shift to CPFF.
This decline in CPAF is a concern since these contracts provide a mechanism by which the
Agency could increase the use and benefits of PBSC. Because only a few existing CPAF
contracts fully incorporated the revised guidance, we could not adequately evaluate whether the
revised award fee procedures had corrected EPA's past problems with management of CPAF
contracts.
       10 This problem no longer exists because current award fee policy precludes use of fees
for satisfactory performance.

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BACKGROUND

Past OIG audits and other internal EPA reviews criticized the Agency for not using the award fee
mechanism in CPAF contracts as an incentive for high quality contractor performance.
Specifically, EPA had given contractors awards for satisfactory, or in some cases, less than
satisfactory performance and had not used contractor performance as a basis for new contracts or
assignment of new work.  In view of this past history, OMB wanted to know what percentage of
maximum award fees contractors had earned and whether the fees awarded comport with their
performance.

FAR 16.404-2(a) defines a CPAF contract as:

       ... a cost-reimbursement contract that provides for a fee consisting of (1) a base
       amount fixed at inception of the contract and (2) an award amount that the
       contractor may earn in whole or in part during performance and that is sufficient
       to provide motivation for excellence in such areas as quality, timeliness, technical
       ingenuity, and cost-effective management.  The amount of award fee to be paid is
       determined by the Government's judgmental evaluation of the contractor's
       performance in terms of the criteria stated in the contract.

Chapter 15 - Use of Cost-Plus-Award-Fee Contracts of the EPA Contracts Management Manual.
issued November 7, 1995, and revised June 24, 1997,  provides guidance for the use of CPAF
contracts.   The requirements of this chapter are applicable to solicitations issued after the
effective date of the Chapter. A feature of the guidance, which represents a significant change
from prior award fee plan structures, is the requirement that the award fee plan must clearly state
that no award fee will be paid for rating elements rated satisfactory or unsatisfactory.

SAMPLED CONTRACTS AWARDED FEES FOR SATISFACTORY PERFORMANCE

Under the 13 randomly selected CPAF contracts, we reviewed 64 rating periods to determine
whether award fees were paid for satisfactory or unsatisfactory performance.   The contracts in
our sample were awarded prior to the implementation of the current guidance which recommends
no award fee for satisfactory or unsatisfactory performance.  Under seven of 13 contracts
reviewed, EPA awarded fees for 20 rating periods that were based on overall satisfactory ratings
in accordance with the contracts' award fee plans.  The percentage of available fees ($4.9
million) awarded for overall satisfactory performance ranged from a low of 25 percent to a high
of 100 percent or an average of 62.54 percent ($3,066,321).  Under seven contracts, award fees
were paid for one or more rating elements that received satisfactory ratings. Five contractors
received better than satisfactory ratings for all rating elements we reviewed. The remaining
contractor received better than satisfactory for all rating elements except one, for which a
satisfactory rating was given.

Significant variances existed between contracts in the percent of award fees paid for satisfactory,
                                           34

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exceeds, and outstanding performance ratings. For instance, one contractor received 100 percent
of available fees for an overall satisfactory rating while another contractor received only 55
percent of available fees for exceeds satisfactory performance.  Even on the same contract, the
award fees paid could vary greatly. For example, one contractor received 98.5 and 100 percent,
respectively, of available fees for satisfactory performance during two rating periods.  For two
other rating periods, the same contractor was paid only 44.9 and 53.2 percent of available fees for
exceeds satisfactory ratings. A summary of the rating periods reviewed by performance level and
the percentage of fees paid for satisfactory, exceeds, and outstanding performance is shown
below.
Overall
Rating
Satisfactory
Exceeds
Outstanding
No. of
Rating Periods
18
35
11
Award Fees
Available
$4,902,891
$3,504,919
$6,481,780
Award Fees
Paid
$3,066,321
$2,724,211
$5,358,607
Average
% Paid
62.5%
77.7%
82.7%
% Range
25%-100%
44.9%-91.8%
73.8%-90%
LIMITED IMPLEMENTATION OF REVISED AWARD FEE GUIDELINES

EPA has awarded significantly less CPAF contracts, especially for the non-Superfund programs,
since issuance of the new award fee guidance. This decline in CPAF causes concern, since
CPAF contracts incorporate one of the tenants of performance-based contracting, i.e., financial
incentives for good performance, and represent one contract mechanism by which EPA could
increase its use of PBSC. A contract official indicated that the administrative burden of award
fee contracts caused a shift to CPFF.  Through contacts with EPA's contract divisions, we did
identify three CPAF contracts at RTP-CMD and seven RACs awarded after the guidance was
issued; however, the contract solicitations for all of these contracts occurred before the date of
the guidance. Therefore, the contracts were not required to comply with the guidance.
However, the award fee plans for two11 of the three RTF CPAF contracts did stipulate that no
fees would be paid for satisfactory or worse performance.  The plan included a base fee of 3
percent of estimated costs and a potential award fee of 7 percent of cost.  These two contracts
were later transferred to another contract division during an OAM reorganization and converted
to CPFF. The fixed fee was set at 7.2 percent of estimated costs. The Director, RTP-CMD,
stated that the award fee plan for the third CPAF contract would be modified to be more
compliant with the new award fee guidance.  RTP-CMD had modified the award fee plan of
another contract it received during the OAM reorganization. However, the modification was to
preclude award fees for unsatisfactory performance which were allowed under the original award
fee plan.
       11 FY 1996 awards of two large CPAF contracts for Environmental Services Assistance
Teams (ESAT).
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The solicitation and the award of three RACs occurred prior to the effective date of the revised
award fee guidance. However, the RACs Performance Fee Plan incorporated many of the
important aspects of the guidance. The RACs plan required  that a performance fee was to be
earned and payable only on completed WAs which were rated "exceeds expectations" or
"outstanding." In addition, no performance fee was to be paid for WAs rated "unsatisfactory"
and the contractor was required to return any provisional fee received.  Because some RACs
contracts were only recently awarded, or lacked significant activity, only the two RACs awarded
by Region 7 had completed an award fee period and evaluation at the time of this review. For
these two contracts, award fees were only paid for ratings of "exceeds expectations" or
"outstanding."

Contracting officials cited the heavy administrative burden created by previous CPAF contracts
as well as an overuse of CPAF in the past, as reasons why the use of CPAF contracts has
declined. They also indicated that the fees were not large enough or disbursed quickly enough to
influence contractor performance. This administrative burden could have been intensified with
revision of the award fee policy in November 1995.  The revised guidance required that  award
fee determinations be made within 60-75 days from the end of the evaluation periods. For the 13
CPAF contracts in our sample, award fee determinations, for all but two contracts, averaged
more than 100 days after the evaluation period ended. For RACs, award fee determinations were
not announced for up to 87 days  after the evaluation period. Prior OIG audits have reported the
lengthy delays in making award fee determinations and that contractors received substantial fees
for satisfactory or worse performance.  EPA revised Chapter 15 of the Contracts Management
Manual on November 7, 1995, and June 24, 1997, to address concerns over the basis for  award
fees and timeliness  of award fee  determinations. The June 24 revision instructs program officials
to ensure that the performance standards for PEB Chairpersons include a subcriterion for meeting
the time frames established for the award fee process.

Contracts solicited or awarded before the new guidance could have been amended to reflect the
new requirements. However, contracting officials indicated  it was not feasible to amend most
existing CPAF contracts because either (1) the majority of the performance periods had expired,
(2) the existing award fee plans were already well behind schedule, and/or (3) the contractors
would be unwilling to accept a plan with potentially lower award fees. Washington contracting
officials indicated that such changes in award fee plans could not be  made without negotiation.
The RTP-CMD Director indicated that the modification of the award fee plan for the contract
discussed earlier was a very  difficult process due to resistance from both the contractor and the
program office to eliminating award fees for unsatisfactory performance.

EPA Awarding Less CPAF Contracts for Non-Superfund Services
                                          36

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Information from EPA's CIS12 for the number and dollar value of active CPAF (Superfund and
non-Superfund) contracts in FY 1992 as compared to FY 1996
shows a significant decrease in non-Superfund CPAF contract
use since FY 1992. The graphs (right) show a minor decrease in
Superfund CPAF contract use. However, FY 1996 RACs
awards and at least three FY 1996 non-RACs CPAF contracts
we identified are not included in the totals.  The CIS data did
not show any CPAF awards in FYs 1995 or 1996.
Consequently, all of the active contracts reflected in the graphs
were awarded prior to implementation of the new guidance.

Benefits of CPAF
(
;PAF Contract Activitjf
By Number of Contracts
Active Contracts
Number



r=

'


* H
• Non-SF
DSF
P
FY 92 FY 96
Fiscal Year
                                                                    PV92   PV96
                                                                      fiscal Yea-
The substantial decline in EPA's use of CPAF in favor of CPFF
contracts causes serious concern. CPAF contracts represent one
mechanism by which EPA could increase its use of PBSC,
provided the SOW contains appropriate performance standards
and a QAP is developed for evaluating these standards. CPAF
contracts furnish the ability to use incentives for the performance
of services which do not lend themselves to objective
performance measurement.  As outlined in FAR 16.404-2
(b)(l)(i) CPAF contracts are to be used when the "... work to
be performed is such that it is neither feasible nor effective to devise predetermined objective
incentive targets applicable to cost, technical performance, or schedule ..." This condition
applies to EPA technical service contracts that are more suited to evaluation through subjective
performance measures established at the contract and WA level.

CONCLUSION
Existing CPAF contracts were generally solicited and awarded before the award fee guidance
restricted fees to above satisfactory performance. Therefore, current CPAF contracts, especially
non-Superfund CPAF, continue to provide for payment of award fees to contractors for
satisfactory performance and provide little incentive for superior performance.  There has been a
general decline in the Agency's use of CPAF contracts for non-Superfund services; and
therefore, limited implementation of the current award fee guidelines. The excessive
administrative burden of managing past CPAF contracts and their apparent inability to motivate
better performance were major reasons cited for the decline. EPA issued guidelines to help
correct the problems associated with the past use of CPAFs. Because of the limited
implementation of these guidelines, we  could not assess whether the new procedures were
       12As discussed in the scope section of this report we did not audit the CIS and cannot
attest to its accuracy.  The data is presented here to illustrate a general trend in CPAF usage that
was substantiated by additional audit work.
                                          37

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successful in eliminating the past problems.  If administered effectively with timely payments of
fees that are sufficient to motivate improved contractor performance, CPAF contracts provide a
mechanism by which the Agency could increase the use and benefits of PBSC.

RECOMMENDATIONS

We recommend that the Acting Assistant Administrator for Administration and Resources
Management in implementing Recommendation 3-3 in Chapter 3 of this report:

4-1    Instruct the workgroups to:

       a.     Identify impediments to use of CPAF type contracts and opportunities to
             streamline the related administrative processes.

       b.     Identify appropriate candidate contracts for an award under CPAF.

       c.     Develop a basis for award fee payments other than hours delivered.

       d.     Develop CPAF contracts for candidate services that meet requirements of PBSC.

4-2    Evaluate CPAF contracts with more than two years remaining before expiration for
       possible modification to incorporate current award fee procedures.

AGENCY COMMENTS AND OIG EVALUATION

With one exception, OARM's response did not express disagreement with the findings presented
in Chapter 4.  OARM's comments indicated that changes were needed in certain
recommendations but expressed little disagreement with the recommendations as a whole.

OARM's comments related to Chapter 4's findings and recommendations are presented in
Appendix II along with the OIG's evaluation of these comments.
                                   CHAPTER 5

         CONTRACT PERFORMANCE PERIODS AND CAPACITY
                     DID NOT PREVENT COMPETITION

For the 26 contracts reviewed, contract capacity and length of base and option periods did not

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preclude adequate competition. The contracts ranged in dollar value from $1.9 to $474 million,
but no correlation was found between the size of contracts and the number of competitive
proposals received. For the largest contract reviewed (MPV $474 million) with the longest
performance period (10 years), EPA received four proposals.  The highest bidder response for the
26 contracts in our sample was the 25 proposals received for a 10-year contract, valued at $62
million. However, EPA may have received a large number of proposals for these  10-year
contracts, because the solicitations anticipated multiple contract awards.  EPA officials stated
that contract competition was not a problem at the Agency, particularly in the Superfund program
where the larger, long-term contracts were awarded.  These officials also told us that for some
types of services, there is a limited pool of vendors with the expertise to do the work.

Although no identifiable link between contract size and competition could be established, a
potential impact on competition still exists with larger contracts, particularly for the large
Superfund contracts that cover wide geographic areas. Small businesses may not have the
resources to meet the contract requirements. For one contract in our sample, EPA preaward
review comments noted that the contract's size may have been a factor in contractors' decisions
to submit proposals. While adequate competition was found on the contract awards we
reviewed, increased competition should be a desirable goal.

During the review, we identified significant unused capacity on many expired EPA contracts.
This may indicate that the contracts should have been smaller in size.  Many of the larger
contracts with a large amount of unused capacity are the expired Superfund ARCS contracts. In
response to past reviews, EPA officials have stated that changes in program direction created
some of the unused contract dollars.  However, EPA regions are reporting similar problems of
underutilization with active Superfund contracts, especially the new RACs. This pattern could
indicate that EPA should consider awarding fewer and smaller contracts in the future.

BACKGROUND

The Competition in Contracting Act (CICA) requires that Federal  agencies conduct their
procurements in a manner that obtains full and open  competition.  FAR Part 6, prescribes the
policies and procedures to promote full and open competition in soliciting offers and awarding
Government contracts. OIG Audit Report E1BMF3-24-0027-4100232, entitled Competition in
Contracting, issued March 31, 1994, found that although EPA followed FAR procedures for
competitive procurements, only one competitive proposal was received in more than 25 percent
of the negotiated contracts awards reviewed. The report noted that large, diverse statements of
work may have contributed to the low number of proposals received in response to EPA contract
solicitations.  EPA officials stated that contracts are structured with the size and duration that
best suits the program objectives and provides for the least administrative burden to the Agency.
They further indicated that limited staff resources precluded smaller contracts for shorter terms.

Generally, EPA contract base and option periods range between one and five years. Since 1982,
Superfund remedial action contracts have been awarded for a 10-year performance period. RACs
                                           39

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were awarded with a 5-year base and an option for an additional five years. According to
Superfund contract officials, the 10-year performance period is needed because it takes an
average of seven to ten years for a hazardous waste site to move through the cleanup cycle of site
identification and assessment to remediation. OMB questioned whether this extended base and
option period and the overall size of some EPA contracts negatively impacted competition.
OMB believed that more vendors may compete if the contracts were smaller or for a shorter
duration.

ADEQUATE COMPETITION OCCURRED FOR CONTRACTS REVIEWED

Twenty-four of the 26 contracts in our sample were awarded competitively.13  Of the 24
competitive awards, all but one received two or more proposals and two had one proposal in the
competitive range.  Both contracts with one firm in the competitive range were $6.1 million or
less MPV with 3.5 to 5-year performance periods.  The large dollar, 10-year contracts (valued at
between $62.5 and $474 million), received the largest number of proposals that ranged from a
low of four to a high of 25. Therefore, no direct correlation between the size of the contracts and
the degree of competition could be established.

Although we determined that adequate competition occurred for the contracts reviewed, more
competition would be a desirable goal.  The largest contract in our sample, a RAC with an MPV
of $474 million, received four proposals, all in the competitive range. This solicitation resulted
in two contract awards, both valued in excess of $400 million.  Length of base and option periods
could have been a factor in limiting the proposals to four, but we found no evidence to support
this premise. EPA's Superfund contracts, which make up the largest single category of active
EPA contracts, are large, 10-year contracts which cover wide geographical areas. However, the
Superfund contracts in our sample received the largest number of proposals, from 4 to 25
vendors.

The 26 contracts reviewed along with the performance period, MPV, and competitive proposals
received for each contract award are shown in the chart below.
Contract
Number
68-W8-0124
68-W9-0054
68-W5-0004
68-W6-0037
68-W6-0025
Length of
Contract
10
10
10
10
10
MPV
62,500,386
288,760,199
302,239,376
253,364,629
275,091,955
Proposals
Received
25
22
6
6
5
Bidders In
Competitive Range
11
16
5
4
4
       13Two contracts in our sample received only one proposal, but were small business or 8(a)
set-aside contracts.
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Contract
Number
68-W5-0022
68-S6-3003
68-W6-0042
68-W1-0055
68-W1-0035
68-D3-00313
68-CO-0047
68-D2-01592
68-W4-00019
68-D6-00101
68-C3-0303
68-W1-0007
68-D2-0174
68-D6-0005
68-D2-0156
68-C4-0007
68-W1-0014
68-W3-0009
68-C3-0332
68-CO-0030
68-W3-0024
Length of
Contract
10
10
10
7.2
6
5
5
5
5
5
5
5
5
5
5
4
3.5
3.2
3
3
3
MPV
313,556,945
168,763,187
474,369,516
140,048,750
177,538,336
24,811,610
32,864,228
19,636,373
29,518,848
60,425,542
30,882,549
44,247,918
3,717,435
65,424,934
5,672,691
4,705,360
6,131,358
1,898,933
6,818,084
3,681,710
5.520.294
Proposals
Received
5
5
4
4
3
9
6
6
5
5
3
3
2
2
1
4
2
8(a) Set-aside
4
2
SB Set-aside
Bidders In
Competitive Range
4
5
4
3
2
7
3
4
3
5
2
3
2
2
1
3
1
N/A
2
2
N/A
Factors, other than size and duration, may contribute to the degree of competition in EPA
contracts.  An analysis of ESAT awards outside our sample indicated that incumbency and
restrictive contract requirements may also affect competition. Competition for the two largest
ESAT contracts was limited to two firms, both incumbents on prior contracts. Two smaller
regional contracts also received limited competition. Only one firm made the competitive range
for both contracts. The solicitation requirement that the winning firm perform work on-site at
regional offices, or off-site within commuting distance of these EPA offices, may have reduced
the competition for these smaller regional contracts. Prior audits have reported that incumbency
and restrictive contract requirements are factors that limit competition for EPA contracts.

BASE PERIODS WERE GENERALLY LIMITED  TO ONE YEAR

OMB raised specific concerns about the length of contract base periods, especially the 5-year
base period for RACs. However, except for RACs, all contracts in our sample had a 1-year base
period. One year is generally the base  period in EPA contracts, as well as contracts awarded by
other Federal agencies. According to the RACs Acquisition Plan, the five year base period was
needed because of the:

       ...uncertainties with respect to what specific direction the [Superfund] program
       will embark upon after reauthorization, a five year period of performance with an
       option to extend the term of the contract provides greater flexibility for the
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       Agency to react to unanticipated changes.

OAM officials also advised us that the RACs base period was five years because they believed it
would take one to two years to determine that a contractor's performance was deficient. It would
take another one to two years to replace them. The five year base period would provide
sufficient time to identify poor performers and award replacement contracts.  In addition, the 5-
year base period lessens the administrative burden associated with exercising 1-year options.

INTERNAL EPA REVIEWS QUESTIONED POSSIBLE IMPACT OF CAPACITY

Time constraints for this review did not permit an extensive analysis of the impact that size and
length of EPA contracts may have had on competition.  We determined that for the 26 contacts in
our sample, EPA obtained adequate competition, based on an established criteria of the receipt of
at least two or more proposals within the competitive range. To determine reasons more vendors
do not submit proposals would require extensive time and resources to identify and interview
potential vendors and ascertain why they have not submitted proposals.  We only identified two
instances during this review where contractors stated in "no-bid letters" that the size of the
contracts factored into their decision not to submit a proposal. Both contracts were small
contracts valued at less than $5 million each. For one contract, valued at $4.4 million (3-year
performance period), EPA's OGC questioned why this procurement could not have been
awarded as a small business set-aside contract.  EPA had utilized  only 50 percent,  or $3.8 of the
$6.8 million available under the predecessor contract.

In a second instance, OGC questioned whether a solicitation for a 5-year contract valued at $33
million would restrict competition. The solicitation resulted in receipt of three bids, with two
included in the competitive range. The follow-on contract was split into three 3-year contracts,
with two valued at $10 million, and one valued at $14 million, for a total of $34 million. The
follow-on contracts had 3-year terms instead of five.  While splitting the follow-on procurement
into smaller contracts may encourage more competition, the size of the total procurement is
questionable. Only 66 percent of the MPV,  $20.5 million was expended in the 5-year period.

CAPACITY OF EPA CONTRACTS MAY BE EXCESSIVE

Our analysis of CIS data for FYs 1994 through  1996 indicated that a significant portion of EPA
contracts may be underutilized. We identified 63 expired contracts with obligations equal to 50
percent or less of the MPV. The size and dollar value of these contracts varied.  Most were
smaller contracts, ranging from $1 to $15 million; but, some were as large as $125 to $140
million. The performance period for the 63  contracts ranged from three to five years. A
significant number of large A&E contracts, originally awarded for 10-year periods, were among
the contracts that were substantially underutilized.  These contracts had some performance time
remaining, but at least 12 contracts, with MPVs of $148 to $280 million, had obligations equal to
only 2 to 34 percent of the MPV.  Based on the CIS data, these A&E contracts appeared to be
ARCS contracts, the predecessor to the RACs. EPA has recognized that the ARCS contracts
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were too large and made changes in the follow-on contracts, RACs, that reduced both the overall
capacity and size of the contracts. However, EPA regions are currently reporting difficulties in
meeting the RACs base period obligations. Other Superfund contracts, such as the ESS
contracts, were also noted in the CIS data as being underutilized. EPA previously reported that
changes in program direction created many of these excess capacity problems.

As previously stated, this information was obtained from a review of CIS data. Time constraints
for this review did not permit a thorough evaluation of reasons for underutilization of specific
contracts; however, we are recommending that this issue be pursued in a future OIG audit.

CONCLUSION

No correlation could be established between the size and performance periods of EPA contracts
and the  competition that occurred during contract award. For the contracts we reviewed, the
largest contracts with the longest performance periods received the highest number of
competitive proposals.  Although no correlation was found for the contracts reviewed, the
capacity and length of a contract can potentially limit competition.  Smaller firms may not be
able to compete for larger contracts.  Therefore, even if two or more firms submitted competitive
proposals, it is possible that more firms could have made the  competitive range if capacity and/or
performance periods were smaller.

An analysis of CIS data identified potential excess capacity in EPA contracts.  Past internal and
external reviews have criticized EPA for excess contract capacity; however, EPA officials have
stated that the additional capacity in their contracts does not result in  any  negative ramifications.
If contract size inhibits competition, contracts costs could be  negatively impacted, as larger firms
with greater overhead costs and less competitive prices become the primary source for services.
The amount of business a contractor receives is a primary factor in calculation of overhead costs.
If significant amounts of anticipated revenue are not realized, contractors costs will rise and
smaller  contractors could be negatively impacted.

AGENCY COMMENTS

OARM's response expressed agreement with the chapter's conclusion that no clear correlation
existed between the size and performance periods of EPA contracts reviewed and the
competition that occurred during contract award. OARM also acknowledged the potential excess
capacity identified on active and expired contracts during this audit. However, OARM
emphasized that the Agency has taken action to significantly  reduce excess capacity on its current
contracts and efforts are ongoing to continue this downward trend in contract size.
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                                    CHAPTER 6

                    OMB CONCERNS SPECIFIC TO RACs

With the development of the RACs, EPA attempted to remedy longstanding criticisms of
Superfund contracting. New contract features and management procedures were to make RACs
more efficient contracts, awarded on a regional basis, with greater opportunities for competition.
OMB questioned whether RACs were awarded in the most cost effective manner with optimal
opportunity for competition between contractors and whether certain RACs provisions could be
used to increase competition for RACs WAs. We determined that RACs were awarded with
adequate competition and in accordance with prescribed procurement procedures. Also, contract
clauses related to regional crossover for WA awards appeared to provide opportunities for
competition of RACs WAs. However, these provisions were intended only for use in capacity
shortfalls and conflict of interest (COI) situations. EPA officials indicated that use of the clauses
to enhance WA competition could potentially increase contract costs.  The RACs further
contained provisions for use of completion form WAs, but did not include any incentives to
induce use of the contracting mechanism by program staff.

OMB also expressed concern with the wide variance in indirect rates approved for RACs
contractors.  However, wide variances in indirect rates among contractors are not unusual. The
variances can be caused by many legitimate reasons such as the differences in contractors'
indirect cost pools and differences in allocation bases. However, PCOs also used unaudited
contractor data to negotiate indirect rates or approved rates higher than the audit recommended
rates.  These actions could have permitted unreasonable and unsupported rates for some RACs
contractors.

BACKGROUND

Superfund's Long Term Contracting Strategy (LTCS) recommended a single response action
contract structure for remedial  action and oversight responsibilities.  RACs provided professional
A&E services to support these  efforts. RACs, which replaced ARCS, were expected to provide
regions with the ability to pursue various enforcement options, as well as remediation and
oversight services.  RACs were also to provide enhanced post-award competition of WAs based
on contractor performance, i.e., the best performing contractors within a region would receive
more of the WAs. RACs were awarded as A&E type contracts under procedures in Title IX of
the Federal Property and Administrative Services Act of 1949 (commonly called the Brooks
Act).  The act stipulated that technical qualifications would be the determining factor for
contract awards instead of other factors, such as cost.

Under RACs, work is assigned to contractors through WAs. RACs WAs can be  issued as either
term or completion form. Term form or LOE WAs require the contractor to devote a specific

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level of labor hours for a specified time period.  Completion form WAs require the contractor to
deliver a specified end-product within an estimated cost as a condition for receipt of an award
fee. This type of WA provided the Agency the ability to penalize a contractor with consistent
overruns through the award fee process.  Although RACs were regional contracts, contract
provisions permitted regions to crossover and issue WAs to contractors in other regions if a
shortage of capacity or COI situation occurred.  This provision is referred to as the regional
crossover authority.

Each RACs contract also included a subcontract pool fund for the prime contractor to obtain
specialized services  that could not be provided by the prime or its team subcontractors.  EPA
officials also stated that inclusion of the  subcontract pool allowed EPA to more efficiently obtain
vendors to do tasks,  such as well drilling, analytical services, mapping or surveying, because
prime contractors can award a contract more quickly than EPA. Prime contractors usually award
fixed-price contracts for subcontract pool work.

OMB Concerns With RACs

OMB officials expressed specific concerns and questions related to the new RAC program as
follows:

Indirect Rates - Are  the indirect rates for RAC contractors too high? Do the rates approximate
the industry average?  Are the variances among the team subcontractors normal variances
throughout RACs since the contractors are performing the same general tasks? Do the team
subcontractors' rates represent the industry average?

Regional Crossover  -  With the RACs extended base and option periods (five years each), EPA
has locked up competition for Superfund remediation work for a number of years. Can
competition between RACs contractors be increased by using regional crossover authority in
issuing RACs WAs? Would this bring down contractor prices or increase competition?

Subcontract Pool - Can completion form WAs be used for work related to the subcontract pool?
Is there a 20 percent limitation on subcontracting in RACs?

Completion Form - Why is there a ceiling on use of completion form in RACs, but not a "floor,"
or required base quantity, as provided for in the term portion of the contracts?

A&E Contracts - Why are all RACs awarded as A&E contracts?  Other agencies do not use A&E
contracts until they are in the remedial action phase.

Because of the limited time provided for this review, we were unable to perform a thorough
evaluation related to certain OMB questions  such as whether RACs indirect rates approximate
the industry average for environmental cleanup type work.  We were able to obtain information
that addresses some  of OMB's concerns.
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INDIRECT RATES FOR RACS NOT EFFECTIVELY NEGOTIATED

Indirect rates and their application to contract costs varied significantly among RAC prime and
team subcontractors (see Appendix V).  The most significant variances were found among team
subcontractor rates.  Both RAC contract placement officials and EPA contract auditors agreed
that it is completely normal for indirect rates to vary among contractors. The award of the
contracts under Brooks Act procedures also dictates that contractor costs are secondary
considerations in award decisions. Therefore, even though some COs made an effort to resolve
cost issues during contract negotiations, COs did not perform comparisons of indirect rates to
industry averages or engage in lengthy cost negotiations after selection of the most technically
qualified vendors.  COs have the final decision in negotiating contract costs, including indirect
rates.  EPA policy does not require COs to consult with contract audit personnel during such
negotiations.  As a result, unverified/unaudited rates were often accepted by COs during contract
negotiations that were often higher than audit recommended rates.  This practice could result in
excessive indirect costs being paid under RACs.

Rates Variances Are Common

OAM and OIG contract auditors indicated that there are several valid reasons indirect rates may
vary significantly among contractors.  The following are some of the general reasons  provided:

•      Contractor treatment of costs is an internal management decision that cannot be dictated
       by the Government. Some contractors include G&A costs in overhead pools and others
       do not. While contractors are required to accumulate certain costs, as prescribed by the
       FAR, they have fairly wide discretion in accounting for most of the costs they incur. The
       basic requirement is that costs are treated consistently under similar circumstances.
       Accordingly, there are fairly broad differences in the content of the indirect cost pools.
       For example, some firms may permit direct charging of clerical or office personnel, while
       others routinely include this type of labor in overhead or G&A. The same is true of
       supplies, postage, telephones, telecommunications, etc.  Including these types of costs in
       indirect pools would obviously increase the rate in comparison to an accounting system
       which charged such costs direct.

•      Contractors may have  different allocation bases for determining their indirect rates.  On
       the RAC contracts, some contractors allocate overhead by direct labor dollars only, while
       others include fringe benefits in the base (which lowers the rate). For G&A expenses,
       some RAC firms allocate over direct labor dollars; others over direct labor, fringe
       benefits, travel and other direct costs; and still others, over total cost input.  Again, the
       larger the allocation base, the lower the rate.

•      The number/composition of indirect cost pools may be different. Some RAC contractors
       have only one indirect cost center while others have as many as four.  These pools
       accumulate essentially the same  type of cost, but the costs are spread over different bases.
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•      The size and direction of a business could affect the indirect rates. Because there are
       fixed costs in essentially all indirect rates, a larger base should result in smaller indirect
       rates.  Therefore, indirect rates should be declining for growing companies whose
       services are in demand.

Although the above represents valid reasons for indirect rate variances, when equitable
application of rates is taken into consideration, contractors providing the same service in the
same general geographic location should have overall direct and indirect rate costs that are
ultimately similar. This means once indirect cost rates  are applied to proposed direct labor, the
resulting total proposed cost should be similar to that of other contractors that provide the same
service in the nearby vicinity. Therefore, a contractor's total rate/cost should be comparable to
other contractors in the industry.

COs Do Not Compare Contractor Rates to Industry Averages

According to the current PCO for RACs, the reasonableness of rates is determined individually
for each contractor.  EPA does not ask a contractor to meet or beat another contractor's rates and
contractors are not evaluated in terms of how their rates compare to other contractors. EPA
contract auditors indicated that such comparisons could provide beneficial information on the
reasonableness of contractor costs; however, the auditors believed that cost reasonableness was
not a paramount concern in many EPA contract awards, particularly those awarded under the
Brooks Act.

Indirect Rates for Prime and Team Subcontractors  Often Based on Unverified Data or
Exceed Audit Recommended Rates

The PCOs used unaudited contractor-provided data in negotiating 67 of 99 (68 percent) indirect
rates with RACs prime and team subcontractors.  Specifically, unaudited rates were used in the
negotiation of indirect rates for 18 of 25 (72 percent) prime contractors and 49 of 74 (65 percent)
team subcontractors.  The following schedule delineates the PCOs' basis for award.
                                                	Indirect Rates	
       CO's Basis for Award                         Prime Contractor Team Subcontractor
       Current but Unaudited Rate                       18(72%)        49(65%)
       Forward Pricing Rate Agreement                    6(24%)         6( 8%)
       DCAA Established Rate                          0             10(14%)
       FACO Review of Revised Rate                      0              2 ( 3%)
       Proposed Rate (Unaccepted by DCAA)               0              2 ( 3%)
       Revised Rate(s) Reviewed & Accepted by DCAA      _L             _5(7%)
       Totals                                        25             74
When audited rates were available, the PCOs often negotiated rates higher than the audit
recommended rates.  This occurred for 15 of 25 indirect rates approved for RACs prime
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contractors and 21 of 72 indirect rates14 for team subcontractors.

The PCOs awarded rates based on unaudited data and higher than audit recommended rates
because:

•      Contractors submitted revised rates to reflect more current cost and pricing data. Audits
       had been requested on the contractor's initial proposal but not any subsequent revisions.
       The PCOs accepted the contractor-revised information based on the premise of using the
       most current, accurate, and complete data.  Our analysis revealed an average elapsed time
       of seven months between the audit report date and the completion of indirect rate
       negotiations.

•      Because RACs are awarded under Brooks Act procedures, the PCO may not be placing
       sufficient emphasis on negotiating reasonable indirect rates. According to the current
       PCO, the duration of cost negotiations ranged from a half day to a full day. Based on
       RACs preaward documents reviewed, the PCOs did not always resolve or follow up on
       the audit findings relative to indirect rates,  such as Cost Accounting Standards
       noncompliance, cost estimating deficiencies, treatment of unallowable costs, etc., as
       addressed in DCAA, OIG, or OAM's Washington Cost Advisory Branch reports. EPA
       cost-reimbursable contracts typically provide for CO-determined rather than audit-
       determined rates.  This gives the CO the option to disregard audit findings and consider
       the rates fair and reasonable  based upon materiality, historical experience, and other
       factors.

The FAR recognizes there may be a need for the contractor to update information prior to price
agreement and provides for updated information through execution of a Certificate of Current
Cost or Pricing Data.  However, the FAR 15.804-4(d) cautions that possession of a Certificate of
Current Pricing Data is not a substitute for examining and analyzing the contractor's proposal.
Therefore, audit assistance may be necessary for subsequent review of any significant revisions
to contractor pricing data. Without such, the Agency only has the representations of the
contractor and interim payments may be too high.  Due to the possibility of erroneous indirect
rates being established in the contract, it is imperative for PCOs to ensure accuracy because
future adjustments could have a significant impact on the total cost of the contract.
RACs DO NOT PROVIDE FOR ROUTINE USE OF REGIONAL CROSSOVER
       14 A total of 72 rates are provided instead of 74 because we could not determine audit
recommended rates in two instances and, therefore, conclude as to whether the final rates were
higher or lower that the rates recommended by DCAA.
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AUTHORITY AND SUCH USE MAY NOT BE BENEFICIAL TO EPA

OMB expressed interest in whether the regional crossover authority provisions in RACs could be
used to compete RACs work assignments across regions.  For instance, if a contractor in one
region provided better performance at less cost than contractors in another region, could the
second region solicit WAs from the contractor in the first region under the regional crossover
authority. According to OAM and OGC, RACs do not provide for WA competition, either
within or across regions. A bilateral contract modification of RACs would be required for such
competition to occur.  OAM officials further indicated that the regional crossover authority was
intended for use only in conflict of interest (COI) situations and capacity  shortfalls.  The
consensus among RACs contract managers was that frequent use of the crossover authority
would not increase RACs cost effectiveness but would potentially increase costs, create capacity
imbalance between regions, and contradict the original intent of awarding regional contracts.
Contract managers also said it would increase the difficulty of administering such WAs because
the CO, PO, and WAM would not be located in the same  region.

RACs contain provisions that permit each region to utilize the services of contractors in other
regions under certain conditions.  These regional crossover provisions provide:

       (a) In  the event of the Contractor's conflict of interest in conducting a specific
       work assignment (as determined by the Contracting Officer), or when maximum
       amount of effort has already been ordered or is about to be ordered by the
       Government [capacity shortfall], or in any other situations in which it is
       determined to be in the best interest of the Government, professional services for
       this Region may be ordered from another EPA Region's contractor.

RAC crossover authority, as currently written, does not preclude issuance of  WAs across
regional boundaries.  However, the Agency believes that the intent of the provisions was only to
address COI,  capacity problems, and other unforseen circumstances. An  OAM official stated
that the crossover provisions were never intended for issuance or competition of WAs across
regions.  She  also indicated that unrestricted use of this authority to issue WAs across regions
could have legal ramifications because such use contradicts the original intent of regional
contracts, i.e., contractors receiving contracts within a particular region would receive all of the
RACs WAs except in cases of COI or capacity shortfalls.

OAM officials and RACs contract managers in five regions indicated that routine issuance (or
competition if permitted) of WAs across regions would be unwieldy, administratively
burdensome,  and expensive. Contract costs would increase due to additional travel and per diem
for the contractor and the EPA administrative burden of soliciting and evaluating WA proposals
from a larger  pool of contractors. Also, administration of the WA would be more difficult
because the CO, PO, and WAM would be located in different regions.  RACs officials were also
concerned that such use of crossover authority would create an imbalance of capacity due to
several regions using another region's contract capacity.  Some regional COs and POs stated that
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competition or issuance of WAs across regions would negatively impact timeliness of WA
completion because it would take more time to award assignments due to the bidding and
negotiation process involved.

Based on our limited review of the possible use of regional crossover authority to increase the
cost effectiveness of RACs WAs, we concluded that such use may not increase the efficiency of
RACs operations, but, instead, may increase costs, create an administrative burden, and
negatively impact program accomplishments. However, we did not have time to thoroughly
evaluate the possible impact of such crossover use or EPA staff comments that this process
would negatively impact the RACs program.

SUBCONTRACT POOL HAS NO PERCENTAGE LIMITATION AND CAN BE USED
FOR COMPLETION FORM WAs

RACs subcontract pools have dollar limitations that are included in the contract as part of the
contract MPV. Although the pools were provided for under the term form component of the
contracts, related subcontract work can be issued under completion form WAs and charged
against the completion form dollar ceiling. According to the RACs User's Guide, the
subcontract pool provides specialized services for the prime contractor that ordinarily cannot be
provided by the prime or its team subcontractors. Discussions with OAM personnel and regional
COs and POs indicated that subcontract pool usage is restricted only by a dollar ceiling that
generally represents a third of the contract value. There is no percentage limitation on
subcontract pools.

In developing the RACs strategy, EPA's Office of Emergency and Remedial Response (OERR)
decided there would be three contract sizes, each having specific maximum dollar limits for LOE
hours, completion form, and subcontract pool. Therefore, the subcontract pool amount, as well
as other segments of RACs, were established with maximum dollar limitations.  Neither OAM
officials nor regional COs and POs had knowledge of a percentage limitation on subcontract
pools. For the ten RACs awarded at the time of this review, there had been minimum use of the
subcontract pool.  Some regions, such as Regions 3 and 5, had not utilized the subcontract pool
because their contracts were relatively new.  However, Region 7, as the first region to award a
RAC, had cumulative subcontract pool payments of over $1.7 million on one contract and over
$75,000 on another.  The contracts contain a clause allowing a unilateral decrease for any unused
portion of the pool inclusive of associated costs and fees.

According to file documentation and OAM officials, the subcontract pool  is a sub-cost element
of the term form segment of each RAC. However, the current PCO stated that, although the
subcontract pool is defined as part of the term form segment, subcontract pool actions can be
issued under completion form WAs and costs for subcontract pool efforts under completion form
are  considered part of and chargeable to the completion form ceiling established in the contracts.
Specifically, a paragraph within the Completion Form Ceiling clause of the contracts states:
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       Subcontracting efforts and equipment pertaining to specific activities under
       completion form work assignments shall be charged against the overall
       completion ceiling.

Therefore, RACs do not preclude use of the subcontract pool for completion form activities.

A CONTRACT FLOOR FOR COMPLETION FORM NOT DEEMED APPROPRIATE
BY AGENCY OFFICIALS

Agency management provided the completion form segment in the RAC contracts to make the
mechanism available to regional offices and encourage their use of this form of contracting. The
term form segment of RACs provides adequate  capacity to accomplish all program requirements.
The completion form ceiling was an additional dollar amount added to the contract which was
not based upon any actual or potential needs.  According to an EPA official  involved in the
development of the RACs program, the intent of including completion form in RACs was to
obtain "buy in" from the regions  and voluntary use of the mechanism. This official did not
believe they could have realistically set a mandatory lower limit for use of completion form. It
was a new concept for the regions and a mandated "floor" would have likely been met with
significant resistance. Regions are comfortable with the use of the term or LOE form of
contracting.  As a result, regional COs/POs did not believe the nature of the work is conducive
to completion form contracting. Therefore, placing mandates for completion form usage in the
contracts may have hindered progression towards completion form.

The current PCO was opposed to establishing a completion form floor within the contracts
because he believed it would create a Government obligation.  The contractor would have a right
to the specified dollar minimum regardless of whether the work materialized or not.  In the
PCO's opinion, this could be very costly because the regions would be reluctant to issue
completion form WAs when they are currently having difficulty using the existing term form
base hours. The PO was more agreeable to restructuring the contracts to make completion form
part of the contract base than to establishing a separate completion form base amount.

USE OF A&E CONTRACTS FOR RAC AWARDS REQUIRED BY STATUTE

According to OAM's Regional Contract Placement Branch, A&E type contracts were the most
appropriate mechanism for awarding RACs and statutory requirements prescribed that A&E
contracts would be used to procure response action services.  The Determination and Findings for
RACs documented that Agency contracting officials believed it impractical to secure the kind
and quality of services required without the use of A&E contracts.

According to the FAR, A&E services are professional services of an architectural or engineering
nature which are required to be performed or  approved by a person licensed, registered, or
certified to provide such services. OMB officials wanted to know why the entire RACs SOW
was awarded as A&E and whether other Federal agencies contracted in a similar manner.
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Current Superfund Legislation Limits Contracting Options

Contracting options for RACs were limited by Superfund legislation which mandated
implementation of Brooks Act procedures and use of A&E services for response actions and
related activities. Section 119(f) of the Superfund Amendments and Reauthorization Act (SARA)
of 1986 requires that:

       Response action contractors and subcontractors for program management,
       construction management, architectural and engineering, surveying and mapping,
       and related services shall be selected in accordance with title IX of the Federal
       Property and Administrative Services Act of 1949  [commonly referred to as the
       Brooks Act].

The Brooks Act requires evaluation of technical qualifications first over other factors, such as
cost reasonableness. However, the inability to obtain a reasonable cost with the highest
technically qualified firm is a basis for terminating negotiations with this firm and opening
negotiations with the second ranked firm.

We asked OAM officials whether there were portions of RAC work that were not of an A&E
nature or that could be procured under other contracting means. OAM officials and at least one
regional CO responded that certain portions of the RACs,  such as enforcement support and
preliminary site assessments, could be separated out and procured in another manner. However,
these tasks were already included in other active EPA non-A&E contracts. EPA officials
acknowledged that there is some overlapping of RACs and other contracts to ensure a contract
vehicle remains available as contracts expire.  Another OAM official stated that although most
remedial activities do not require a licensed A&E certification, use of this mechanism is critical
to remedy selection and design preparation. Project continuity, or having one contractor perform
the entire effort from beginning to end was to establish contractor accountability for schedule
delays, cost overruns, and public dissatisfaction.  At least one OAM official confirmed that this
method of procurement (A&E contracts) is more costly. Regions prefer to use other contract
mechanisms, when available, because contracts like ARCS and RACs, do cost more to use.
However, some Agency program and contracting personnel believe A&E contracts will save
money in the long run, because the Agency will be able to hold one contractor accountable for all
cleanup activities at a Superfund site. Also, EPA officials pointed out that potential PRP
litigation made use of certified engineering services the best mechanism. Work done by A&E
contractors was deemed more defensible in court.

In summary, RACs were procured as A&E contracts  because of the statutory requirement.
Additionally,  OAM officials believed it was more beneficial to have all Superfund cleanup
requirements under one contract. However, they were not opposed to a contracting mechanism,
other than A&E, for Superfund work if it were permitted by law.
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Use of A&E Contracts By Other Agencies

Information provided by the COE disclosed that the COE has several contract vehicles available
for remediation work that are not A&E contracts.  They indicated that these contracts are used for
services such as removal of contamination, construction (incineration, bioremediation, etc.),
environmental  impact statements, and compliance assessments.  The COE advised us that they
use A&E firms whenever issues of liability, or life and property, are involved.  COE officials
stated design work must be done by an A&E firm. The COE also listed work in the categories of
preliminary assessments, site investigations, remedial investigations, sampling and  analysis as
A&E contract work.  The COE's Total Environmental Restoration Contracts (TERC) are "cradle
to grave" contracts like the RACs, and are not A&E contracts.  The COE provides  contract
management and oversight on EPA's large Superfund sites.  On EPA sites, the COE normally
uses  TERCs for the remedial action  or construction phase of the cleanups and in that phase as
remedial action contractors, not construction management. The COE engineers provide
construction management and oversight for the TERCs contractors. The  Navy and  DOE also use
non-A&E contracts in hazardous waste cleanup activities.

When EPA enters into an interagency agreement with other Federal agencies to perform
hazardous waste clean-up activities, the contracting mechanism used by the other Federal agency
must meet the requirements of SARA Section 119(f).  Therefore, if the other Federal agency
performs the work specified in SARA as A&E, and a different form of contracting was used
(other than  A&E), there may have been a violation of the law. EPA needs to be aware of the
contracting mechanism being used to perform various aspects of site clean-ups, to ensure that the
appropriate contracting mechanism is being used by other Federal agencies.

RECOMMENDATIONS

We recommend the Acting Assistant Administrator for Administration and Resources
Management:

6-1   Require that COs consult with cognizant audit personnel prior to contract negotiations
      concerning revised indirect rates, which are higher than initially proposed or may result in
      a rate higher than the audit recommended rate.

6-2   Require COs to document efforts made to resolve outstanding audit issues relative to
      indirect rates and prepare justifications for approving rates while resolution  is still
      pending.

6-3   During the forthcoming Superfund reauthorization, seek a change in Section 119(f) of
      SARA to permit use of contract types, other than A&E, for program management,
      surveying and mapping, and related services.

6-4   Meet with other Federal agencies and obtain bench marking information on contract
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       mechanisms used for hazardous waste cleanup. Determine Superfund cleanup activities
       that may be feasible for non-A&E contracts.
AGENCY COMMENTS AND OIG EVALUATION

OARM expressed some disagreement with our conclusions and recommendations regarding
indirect rates for RACs. OARM did not express any substantial disagreement with the other
findings and recommendations presented in Chapter 6. OARM did indicate that certain
statements in the chapter needed to be clarified or corrected. Changes were made as considered
appropriate.

Draft report recommendations 6-3 and 6-6 were dropped from the final report.  Draft
recommendation 6-3 essentially duplicated Recommendation 3-5 in Chapter 3 of the final report.
Recommendation 6-6 related to a determination by EPA that the COE was complying with
SARA Section 119(f) in the use of A&E contracts for remediation on EPA's Superfund sites.
Information received from the COE in response to draft report clarified that the COE's use of
non-A&E contractors, such as TERCs, was for work which Section 119(f) did not require to be
done by A&E contractors.

A summary of OARM's comments on Chapter 6  findings and recommendations are presented in
Appendix II along with the OIG's evaluation of these comments
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                                                                          APPENDIX I
                                                                           Page 1 of 28
                                AGENCY RESPONSE
MEMORANDUM

SUBJECT:   Draft Report El SKF7-04-0037
             OMB Requested Review of EPA Contracting

FROM:      Alvin M. Pesachowitz
             Acting Assistant Administrator

TO:          Elissa R. Karpf
             Deputy Assistant Inspector General
              for External Audits
       The Office of Administration and Resources Management (OARM) and the Office of
Solid Waste and Emergency Response (OSWER) appreciate the opportunity to respond to the
concerns raised in the subject draft audit report. We value the Office of the Inspector General
(OIG) as an independent management control and take seriously any concerns the OIG might
raise.

       To the extent possible in the time frame allotted, we have looked into the issues raised in
the draft audit report.  We believe that we are acting properly and are continuously improving the
effectiveness and efficiency of contract management.  While we agree with many of the findings
in the draft report, we also believe the Agency has made significant progress in terms of the
visibility and quality of contracts management. As indicated, progress is continuous as we
proceed with several initiatives to streamline the process and increase management integrity and
accountability.

       Detailed comments on the draft report are attached. These issues are provided in the
materials that follow.  To simplify our  response, the findings and recommendations are discussed
by subject in the order of appearance in the report.  Thank you for considering our comments in
preparation of the final report.

       If you have any questions or comments, please call me at 260-4600, or have your staff
call Betty L. Bailey, Director, Office of Acquisition Management, at 202/564-4310.

Attachment(s)
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                                                                      ATTACHMENT 1

GENERAL CONCERNS

       We have taken the liberty to clarify, chapter by chapter, what we believe are
misperceptions or misunderstandings on the part of the OIG. Even so, there are several
comments we would like to make that apply to all of the chapters of the draft audit report.

       We believe the OIG's use of the term work assignment (WA) to encompass all task order
types fails to recognize the inherent differences between WAs, delivery orders, and task orders.
One significant  difference is that WAs are not funded; the contract is funded. Not so with
delivery orders.  Hence, while delivery orders and task orders issued under indefinite delivery/
indefinite quantity (ID/IQ) contracts are instruments that create obligations against which
appropriations may be expended to liquidate the obligations, WAs issued under level-of-effort
(LOE) contracts do not create obligations and are not funding instruments. Rather, under LOE
contracts, monies for performance of contract tasks are obligated at the contract level and WAs
are management tools used to control the flow of work and expenditure of those contractually
obligated monies.

       Keeping in mind that contracts are awarded, WAs are issued, and work plans are
approved should help limit the confusion.  WAs are not awarded; the only time a WA might be
considered awarded is when multiple contracts are awarded under the Federal Acquisition
Streamlining Act (FASA) and the WA is issued and competed among the contractors receiving
one of the initial multiple award contracts.

       Finally, we believe the OIG should recast the reasons behind the OMB request to review
various contracting issues.  As we discussed, we believe the language should be clarified  to
reflect the specific Passback language:

       "Agency-wide  Contract Issues - The Office of Inspector General, working with the Office
       of Acquisition Management and appropriate program offices, is requested to review
       contracting procedures and implementation for Superfund and other agency contracts
       relating to: 1) use of fixed price contracts; 2) accuracy of independent government cost
       estimates;  3) contract capacity; 4) use of award and incentive fees; 5) use of completion
       vs. term  forms; 6) length of base period and option periods; and 7) other items at the
       discretion  of the review team.  A preliminary draft of the report is requested to be
       forwarded to OMB with submission of the FY 1999 budget request in September of
       1997."
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                                    CHAPTER 2
        INDEPENDENT GOVERNMENT COST ESTIMATES NOT ALWAYS
      PROPERLY PREPARED OR EFFECTIVELY USED FOR COST CONTROL
       This chapter discusses the development and utilization of Independent Government Cost
Estimates or IGCEs.  The OIG reports that IGCEs were not appropriately prepared or adequately
used in contract negotiations.

Agency Response

1.  IGCEs Were Not Used as a Negotiating Tool

       The OIG implies that the Agency did not do a proper job in negotiating its work
assignments based on the OIGs perceived use and accuracy of an IGCE. Numbers alone do not
tell the whole story, and recognition should be made that prices negotiated were considered to be
fair and reasonable. While we agree that there are improvements to be made in the development
of good, realistic IGCEs, we believe, however, that the Agency has come a long way in this area
from several years ago when IGCEs were rarely done.

       We believe that IGCEs are most effectively used when they are used to monitor costs, not
as indicated in the report for "control" purposes. It is recommended that the word control be
replaced with words which indicate that IGCEs may be used to monitor the cost of performance.
EPA's Guide for Preparing Independent Cost Estimates" at 3.B. states:

       "A good IGCE can be used to prepare the budget, prioritize areas of concern and monitor
       the work in process. You must always keep in mind that the IGCE is an estimate and
       may differ from final cost."

       The draft report also states that providing contractors with the LOE estimate in a WA (as
opposed to a TO or DO) reduced the effectiveness of the IGCE as a cost control mechanism and
compromised the IGCE as an independent estimate since the contractor is being provided
information on fund availability.

       As the OIG indicates later in the report, the estimate for the WA and the amount of
available funds are irrelevant to each other.  We don't believe that providing the government
estimate of total LOE hours results in contractor proposals based on available funding. This
occurs only if the total hours set forth by the government when the WA is issued is based on the
available funding. The contractor's cost estimate will be based on the hours  stipulated regardless
of the government's basis for the estimate of hours.

       In addition, the draft report makes little distinction between work assignments, task
orders, or delivery orders. Little distinction is also made between LOE versus completion

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efforts. While we do not disagree with the direction the OIG appears to be going, i.e., that more
completion type efforts are desirable, in a true LOE WA, we must provide the contractor with the
maximum number of hours (at the WA not task level).  LOE WAs are "best efforts" assignments.
Without the government estimate on the number of hours needed, the contractor has no way of
gauging the magnitude of the WA. In fact, Federal Acquisition Regulation (FAR) language on
term form contracts repeatedly states that the contractor is to devote a "specified" level of effort.

       The OIG also makes the assumption that completion form WAs may be issued under a
LOE contract.  This is true only if the contract was awarded as such or allows for different types
of task orders.  Otherwise, WAs issued under an LOE contract require the contractor's best effort.
Hence, the OIG's statement that contractors are not "held accountable for completion or
individual tasks" fails to take into account that we are using cost reimbursable, term form LOE
contracts.  We believe the OIG should be careful not to mix contract types in the report.

       We agree,  however, that if WAs are truly written as completion efforts (assuming the
contract allows them to be issued under the contract) it would not be appropriate to provide the
contractor with an estimate of the hours anticipated.

2.  IGCEs Lacked Detail Necessary for Effective Cost Control

       The draft report is very critical of the lack of detail of IGCEs at the task level and fails to
mention EPA's "Guide for Preparing Independent Cost Estimates." The Guide provides for either
the "top-down" or "bottoms-up" method for preparing an IGCE. When the top-down method is
used, costs will rarely if ever be broken out at the task level. This may be appropriate depending
on the requirement and contract type.

       The draft report also indicates that IGCEs which do not provide for a breakout of costs at
the task level prevent any accumulation of individual task costs for historical purposes.  IGCEs
have no impact on the accumulation of actual costs. The reporting requirements of the contract
dictate whether cost details are provided to the Government at the task level.

       It is also noted that EPA provided additional hours to allow for completion of tasks
already started. The report concluded that this practice increases the potential for contractors to
continuously bill for hours without being  held accountable for completion of individual tasks.
Here again, if the comment was intended to apply to WAs, LOE contracts are a "best efforts"
arrangement.

3.  RACs IGCE Process Needs Improvement

       We believe that the OIG misunderstands the role and use of IGCEs in the A/E process
and award of response action contracts (RACs).  The draft report's statement concerning EPA's
emphasis on technical proposals, and less emphasis on negotiating contract costs, is by definition
true and should not be surprising. This is so because, as noted elsewhere in the report, we are
required by statute to obtain such A/E services using Brooks Act procurement procedures.  Those

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procedures dictate emphasis on the most highly qualified technical proposals as opposed to
lowest cost.

      We are concerned with the discussion referring to contractors preparing the government's
cost estimate. We note that it is common industry practice for the design contractor to prepare a
construction cost estimate along with the plans and specifications for the facility or remedy they
were commissioned to design. This estimate helps provide a benchmark for judging the
adequacy of the design, but is not intended to be blindly accepted by EPA as the Government's
cost estimate as the report implies.

      OSWER Directive 9202.1-12, jointly signed by OSWER and OAM personnel and issued
in July 1993, makes a clear distinction between the contractor's estimate at the remedial design
stage and the IGCE. This guidance document describes methods that should be used to develop
the government's construction cost estimate, including use of in house expertise if available or
use of other Federal agencies such as the Army  Corps of Engineers (COE). If the auditors have
found that this guidance was not being followed, and that the contractor's estimate was being
used as the IGCE with no review or modification, then the clarification needs to  be made.

      While we agree that the inexperienced or untrained personnel should not be preparing
IGCEs, we do not agree that a temporary Government employee should not prepare an IGCE just
because the employee is temporary. There may be cases where a temporary employee is just as
qualified as permanent staff, if not more so.  An employee's temporary status is irrelevant, as
long as the employee has the proper qualifications.

4. No process for Accumulating Historical Contract Costs or Evaluating IGCEs

      In general, the draft report reflects  an over dependence on historical workload data in
developing accurate cost estimates  and IGCEs.  We do not dispute the importance of historical
cost data, however, other factors and/or variables are equally important. An over reliance on
historical data does not allow for adjustments due to past inefficiencies of contractors,
improvements in productivity, or changes  in technology.

      This section of the report also discusses cost estimating techniques and procedures used
by the COE. The historical cost data base referred to may be the microcomputer computer-aided
cost engineering system (MCACES). The EPA Superfund program contributes information to
this system.  We also participate in the interagency cost estimating workgroup and have helped
develop several of the cost estimating tools such as the remedial action cost engineering and
requirements system (RACER) and MCACES.  In fact, we mandate the use of MCACES in our
RACs to estimate remedial  action costs during remedial designs.
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OIG Recommendations
       The Acting Assistant Administrator for Administration and Resources Management
       in coordination with other appropriate senior Agency managers:

       2-1    Obtain cost estimator training for contracting officers (COs) and project
             officers  (POs) similar to that received by COE contract managers.

       We agree that cost estimator training would be a valuable tool for POs and work
assignment managers (WAMs). We believe that COs should be deleted from the
recommendation since this is not a CO function, but more appropriate for SROs and program
offices. We will research cost estimator training and make the appropriate recommendations to
program offices.

       It should be noted that specific training in developing detailed IGCEs to all POs and
WAMs using models like the COE's MCACES and RACER would be best suited for Regional
POs and WAMs. This type of training was provided several years ago and could be presented
again.

       2-2    Emphasize to program staff that IGCEs should include a detailed cost
             analysis of each task  and/or subtask to be performed under a contract or WA
             as a basis for effective cost negotiations and as a mechanism for tracking
             actual costs for specific work.

       2-3    Instruct POs and COs not to accept IGCEs that do not include estimated
             costs for individual contract or WA tasks, or that do not otherwise comply
             with EPA guidance.  Emphasize to COs that IGCEs are a cost control tool
             that should be effectively utilized during contract and WA negotiations

       As we noted earlier, IGCEs are not a cost control tool but a tool to monitor costs. We
agree that project officers or contracting officers should follow current guidance provides for
both the "bottoms-up" and "top-down" method of estimating when preparing IGCEs.  The "top-
down" method will not provide a breakout of anticipated costs at the task level.  In addition,
OSWER Directive 9202.1-12 states that "estimates must, at a minimum, be broken out by task
and subtask as outlined in the statement of work (SOW). . ."

       OAM will issue a memorandum to program officials regarding IGCE issues raised by the
OIG, and will emphasize that were appropriate, cost analyses of tasks and/or subtasks should be
included in the overall IGCE.  OSWER will also reemphasize or reissue the OSWER guidance as
appropriate, to ensure that IGCEs contain  the necessary detail to be used as an effective
negotiating tool.

       2-4    Develop processes to  evaluate IGCEs and accumulate historical contract
             workload and related cost information in a database format. Form focus

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             groups, to include program staff, to identify existing impediments to
             developing historical cost databases on an individual program basis.

       This information is already called for in RAC contract work assignments, and options are
now being considered for how best to utilize that information in an interactive data base format.
The goal is to form a data base that will capture our own cost information so that it can be used
as an IGCE resource, and to have this data base feed the Interagency Historical Cost Analysis
System (HCAS) that is being developed by the COE and others.

       The SROs of each AA-ship meet periodically as the Resource Management Committee to
discuss various resource issues. At the next meeting in October, OAM and the OIG will make a
joint presentation to address this and other OIG reviews. OAM will include the database issue in
that discussion.

       2-5   Instruct program  staff to seek available cost information from other Federal
             agencies, such as the COE, or private entities that are contracting for similar
             work when preparing IGCEs.

       Several of the Regional offices already use the COE or the Bureau of Reclamation for the
types of assistance noted above. OSWER is currently exploring ways to encourage other
Regional offices to utilize the cost estimating expertise of these Agencies for  support.

       In addition, in its memorandum to program  officials regarding IGCE issues raised by the
OIG, OAM will highlight the types of assistance that is available through other Federal agencies.
       2-6   Develop model SOWs to determine if ranges can be established for
             contingencies, or information gathered to clarify and define contract tasks
             and resolve uncertainties involved in work currently performed under LOE
             contracts.

       OSWER believes that their ability to comply with this recommendation is dependent on
the ability to create the historical cost data base referred to in recommendation 2-4. If a data base
of historical RACs costs is developed, cost contingencies for individual tasks could be
developed.

       We agree that model SOWs can be helpful.  We believe, however, that in many cases, it
is our inability to define specific contract tasks and resolve uncertainties which led to the award
of an LOE contract. As opportunities present themselves, we will aid program offices  in
developing model SOWs. We will bring this issue  to the attention of the Resource Management
Committee for their consideration.

       2-7   Instruct POs and WAMs not to use contractors and inexperienced,
             temporary employees to prepare Government cost estimates. Require that
             program personnel preparing IGCEs have the necessary experience and
             training to ensue that accurate, detailed cost estimates are  developed.

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      In its memorandum to program officials, OAM will also emphasize that experienced and
properly trained Government employees should be preparing IGCEs and that contractors should
not be involved.
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                                     CHAPTER 3

  EPA HAS NOT MADE OPTIMAL USE OF MORE EFFICIENT CONTRACT TYPES
       The OIG maintains that EPA continues to rely on cost-reimbursable LOE contracts that
essentially buy labor hours and place the majority of risk for performance on the Agency.
Consequently, the OIG believes that EPA may also be paying excessive costs for services that
could be procured under different contract types.

Agency Response

1.  Tasks Conducted Under Cost-Reimbursable LOE Contracts Could Be Awarded Under
Contract Types More Favorable to the Government

       We agree that more WAs issued under LOE contracts could probably be issued as
completion, firm, fixed-price, or performance based efforts.  We are not convinced, however, that
the extent to which those opportunities exist is as great as the OIG believes. Even if those
opportunities do exist, they carry with them significant vulnerabilities Government-wide.

       For example, in December 1996, the OIG forwarded to us the article "Combining Cost-
Pius and Time and Materials Contracts to Earn Excess Profits: A Case Analysis," with its
comments against using more than one type of WA under an LOE contract type due to the
increased potential for contractors to earn excess profits. (See Attachment 2.)  In addition,
Attachment 3 includes an article from the September 1997 Contract Management Magazine
published by the National Contract Management Association also arguing against the use of
fixed-price and performance based contracting arrangements in the environmental arena as
inappropriate for the type of work at hand. Moreover, despite espousing the opposite, the
promise from the Hazardous Waste Action Coalition of sample SOWs for performance-based
contracting in the environmental arena has never materialized. EPA has been working with
several Government and industry groups to identify best practices in this arena and will continue
to  do so.

2.  Potential for Completion Form Contracting

       We agree that there is  a potential for more completion form WAs under RACs contracts.
However, only Region 7 has had any success with the completion type of WA - not yet enough to
draw the conclusion that completion form efforts are an appropriate contracting mechanism for
many more actions.  Regardless of the historical knowledge we have accrued under the
Superfund program, the variability of site conditions will always have an impact and lend a great
deal  of uncertainty to a cleanup effort. Numerous change orders, as noted in Attachment 3, are
costly in terms of valuable scarce resources.

3.  Barriers/Limitations affecting the Use of Other Contract Types - Funding

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       The discussion of funding indicates the OIG's position that 48 CFR 16.306 suggests that
work performed under completion contracts and work assignments is considered non-severable.
The Superfund program is funded with no year appropriations, and such appropriations are
available for obligation without any fiscal year limitation. Thus a multi-year non-severable work
assignment can be incrementally funded because the no year appropriation remains available
until it is expended.  On August 28, 1995, the Director of the OAM Superfund/RCRA
Procurement Operations Division issued a memo clarifying the fact that completion form work
assignments under RACs may be incrementally funded.

       The statement that the IG "could not identify any program or regional office commitments
to plan and propose more completion form, fixed-price, and/or performance-based contracts" is
factually incorrect.  The OSWER Office of Emergency and Remedial Response (OERR) has
made a strong commitment to OMB to implement performance based service contracting (PBSC)
pilots within the Superfund program.  OERR's continues to work with OMB on this initiative.

       The Office of Management  and Budget's (OMB's) FY 1998 Passback tasked EPA to
prepare one performance-based cleanup RAC contract and one performance-based cleanup
contract for Emergency and Rapid Response Services (ERRS) as a pilot project within eight
months.  In response to this, OERR met with OMB representatives to offer an alternative
approach for the application of PBSC within the Superfund program. OERR's approach was to
canvass the ten Regional offices to  ascertain FY 97 candidate sites (i.e., at the work assignment
and/or  delivery order level) that offered the type of work and contracting vehicles appropriate for
the successful application of PBSC.

       Consequently, OERR conducted conference calls with designated leads in each Region
and found eleven (11) candidate sites offering both remedial and removal PBSC opportunities
within  the Superfund program.  OMB reviewed these sites, but since most of them were sites
where the prime contractor was subcontracting the cleanup work,  OMB requested that we try to
identify candidate sites where the prime contractor has direct responsibility for the cleanup and
where opportunities exist to influence both the design and construction  as PBSC.  OERR is
working closely with the Regional designated leads to identify new FY  97 PBSC candidate sites,
as well as FY 98 sites that meet OMB's criteria.

       Currently, EPA has received approval to implement the principles and techniques of
PBSC for Residential Cleanup Services at three pilot sites bordering both Regions 6 and 7.
During the week of August 11, OERR representatives together with COE personnel met with
EPA Region 6 and conducted a two day PBSC Workshop.  The purpose of this workshop was to
develop a PBSC ordering instrument (i.e., work assignment and/or delivery order) and other
ancillary documents to acquire Residential Cleanup Services for use at the three pilot sites. The
results  of our collective efforts were provided to OMB for review and approval  at our meeting on
Thursday, September 4, 1997.

       Finally, the OAM and OERR are sponsoring a five day training course offered by the
Naval Center for Acquisition Training (NCAT) to Regional and headquarters personnel to

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educate them on PBSC concepts and techniques. The first of several planned training sessions
will be conducted on September 8 -12 in Washington, D.C.

OIG Recommendations

       The Acting Assistant Administrator for Administration and Resources Management
       in coordination with other appropriate senior Agency managers:

       3-1    Establish goals for each Headquarters program office and each regional
             office for awarding more of its extramural funds under completion form,
             performance-based and/or fixed-price contracts.

       In the upcoming October meeting of the Resource Management Committee, OAM and
the OIG will make a joint presentation to the Senior Resource Officials representing each of the
Agency's AA-ships.  At that time, this and other issues will be discussed.

       Also, as part of the development of the Superfund Contracts  2000 Work Group
initiatives, we will continue to work with the program and encourage movement towards
completion form performance-based service contracts.

       3-2    Require Senior Resource Officials (SROs) to justify  awarding contracts that
             do not comply with OFPP Policy Letter 91-2 regarding PBSC.

       Not all requirements are suitable for PBSC  and requiring the SRO to justify all non-
PBSCs is contrary to streamlining the pre-award process, will increase an already extended lead
time.  We believe the training that is already scheduled, coupled with the initiatives currently
underway by OAM and OSWER will help to address the issue.  In addition, we will add PBSC to
our list of issues to be presented to the RMC in October.

       3-3    Establish work groups of both OAM and program officials to:

             a.      develop model performance statements of work for recurring services
                    that would facilitate increased use of completion form, fixed-price,
                    and performance-based contracts. At least one workgroup should
                    address tasks of a technical support nature.

       Several Government-wide work groups have developed  sample SOWs which are
available on the Internet and have been identified to contracting and program officials.

       Regardless, this is also an issue that will be identified at the October RMC meeting for
discussion with the various program offices.

             b.     develop a strategy for meeting OMB's contract reform goals.  This
                    strategy should include identifying candidate services for conversion

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                    from LOE, and deciding on appropriate contract types for facilitating
                    this conversion.

       OAM is currently working on over 50 separate initiatives to help meet OMB's contract
reform goals, of which PBSC is one. We have embarked on a plan of continuous improvement,
including choosing the appropriate contract type for the requirement.

       In addition, the PBSC work group with members of OAM, the program office, and OMB
currently exists to identify PBSC  specific WA candidates.  The work group is projected to
identify the fiscal year 1998 PBSC sites by the end of the first quarter.

       3-4    Provide training on completion form and PBSC to both contracting and
             program officials.

       PBSC training, provided by the naval Acquisition Training Center, is scheduled to begin
September 8, 1997 for both contracting and program officials. The training will be provided to
all contracting officials and provided for other program officials as well.

       3-5    Request a waiver from the Comptroller General to the requirement to fully
             fund completion form WAs at time of award. Such a waiver could resolve
             program office concerns over funding this type of WA and increase the
             Agency's use of completion form contracting.

       Since this is based on the Bona Fide Needs Rule, a statutory requirement which cannot be
waived, it was agreed that this recommendation would be withdrawn.

       3-6    Modify existing RACs contracts to establish an appropriate base amount for
             completion form as currently exists for term form, LOE contract actions. In
             addition, future RACs awards should include a minimum completion form
             usage amount.
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       We do not believe that it is feasible, or in the Government's best interest, to re-negotiate
RACs, as doing so will obligate the Government to meet stated minimums for completion level
amounts which will only increase the Government's fiscal liability.

       As part of the development of the Superfund Contracts 2000 Work Group initiatives, we
will work with the program to address this issue.

       3-7   In coordination with the director, OAM, and the Director, Office of
             Emergency and Remedial Response (Superfund), perform benchmarking to
             determine appropriate uses of completion form assignments for RACs
             activities other than mobilization.

       As noted above, OAM and OSWER are working together on several initiatives which
will address the appropriate uses of completion form assignments for RACs contracts.

       3-8   Review coding  of contract types in the Contract Information System (CIS) to
             ensure that fixed-price and ID/IQ contracts are accurately identified.

       As more and more of our contracts are awarded through the Integrated Contract
Management System (ICMS), our dependence on CIS diminishes. At this time, we do not
believe that it is in our best interest to devote the resources to altering  CIS.
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                                     CHAPTER 4

                AWARD FEE CONTRACTS GENERALLY PROVIDED
              LIMITED INCENTIVE FOR SUPERIOR PERFORMANCE

       This chapter of the report discusses the benefits of CPAF-type contracts and expresses
concern over the decline in the use of CPAF and the increase in use of fixed fee (CPFF) type
contracts.

       By way of clarification, please note that available award fees are calculated based on
hours ordered not costs billed. The latter would present a cost-plus-percentage-of-cost situation
which is prohibited.

Agency Response

1.  Limited Implementation of Revised Award Fee Guidelines

       The draft report is critical of the Agency as a result of the overall decline in the number of
award fee contracts. The report attributes the decline to the new administrative requirements and
award fee restrictions implemented by the Agency. In fact, these restrictions were developed in
part to respond to earlier OIG reviews which were extremely critical of the Agency and our
mismanagement of award fee contracts.

       Overwhelmingly, the decline of the CPAF and the increased use of CPFF is the result of
the great administrative burden on EPA personnel associated with CPAF contracts.  The costs of
this effort must be weighed against the expected  benefits resulting from use of the CPAF contract
type.  When the costs are greater than the expected benefit in terms of motivating contractor
performance, use of the CPAF type contract is not appropriate.

       Contracts Management Manual (CMM) Chapter 15 serves to strengthen and reinforce the
limitations set forth in FAR Part 16 regarding use of award fee contracts. FAR 16.405-2(c)(3)
specifically states that no cost-plus-award-fee contract shall be awarded unless the contract
amount, performance period, and expected benefits are sufficient to warrant the additional
administrative effort and cost involved. The CMM requires that a determination be made that the
contract is likely to be less costly and that it is impractical to obtain the supplies or services
without the use of this type of contract.

       In addition,  the conclusion drawn by the OIG does not take into account attempts by the
Agency to split large mission contracts into smaller contracts which were no longer suitable for
award fee contracts.
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OIG Recommendations
       The Acting Assistant Administrator for Administration and Resources Management
       in implementing Recommendation 3-3 in Chapter 3 of this report:

       4-1    Instruct the workgroups to:

             a.      Identify impediments to the use of CPAF type contracts and
                    opportunities to streamline the related administrative processes.

       As requirements  for CPAF type contracts are identified, we will look into potential
streamlining initiatives.  We will also present this to the RMC at the October meeting for further
discussion.

             b.      Identify appropriate candidate services for an award under CPAF.

       When each new contract action, the CO in conjunction with the program office,
determines the appropriate contract type for the requisite requirement.  We believe that this is the
proper way the contract type decision should be made.

             c.      Develop award fee plans that provide proper incentive for superior
                    performance and that, for LOE contracts, base award fees on some
                    element other than costs billed.

       As noted earlier,  award fee awarded in a LOE contract is based on LOE hours delivered
during the evaluation period, not costs billed. We believe that the current policy as written
provides proper incentive for superior performance.

             d.      Develop CPAF contracts for candidate services that meet requirement
                    ofPBSC.

       As noted in (b) above, CPAF contracts will be developed for requirements as appropriate.

       4-2    Evaluate existing CPAF contracts for possible modifications that incorporate
             current award fee procedures.

       The policy incorporating the current award fee procedures is now two years old.  We do
not believe that it is in the Government's interest to modify existing contracts since most of them
should be expiring soon.
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                                    CHAPTER 5

             CONTRACT PERFORMANCE PERIODS AND CAPACITY
                        DID NOT PREVENT COMPETITION
      We believe that the OIG correctly concludes that there is no correlation between the size
and performance periods of EPA contracts, and the competition that occurred during contract
award.

      The OIG observes, however, that an analysis of CIS data identified potential excess
capacity in EPA contracts.  We would like to note, however, that the Agency has already
significantly reduced the excess capacity on its contracts, and continues to make efforts to
continue this downward trend.
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                                      CHAPTER 6
                        OMB CONCERNS SPECIFIC TO RACs
       This chapter addresses several questions posed by OMB regarding Superfund's Response
Action Contracts or RACs. In general, the OIG found that RACs contracts were awarded with
adequate competition and in accordance with prescribed procurement procedures. Contract
clauses related to regional cross-over by contractors do not, however, allow for competition of
RACs WAs.

Agency Response

1.  Indirect Rates For RACs Not Effectively Negotiated

       We disagree with the implication that using unaudited rates will cost the Government
more.  These are provisional billing rates, not final rates, which will be audited and will represent
the actual cost to the Government. Provided the billing rates are not too far off from what the
final rate are (which can happen whether the rates are audited in the preaward stage or not), the
impact will be slight, other than potentially paying too much before closeout, and having to
recoup it later.

2.  Use of RACs Regional Crossover Authority to Increase Competition May Not Be Beneficial
to EPA

       At pages 49-51 of the draft audit, the OIG discusses whether the regional crossover
authority in RACs could be used to compete RACs work assignments across regions. The OIG
states that it believes that the crossover provision could legally be used in this manner, however,
the provision was  intended for use only in conflict of interest (COI) situations and capacity
shortfalls. The OIG concludes that, based upon its limited review of possible use of regional
crossover authority, competing RAC WAs may not increase the efficiency and effectiveness of
RACs operations but rather, may increase costs, create an administrative burden and negatively
impact program accomplishments.

       We do not disagree with the OIG's conclusion that a hypothetical competition of WAs
issued under RAC contracts,  either within or across regions, may not  increase the efficiency and
effectiveness of RACs operations, but rather, could result in increased costs and administrative
burdens. However, this audit section incorrectly states that WAs may be competed among
RACs, either within or across regions.

       The Agency's active RAC contracts do not provide for WA competition, nor were they
intended to do so.  Rather, as the OIG correctly notes, the regional crossover provisions in these
contracts were designed to enable EPA to utilize another contract to obtain RAC services in
those instances where COI concerns or capacity shortfalls prevent a RAC from performing a
particular WA. Competing WAs among RACs would be such a significant change to these

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contracts, that to do so would require EPA and the affected RACs to negotiate bilateral contract
modification(s). This would undoubtedly increase administrative burdens associated with the
RAC contracts and could result in increased costs to the Agency.

3.  Use of A&E Contracts for RAC Awards Required by Statute

       We agree that Section 119(f) of the Superfund Amendments and Reauthorization Act
(SARA) of 1986 requires the implementation of Brooks Act procedures and the use of A/E
services for response actions and related activities.

       We believe that there is a fundamental difference in the nature of the work being done
under the COE's Total Environmental Restoration Contracts (TERCs) versus the EPA RACs.
During the development of the TERCs, COE personnel had discussions regarding the Brooks Act
and its  application to these contracts.  The COE ultimately determined that the focus was clean
up and  not program management, construction management, A/E services, surveying and
mapping, or related services. It was for this reason that the TERCs were not awarded as A/E
contracts.

       Within the COE contract tool box, there are also A/E contracts (as noted in the report)
which are used when the product is a design, investigation, or study. EPA uses the RACs for
more of these services in the conduct of RI/FS and remedial design work.  When assigned a
remedial action, the RAC's responsibility is limited.  We therefore do not believe a direct
comparison can or should be made between the COE TERCs and the EPA RACs.

Recommendations

       The Acting Assistant Administrator for Administration and Resources
Management:

       6-1   Require that COs consult with cognizant audit personnel prior to contract
             negotiations concerning revised indirect rates, which are higher than initially
             proposed or may result in a rate higher than the audit recommended rate.

       COs will continue to seek advice and counsel from cognizant audit personnel; however,
the auditors do not determine the final rates or direct the method of charging. Such final
decisions are within the discretion of the CO. Since all rates billed are provisional until final
audit, and annual submissions are required by the contractor to determine rates, we do not believe
that excessive indirect costs are paid under RACs.

       6-2   Require COs to document efforts made to resolve outstanding audit issues
             relative to indirect rates and prepare justifications for approving rates while
             resolution is still  pending.

       It is OAM's standard practice to have COs follow-up on indirect cost issues after contract

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negotiations and prepare contract file documentation. We will remind COs of the importance of
doing this consistently.

       6-3    Modify existing RACs contracts to incorporate completion form as part of
             the required base usage amount.

       This recommendation is essentially the same as recommendation 3-6.  In order to modify
existing RACs to establish an appropriate base amount for completion form as currently exists
for term form, we believe that the terms and conditions of each individual contract would have to
be renegotiated to include provisions allowing completion-form WAs, as well as the appropriate
base amounts. We do not believe that it is feasible, nor is it in the Government's best interest, as
doing so will obligate the Government to meet stated minimums for completion level amounts
which will increase the Government's fiscal liability.

       OSWER also disagrees with this recommendation and recommendation 3-6 which are
essentially the same. It believes that the use of completion form work assignments should not be
a requirement that is established in the contracts, but rather established as a management policy.
In other words, use of completion form work assignments is an EPA management issue and not a
contractual  issue.

       6-4    During the forthcoming Superfund reauthorization, seek a change in  Section
             119(f) of SARA to permit use of contract types other than A&E for program
             management, surveying and mapping, and related services.

       All elements of Superfund contracting are being examined in the Superfund Contracts
2000 Work Group.  The work group is discussing separation of the remedial work from the pre-
design site assessment work. To the extent that it is logical to break out services, we will use
separate contract vehicles to acquire these services.

       6-5    Meet with other Federal agencies and obtain benchmarking information on
             contract mechanisms used for hazardous waste cleanup. Determine
             Superfund cleanup activities that may be feasible for non-A&E contracts.

       On a continuing basis, EPA is exploring other agencies' contract strategies and methods
for the purpose of benchmarking Agency Superfund contracting techniques.  EPA believes its
acquisition  strategies and contract types provide value equal to those of other  agencies' contracts.
This is another issue to be addressed by the Superfund Contracts 2000 Work Group.

       6-6    Review the current interagency agreements to determine whether the
             requirements of SARA Section 119(f) are being met.

       As we discussed subsequently, we do not believe that a review of current interagency
agreements is the correct approach, especially since no instances were found in which an
incorrect contracting mechanism was used by another Federal agency.

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      Regardless, OAM will coordinate with the COE to ensure the proper usage of A/E
contracts in accordance with SARA 119(f).
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                                                                        APPENDIX II
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                    OIG EVALUATION OF AGENCY RESPONSE
Specific OARM comments on the report's findings and recommendations as presented in
Appendix I are summarized below along with the OIG's evaluation of these comments.

Chapter 2 - Comments on Findings

IGCEs Were Not Used as a Negotiating Tool

OARM disagreed that IGCEs should be used for cost control as reflected in the draft report.
OARM believed that IGCEs were most effective when used to monitor costs.  OARM cited
EPA's IGCE guidance which stated: "A good IGCE can be used to prepare the budget, prioritize
areas of concern and monitor the work in process (emphasis added)."

While we agree that a good IGCE does represent a valuable tool for monitoring post-award
contract costs, the finding addresses preaward use of the IGCE. FAR 15.805-3(c)(4) and
15.807(a) discuss the usefulness of IGCEs as a tool for cost analysis and establishing
prenegotiation objectives.  Therefore, we substituted the term "cost analysis" for "cost control"
where appropriate.

OARM disagreed that providing contractors with the government estimate of LOE hours used in
the IGCE would necessarily compromise the IGCE process.  OARM did agree that when the
government's labor hour estimate is based on available funding, the effectiveness of the IGCE
could be reduced. OARM further stated that, in a true LOE WA, the government must provide
the contractor with the estimated hours because such WAs are best effort assignments  and the
contractor has no other way of gauging the magnitude of the WA.

As indicated in the report, many IGCEs for LOE WAs reviewed at RTF, Cincinnati, and
Washington seemed to be based on the budgeted or available funding for each WA. A member
of the Task Force that developed EPA's IGCE guidance stated that LOE IGCEs should be treated
no differently that IGCEs for completion form type contracts. Although we are essentially
buying hours, a good SOW will provide a basis for the types  of labor required  for the hours EPA
is buying. The member further said that it would only be appropriate to provide the contractor
with the government's labor hour estimate when EPA has already developed the labor mix for
the WA requirements.

A well defined SOW should provide a contractor with sufficient information to estimate costs.
Providing contractors with the government's estimate of labor hours establishes an opportunity
for the contractor to skew the labor mix, if necessary to use all available hours included in the
government's estimate.  Contrary to OARM's response,  we do not believe the  FAR definition of
an LOE contract defines the procedures EPA should employ in developing IGCEs and
negotiating WA costs.
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OARM's response further contends that the OIG makes the assumption that completion form
WAs may be issued under an LOE contract.  OARM states this assumption is true only if the
contract allows for different types of task orders. Therefore, the OIG's statement in the report
that contractors are not "held accountable for completion of individual tasks" fails to take into
account that the contracts are term form, cost reimbursable which provide only for the
contractor's best efforts, not task completion.

We could not find any statement in the draft report that completion form WAs could be issued
under LOE contracts. The report does indicate that whenever a contract action of any type is
initiated, the Government should establish goals for the action, either completion of tasks, a
period of performance or some other attainment.  These goals form the basis for developing the
IGCE.  As discussed in Chapter 3, many of the LOE WAs reviewed were often written, although
not issued,  as completion form with specific goals to be obtained or tasks to be completed during
the WA performance period.

IGCEs Lacked Necessary Detail for Cost Analysis

OARM indicates that the draft report failed to mention EPA's IGCE guidance.  OARM also
points out that the IGCE Guide provides for  either a "top-down" or "bottoms-up" method of
preparing IGCEs. The "top-down" approach rarely results in costs broken out at the task level.

Contrary to OARM's response, the draft report recognized and quoted from EPA's guidance for
preparing IGCEs in the Background section for Chapter 2. We agree that this guidance provides
for both detailed and summary type cost estimates; however, Section 3-2 of this guidance also
stated: "The Agency wants the bottom-up type of detailed IGCE for all work assignments and
delivery orders."

RACs IGCE Process Needs Improvement

OARM indicated that the OIG misunderstood the role and use of IGCEs in the  award of A&E
contracts. This comment was based on the draft report statement that during the RACs award
process, EPA placed more emphasis on technical proposals than on negotiating costs.  OARM
points out that Brooks Act procedures for acquisition of A&E services requires emphasis on the
most highly qualified technical proposal rather than the lowest cost.

We recognize that RACs were awarded under Brooks Act procedures.  However, once the most
highly qualified proposals are identified, price reasonableness of these proposals must be
addressed.  Review of RACs awards for four regions provided insufficient evidence that contract
costs were effectively negotiated. A&E procedures provide for going to the next qualified
vendor if a reasonable price can not be agreed upon.  This did not occur in any  of the contracts
reviewed, despite significant variances between IGCEs and final contract amounts.  To address
OARM's concerns, we recognized in the final report that the Brooks Act required EPA to
emphasize technical  qualifications in the RAC awards.
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OARM expressed concern with our reference to a contractor who essentially prepared the
government's cost estimate for a follow on contract action. OARM indicated that it is common
industry practice for contractors who prepare the remedial design to also estimate construction
costs for the design remedy. OARM agreed with the report that inexperienced and untrained
personnel should not prepare IGCEs but disagreed that a temporary employee should not prepare
an IGCE just because the employee is temporary.

We recognize that it may be common practice for contractors to prepare and cost out remedial
designs. However,  the work involved in the cited WA was not related to design or construction.
According to the PO, the ARCS contractor prepared the estimate as part of an ARCS WA for a
river study. The RACs contractor was tasked to performed a health and ecological risk
assessment. The PO said since the tasks to be performed were similar, she used the ARCS'
estimate, and added additional hours for start-up and re-sampling.  This was clarified in the final
report. Furthermore, we agree that temporary status does not necessarily indicate that an
employee is unqualified to prepare an IGCE. However, regional files documented that the
employee was "not familiar with the Brownsfield initiative and did not take into consideration
certain requirements" in preparing the IGCE. We added this information to the final report.

No Process for Accumulating Historical Contract Costs

OARM's response indicated that the draft report reflected an over dependence on historical costs
in developing accurate costs estimates. OARM indicated adjustments for past contractor
inefficiencies, improvements in productivity, or changes in technology are important
considerations in IGCE preparation. The response also indicates that the RACs mandate use of
the COE's Microcomputer Computer Aided Cost Engineering System (MCACES) to estimate
remedial action costs.

We agree that factors other than historical cost have to be considered in preparing IGCEs.  Our
review focused on the Standing Committee conclusion that creation of an historical cost data
base would substantially improve IGCEs.  However, in the five years since the Standing
Committee Report,  EPA has not made the commitment to create and use this type of information
in preparing IGCEs. WAMs, POs and others interviewed stated that they relied on their personal
experience to develop IGCEs. Therefore, the quality of the cost estimate is dependent to a large
degree upon the experience level of the WAM and PO. WAMs and POs generally believed that
access to historical  cost data would be a valuable resource in creating more effective IGCEs.  We
did not identify any requirement that POs and WAMs use MCACES in preparing RACs cost
estimates.  While such a requirement may exist, none of the RAC POs or WAMs interviewed
indicated that any data base or system was used to develop their cost estimates. These POs and
WAMs did state that estimates were primarily based on their personal experience.
Chapter 2 - Comments on Recommendations

OARM Response to Recommendation 2-1

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OARM agreed that cost estimator training would benefit POs and WAMs, but disagreed that
COs need the training because IGCE preparation is not a CO function. OARM indicated that it
would research this type training and make recommendations to the program offices.

OIG Evaluation

We continue to believe that COs need training to enhance their ability to evaluate IGCEs
prepared by POs and WAMs and properly use the IGCEs to negotiate contract costs. Therefore,
we changed the recommendation to require CO training in the review and use of IGCEs.

OARM Response to Recommendations 2-2 and 2-3

OARM again concludes that IGCEs are not a cost control tool but a tool to monitor costs.
OARM also emphasizes that POs and WAMs, under current IGCE guidance, have a choice
between the detailed "bottoms-up" approach and the summary "top-down" approach.

OIG Evaluation

As previously stated, the term "cost analysis" was substituted for the  term "cost control" in
describing IGCEs in Chapter 2. Although the IGCE guidance referred to in OARM's response
does outline two approaches to IGCEs, Section 3.2 of the guidance subsequently provides that
EPA wants IGCEs prepared using the detailed "bottoms-up" approach. As a result we continue
to believe that these are valid and reasonable recommendations.

OARM Response to Recommendation 2-4 through 2-7

OARM expressed no serious disagreement with these recommendations. OARM referred to
some planned or ongoing initiatives related to several of the recommendations including
presenting several of the recommendations to the Agency's Resource Management Committee.

OIG Evaluation

In response to the final report, OARM should identify specific completed actions or planned
actions with milestone dates for completion for each recommendation to facilitate resolution of
these recommendations.

Chapter 3 - Comments on Findings

OARM disagreed with the statement  that the OIG could not identify any program or regional
office commitments to plan and propose more completion form, fixed price, and/or performance
based contracts. OARM indicated that OERR had a strong commitment to OMB to implement
performance based pilot contracts within the Superfund program.
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We recognize that OERR currently has commitments to pilot PBSC contracts in the Superfund
program. However, these commitments were essentially mandated by OMB in the FY 1998 Pass
Back Decisions for the President's Budget. The final report was changed to acknowledge
OERR's commitments.

Chapter 3 - Recommendations

OARM Response to Recommendation 3-1

OARM indicated that establishment of program and regional goals for completion form, PBSC,
and fixed price contracts would be an issue discussed at the October 1997 Resource Management
Committee meeting.  OARM also stated that they would work through the Superfund Contracts
2000 Work Group to encourage program office movement toward completion form, PBSC
contracts.

OIG Evaluation

Specific planned or completed actions for implementing program and regional goals and
milestone dates for completion of planned actions will be needed to resolve this
recommendation.

OARM Response to Recommendation 3-2

The draft recommendation required the SRO to justify contract awards that did not comply with
OFPP Policy Letter 91-2. OARM expressed concern that requiring SROs to justify all non-
PBSC contracts would extend current contract lead times and contradict the current process to
streamline preaward actions.

OIG Evaluation

We believe the Agency should implement OMB Policy Letter 91-2 that states: "In addition,
agencies shall justify the use of other than performance-based contracting methods when
acquiring services, and document affected contract  files." The recommendation was changed to
require SROs to implement the Policy Letter provisions that require a justification for contracts
that do not meet PBSC criteria.

OARM Response to Recommendation 3-3

OARM's response indicated that model SOWs developed by Government-wide work groups and
available on the Internet had been identified to contract and program officials.  OARM also
stated that the issue of model SOWs would be discussed at the October 1997 Resource
Management Committee meeting.

OIG Evaluation

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We will need specific corrective actions completed or planned, with milestones for completion,
to resolve this recommendation.

OARM Response to Recommendation 3-4

OARM indicated that PBSC training for program and contracting officials is scheduled to begin
Septembers, 1997.

OIG Evaluation

The cited training is considered responsive to the recommendation. However, a milestone date
for  completion of the training of all contracting and appropriate program officials is needed to
resolve this recommendation.

OARM Response to Recommendation 3-5

OARM did not believe it was feasible or in the Government's best interests to renegotiate RACs
because this would increase the Government's fiscal responsibility to the meet the minimum
funding levels for both completion form as well as the LOE contract actions.

OIG Evaluation

We agree that establishing a minimum in RACs for completion form may increase the minimum
contract capacity that the Government must fund. We recognize that such an increase in the
minimum funded capacity concerns EPA since the regions are currently having difficulty in using
the  minimum capacity for LOE WAs. However, we continue to believe that some type of
incentive is needed to encourage regions to expand the use of completion form WAs. Because
we  encountered such strong resistance to the use of completion form WAs during the audit, we
believe only a persuasive incentive will result in realizing the established goal for completion
form under RACs.  This incentive can be in the form of a minimum contract capacity for
completion form or regional goals for completion form usage with clear accountability for
meeting these goals. In addition, the minimum capacity for completion form could be
established by converting some of the LOE capacity to completion form. This action would result
in no increase in the total minimum capacity for RACs

To address the Agency's  concerns with RACs capacity and increased fiscal obligations, we
changed the recommendation to permit the Agency the option of establishing a minimum by
converting LOE capacity to completion form capacity, or establishing regional goals under which
regions would be held accountable for minimum levels of completion form use.

OARM Response to Recommendation 3-6

OARM's response provides that OAM and OSWER are working on several initiatives which

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address the appropriate uses of completion form assignments for RACs.

OIG Evaluation

The initiatives referred to by OARM were not identified in the response. Information on these
initiatives with milestone dates will be needed to close out this recommendation.

Chapter 4 - Comments on Findings

OARM disagreed that the November 1995 change in award fee policy caused the significant
decline in CPAF contract awards as stated in the draft report..

The draft report did not attribute the decline in CPAF contracts solely to EPA's change in award
fee procedures.  The report clearly stated that EPA officials interviewed identified the significant
administrative burden of CPAF  contracts and insufficient size of award fees as the primary
reasons for less use of this type of contract. EPA's guidance changes did intensify the
administrative burden by setting a certain number of days for completion of award fee
determinations and requiring performance standards related to meeting award fee determination
time frames. However, we deleted our conclusion that these new administrative requirements
may have impacted program officials decisions on the type of contracts to award.

Chapter 4 - Comments on Recommendations

OARM Response to Recommendation 4-la

OARM indicated that they would look into the possibility of streamlining the administrative
process related to CPAF contracts.   OARM also stated that they would present the streamlining
issue to the Resource Management Committee meeting in October 1997 for further discussion.

OIG Evaluation

Specific corrective actions with milestone dates for completion will be needed to resolve this
recommendation.

OARM Response to Recommendation 4-lb

OARM believed that the CO and program office were the appropriate parties that  should
determine contract type.

OIG Evaluation

The intent of the recommendation was for the workgroups to identify candidate services that
would be appropriate for CPAF contracts. The workgroups could then make recommendations
to the CO and program offices involved.  The final decision as to the type of contract appropriate

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for the requisite requirements would still be made by the CO and program office.

OARM Response to Recommendation 4-lc

OARM believed that the current award fee policy provided proper incentive for superior
performance.

OIG Evaluation

We agree that the current policy does provide incentive for superior performance. However, the
recommendation related to development of model award fee plans based on this policy. Since
our review did not disclose significant problems with award fee plans developed under the
revised policy, we dropped that part of the recommendation related to plan development from the
final report.

OARM Response to Recommendation 4-Id

OARM's response stated that CPAF contracts would be developed for requirements as
appropriate.

OIG Evaluation

Specific actions and milestone dates for completion will be needed to resolve this
recommendation.

OARM Response to Recommendation 4-2

According to OARM's response, they did not believe it was in the Government's best interest to
modify existing CPAF contracts since most of them would soon be expiring.

OIG Evaluation

At our exit conference on September 24, 1997, OARM agreed to consider modifying CPAF
contracts that had more than two years remaining before expiration. We changed the
recommendation to reflect this agreement.

Chapter 5 - Comments on Findings

OARM agreed with the findings. There were no recommendations included in this chapter.

Chapter 6 - Comments on Findings

Indirect Rates For RACs Not Effectively Negotiated
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OARM disagreed with the draft report's implication that use of unaudited rates would increase
contract costs.  OARM points out that the negotiated rates are only provisional and are subject to
audit before being finalized. If the provisional rates are later determined to be too high, EPA can
recoup the money.

The draft report did not specifically state that acceptance of unaudited rates would result in
excessive costs. Our intent was to emphasize that acceptance of rates, especially those
questioned by auditors and the Agency's cost advisory staff, based on unverified contractor data
makes the Agency vulnerable to excessive rates.  Delays in final audits, along with the potential
for lost records and changes in contractor ownership, could mean that rates agreed to at contract
award may be the rates billed through most of the contract's life. When final audits are
performed, contractor records may not contain sufficient information to support significant
adjustments to the rates incurred.  Therefore, EPA may not be in a position to recoup excessive
indirect costs. We believe it is better to prevent excessive charges rather than pay excessive costs
based on the premise that a final audit will identify any overcharges and EPA will be able to
recover any excessive payments.

Use of RACs Regional Crossover Authority For WAs

OARM expressed concern that a statement in this section indicated that RACs WAs could be
competed. OARM emphasized that RACs do not provide for WA competition either within or
across regions and that bilateral modifications to RACs would be required to permit such
competition.

This section was revised to clearly state that, according to OAM and OGC officials, RACs do not
provide for any competition of WAs.

Use of A&E Contracts for RAC Awards Required by Statute

The OARM response states that fundamental differences exist between the work performed
under the COE TERCs contracts and that performed by under RACs. Therefore, OARM does
not believe that a direct comparison can be made between the COE TERCs and the EPA RACs.

We disagree that there are fundamental differences between TERCs and RACs. Based on
information obtained from the COE, both contracts cover all phases of remedial work at a
hazardous waste site. We agree, however, that work performed under TERCs for EPA primarily
consists of remedial cleanups. Our intent was not to make a direct comparison of TERCs with
RACs but to point out that all activities performed under RACs, such as remedial actions, do not
require an A&E contractor. Therefore, the possibility exists that these activities could be
separated from A&E contracts in the future and awarded under separate non-A&E contracts by
EPA.

Chapter 6 - Comments on Recommendations
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OARM Response to Recommendation 6-1
OARM's response stated that COs will continue to seek counsel and advice from cognizant
auditors; however, COs, not auditors, make the decisions on final rates. OARM further states
that since contractors must justify their indirect rates on an annual basis and rates billed are
subject to audit, they do not believe that excessive indirect costs are paid under RACs.

OIG Evaluation

The decision on final rates is the responsibility of the CO and not the auditors. However, when
contractors propose rates that are significantly higher than audited rates, we believe that COs
should discuss the rates and the contractor's basis for varying from the audited rates with the
cognizant auditors before accepting the rates. The auditors may be able to provide the CO with
information that raises questions about the contractors basis for the higher rates.

Appendix V shows that some indirect rates accepted by COs were significantly higher than the
rates of other contractors performing similar tasks.   In one instance,  a contractor had different
rates for different contracts. The cognizant auditors and EPA's cost advisory reports questioned
the rates.  While variations in company accounting methods and operations can create such
differences, cognizant auditors, in these instances, had performed reviews of the contractors costs
and activities and were in the best position to comment on the accuracy of the rates.  We do not
specifically state that rates were excessive but appeared questionable because they were (1)
significantly out of line with rates used by other contractors and (2) the auditors questioned the
validity of the rates. Also, our intent was to emphasize EPA's inherent vulnerability (particularly
on A&E contracts where technical capabilities outweigh cost considerations)  to excessive rates
when COs  accept unverified contractor data at negotiations to justify rates that may be billed over
the life of the contract.

OARM Response to Recommendation 6-2

The response states that it is OAM's standard practice to follow up on indirect cost issues and
prepare  related documentation for the contract file.  OARM indicated that they will remind COs
of the importance of consistently documenting resolution of indirect  cost issues.
OIG Evaluation

Specific actions with milestone dates for completion will be needed to resolve this
recommendation.

OARM Response to Recommendation 6-3 (draft report recommendation 6-4)

OARM said that the requirement under SARA Section 119(f) to use A&E contractors for specific

                                           94

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                                                                         APPENDIX II
                                                                          Page 11 of 11

Superfund activities would be examined in the Superfund Contracts 2000 Work Group. OARM
indicated that the Work Group is currently discussing the separation of remedial work from the
pre-design site assessment work. The response further indicated that where it is logical to
breakout non-A&E services, OARM would use a separate non-A&E contract to acquire these
services in the future.

OIG Evaluation

OARM's response did not directly address the recommendation. The recommendation requested
that the Agency seek changes to SARA 119(f) during the forthcoming Superfund reauthorization
to permit non-A&E contracts for all Superfund remediation work not related to remedial design.
However, we also recognize that breaking out non-A&E services for separate contracts is
probably the second best alternative to a change in the law. The Agency's response to  the final
report should specifically address the recommendation with milestones for completion  of any
planned actions.

OARM Response to Recommendation 6-4 (draft report recommendation 6-3)

OARM stated that EPA is researching other agencies' contract strategies and methods for the
purpose of bench marking Superfund contracting techniques.  The response further stated that
this is another issue to be addressed by the Superfund Contracts 2000 Work Group.

OIG Evaluation

Specific actions taken  or planned with milestone dates for completion will be needed in the
Agency's response to the final report to resolve this recommendation.
                                          95

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                                                                       APPENDIX III
                                                                          Page 1 of 2
                            SAMPLING METHODOLOGY

In order to accomplish our audit objectives related to cost-reimbursable contracts, we reviewed a
judgmental sample of RACs contracts and two random samples of other EPA cost-reimbursable
contracts. We judgmentally selected six of 10 active RACs. We also randomly selected a
sample of 2015 cost-reimbursable contracts and a random sample of five cost-plus-award-fee
contracts. The RACs sample and the initial random sample of 20 contracts were used to
evaluate IGCEs, contract type, effect of capacity and length on competition, and, where
applicable, use of award fees. In order to ensure adequate coverage of the award fee objective,
we randomly selected an additional five CPAF contracts for which only the award fee process
was evaluated. Both random samples were selected from a database file downloaded from
EPA's CIS.  The file contained contracts that were active in FYs 1994 through 1996.  The
samples were selected using Interactive Data Extraction and Analysis (IDEA) software.

In selecting RACs for review, our main selection criteria were contracts with the most activity as
determined by the number of work assignments  issued. In addition, we avoided selecting more
than one contract with the same prime contractor.

Our primary sample of 20 contracts was selected from the universe of all cost-reimbursement
contracts active in fiscal years 1994 through 1996, excluding contracts that expired in fiscal year
1994 and RACs.  A total of 507 contracts was in this audit universe. In order to ensure that our
sample included contracts of different sizes and  from each EPA contracting location,  we
stratified the audit universe by location (RTF, Washington16, and Cincinnati) and MPV of the
contract. Three dollar ranges were established for the RTF and Cincinnati locations:  $0 to
$4,999,999; $5,000,000 to $24,999,999; and $25,000,000 and above.  The Washington
contracts were divided into the same three strata as outlined above but with one additional
stratum: $100,000,000 and above.  This fourth stratum was created for the Washington universe
because of the large number of contracts of more than $100 million at this location. Contracts
were randomly selected from each of these strata for each contracting location using computer
software.

We also selected an additional random sample of five cost-plus-award-fee contracts.  We used
the same cost-reimbursable contract universe described above and segregated out the CPAF
       15Two of our originally selected contracts were expired and had been replaced with
follow-on contracts which were administered differently than the prior contract.  Therefore, we
reviewed the current, successor contracts rather than the expired contracts.

       16Regional contracts were included in the Washington location universe.

                                           97

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                                                                      APPENDIX III
                                                                         Page 2 of 2
contracts.  This identified a universe of 110 CPAF contracts.

The following table summarizes the universe and sample sizes for our samples:
Contract Type
RACs- Universe
RACs- Sample
All Cost17 - Universe
All Cost - Sample
CPAF18 - Universe
CPAF - Sample
Number of
Contracts
10
6
507
20
110
5
Maximum
Potential Value
$3.1 billion
$1.8 billion
$13.9 billion
$1 billion
$9.9 billion
$224 million
Average Value
$3 10 million
$300 million
$27.4 million
$49.0 million
$90.5 million
$45.0 million
Since our audit objective required us to evaluate WAs, we selected a sub-sample of WAs from
our sample of six RACs and 20 other cost-reimbursable contracts. For each of the contracts in
our sample, we identified all WAs with a value over $25,000 and issued during the period July
1994 through September 1996. We randomly selected one to five WAs issued under each
sample contract for detailed review, depending on the number of work assignments awarded.
These samples were selected by the auditors in the field using random numbers tables. The
following table shows the number of WAs selected for review per contract based on the total
number of WAs that had been issued at the time of this review:
Number of WAs
Issued
1-3
4-20
21-50
5 1 and above
Number of WAs
Reviewed
All
3
4
5
                                                                  APPENDIX IV
       "Excludes RACs contracts.  Includes CPAF contracts.

       18 Subset of Cost universe.

                                          98

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                                                                       Page 1 of 3
                                    CONTRACTS REVIEWED
Random Sample of 20 Cost-Reimbursable Contracts:
NUMBER    TYPE AWARD     EXPIRE
MPV
68C00047
68C10030
68C30303
68C30332
68C40007
68D60005
68D60010
68D20156
68D20159
68D20174
68D30031
68W10007
68W10014
68W30009
68W30024
68W40019
68W80124
68W10055
68W10035
68W90054
CPAF
CPFF
CPAF
CPFF
CPFF
CPAF
CPFF
CPFF
CPFF
CPFF
CPFF
CPAF
TM
CPFF
CPFF
CPFF
CPAF
CPAF
CPAF
CPAF
26-Sep-90
17-Jul-91
02-Jul-93
12-Apr-94
07-Mar-94
26-Mar-96
30-Sep-96
21-Sep-92
30-Sep-92
30-Sep-92
26-May-93
22-Feb-91
26-Jul-91
22-Jan-93
22-M-93
22-Mar-94
30-Sep-88
30-Sep-91
04-Feb-91
09-Jun-89
24-Dec-95
30-Sep-95
30-Sep-97
31-Aug-96
31-Jan-97
26-Mar-Ol
30-Sep-Ol
30-Sep-97
30-Sep-97
30-Sep-96
30-Sep-97
30-Sep-96
ll-Nov-94
30-Apr-96
21-M-96
21-Mar-99
28-Sep-98
30-Sep-97
31-Mar-97
09-Jun-99
$32,864,228
$3,681,710
$30,882,549
$6,818,084
$9,259,281
$65,424,934
$60,452,542
$5,672,691
$19,636,373
$3,717,435
$16,073,986
$44,247,918
$6,131,358
$1,898,933
$5,520,294
$29,682,501
$62,500,386
$127,317,045
$177,538,336
$288,760,199
TITLE

TECH. SUPPORT FOR SITE PROGRAM-SITE A

TECHNICAL SUPPORT FOR PEER REVIEW

TECHNICAL SUPPORT FOR WATER PROGRAMS...

DEVELOPMENT OF HUMAN HEALTH DOCUMENTS...

REGULATION DEVELOPMENT PROCESSING/ANALYSIS

ENVIRONMENTAL SERVICES ASSISTANCE TEAMS

NSPS CONTRACT

SUPPORT FOR RADIOACTIVE WASTE, MIXED WASTE..

TECH. SUPPORT FOR AIR EMISSIONS INVENTORIES

TRANSPORTATION CONTROL MEASURES

TECH. SUPPORT FOR AIR POLLUTION CONTROL...

HEADQUARTERS TECH. ENFORCEMENT SUPPORT

REG/NEG CONSULTATION DISPUTE RESOLUTION

INFORMATION MNGMENT AND COMMUNICATION

TECHNICAL SUPPORT GLOBAL CLIMATE CHNGS

ENFORCEMENT SUPPORT

FUNDING ARCS REGION II

MISSION ORIENTED SYSTEMS ENG. SUPPORT

EMERGENCY REMOVAL

ARCS REGION 9
                                Total Non-RACs $998,080,783
                                Average MPV   $49,904,039
                                                99

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                                                                 APPENDIX IV
                                                                 Page 2 of 3
                               CONTRACTS REVIEWED
Judgmental Sample of RACs:
NUMBER
68-W6-0042
68-S6-3003
68-W6-0025
68-W6-0037
68-W5-0004
68-W5-0022

TYPE
CPAF
CPAF
CPAF
CPAF
CPAF
CPAF

AWARD
30-Sep-96
30-Sep-96
30-Sep-96
13-Sep-96
15-Jun-95
29-Sep-95

EXPIRE
30-Sep-06
30-Sep-06
30-Sep-06
13-Sep-06
15-Jun-05
29-Sep-05
Total RACs
Average MPV
MPV
$474,369,516
$168,672,293
$275,091,955
$253,364,629
$302,239,376
$313,556,945
$1,787,294,714
$297,882,452
TITLE
RACs REGION 1
RACs REGION 3
RACs REGION 5
RACs REGION 6
RACs REGION 7
RACs REGION 8

                                         100

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                                                                       APPENDIX IV
                                                                       Page 3 of 3
                                 CONTRACTS REVIEWED
Random Sample of five CPAF Contracts:

NUMBER   AWARD    EXPIRE      MPV
68W90057
68D00110
68W40005
68C30309
68W80092

16-Jun-89
30-Sep-90
06-Jan-94
30-Sep-89
22-Jun-88

14-Jun-99
30-Sep-95
31-Dec-96
30-Sep-95
22-Jun-98
Total CPAF
Average MPV
$66,306,241
$14,535,657
$67,056,252
$10,660,990
$65,342,544
$223,901,684
$44,780,337
CONTRACT TITLE

REGIONAL PROGRAM MANAGEMENT

OPER,MAINT & MOD OF CLINICAL RESEARCH
FACILITY

RCRA REPA - ZONE III (WEST COAST) FOR OWPE

ON-SITE TECHNICAL SUPPORT SERVICES

ARCS AWARD REGION III - TETRA TECH
                                            101

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                                      APPENDIX V
                                      Page 1 of 3
              102

-------
SCHEDULE OF WORK ASSIGNMENTS REVIEWED
Contract
Number
68C00047

68C00030


68C30303




68C30332



68C40007



WA/DO
Number
53
71
3-51
3-57
3-61
2-40
3-47
3-92
2-93
3-115
1-13
1-15
1-24
2-31
2-14
2-15
2-17
4-15
Cincinnati subtotal
68D60005 [2]



68D60010-14









68D20156


68D30031


68D20159

10-96-0-04
9-96-0-7
10-96-0-02
06-96-0-02
[3] ERG 3
ERG 4
ERG 6
MRI5
ECR4
PES4
RTI17
PES6
ERGS
MRI9
3-8
4-8
4-4
1-16
11-19
11-20
2-05
3-01
WA/DO
Amount[l]
$764,860
$ 54,983
$ 59,998
$ 78,238
$ 38,977
$181,000
$249,875
$ 48,482
$ 87,393
$ 39,946
$ 53,402
$ 49,800
$ 64,602
$ 66,362
$ 25,653
$155,851
$ 79,360
$ 37.555
$2,136,337
$194,063
$169,988
$200,494
$478,972
$ 53,546
$ 20,218
$153,168
$ 74,945
$189,526
$ 16,888
$120,981
$ 27,069
$263,725
$198,537
$ 78,750[4]
$102,693
$ 45,833
$ 79,962
$ 74,977
$ 65,535
$ 27,141
$275,603
WA/DO Contained Tasks
Completion
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Yes
Yes
Yes
Yes
NA
NA
NA
NA
NA
NA
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Fixed-Price
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
No
Suited to [2]
PBSC
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
                                       APPENDIX V
                                       Page 2 of 3
                    103

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Contract
Number

RTF Subtotal
68W10007



68W30009


68W30024


68W40019


68W80124


68W10055


68W10135




68W90054


WA/DO
Number
4-01

C11318
C11315
R11301
C11317
CO2
COS
COS
WA102
WA201
WA202
WA10
WA18
WA22
037-2PY4
038-2PY1
040-2QB1
DO 82
DO 70
DO 78
DO 53
DO 71
DO 76
DO 104
DO 116
54-45-96FJ
54-46-9J5N
54-47-9NJ5
Washington Subtotal
68-W6-0042


68-S6-3003

68-W6-0025


004
008
012
004
005
001
003
005
WA/DO
Amount[l]
$ 77.745
$2,990,359
$ 91,475
$ 32,007
$126,927
$ 61,833
$132,380
$150,787
$112,018
$158,503
$ 86,577
$194,514
$146,315
$142,110
$ 58,073
$178,613
$ 90,762
$150,000
$3,351,556
$2,339,469
$3,981,581
$453,000
$ 50,000
$ 75,000
$2,842,405
$4,384,000
$199,450
$1,588,682
$7.588.547 [5]
$28,766,584
$ 50,000[6]
$203,821
$362,391
$760,261
$ 20,000 [6]
$150,000[6]
$200,000 [6]
$150,000[6]
WA/DO Contained Tasks
Completion
Yes

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
NA
NA
NA
NA
NA
NA
NA
NA
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Fixed-Price
No

Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes

Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Suited to [2]
PBSC
Yes

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
104

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                                                                           APPENDIX V
                                                                           Page 3 of 3
Contract
Number

68-W6-0037
68-W5-0004
68-W5-0022
RACs Subtotal
WA/DO
Number

003
006
009

 004
 008
 012
 016

005
010
015
 WA/DO
 Amount[l]

 $ 75,841
 $203,421
 $688,922

 $653,038
 $545,588
 $ 87,494
 $138,018

 $440,484
 $309,155
 $134.500
$5,172,934
 WA/DO Contained Tasks Suited to [2]:
Completion   Fixed-Price    PBSC
Yes
Yes
Yes

Yes
Yes
Yes
Yes

Yes
Yes
Yes
Yes
Yes
Yes

No
Yes
Yes
No

Yes
Yes
No
Yes
Yes
Yes

Yes
Yes
Yes
Yes

Yes
Yes
Yes
Total All WAs/DOs [7]
             $39,066,214
ABBREVIATIONS:
NA = Not applicable, was issued in completion form.
FOOTNOTES:
[1] = Final WA/DO amount, including amendments. This total does not represent the dollar value of tasks that
could be issued or awarded under other contract types. Total dollar value of tasks suited to award or issuance under
other contract/WA types would be less than the WA/DO amount in many cases.
[2] = Yes means one or more tasks included in the WA were suited for award or issuance as completion,
     fixed-price, or PBSC.  Tasks that were suited to fixed-price were also included in the
     completion category.
[2] = Contract transferred to Washington, SRRPOD
[3] = Five contracts compete for Task Orders.
[4] = Amount shown is cumulative cost.  Final issue/award amount not in file.
[5] = Final amount pending.  Amount shown is IGCE.
[6] = Amounts provided are expenditure limits and not final negotiated amounts for the WA.
[7] = Two contracts in our sample did not have any issued WAs within the scope of this review.  These contracts are
not included in this schedule.
                                               105

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               106

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              RACs INDIRECT RATES
PRIME

Contractor A
Contractor B
Contractor C
Contractor D
Contractor E
Contractor F
Contractor G
Contractor H
Contractor 1
Contractor J
Contractor G













Overhead

40.50%
43.00%
45.50%
68.80%
68.80%
100.83%
105.00%
105.31%
151.37%
178.40%
190.00%
                                                    APPENDIX VI
                                                       Page 1 of 3
PRIME

Contractor C
Contractor B
Contractor F
Contractor H
Contractor A
Contractor E
Contractor D









G&A

6.40%
7.00%
10.28%
10.32%
20.40%
67.40%
67.40%
PRIME

Contractor F



G&A-Sub

5.20%
PRIME

Contractor D
Contractor E
Contractor A
Contractor C
Contractor B







Fringe
Benefits
31.70%
31.70%
35.60%
39.70%
39.80%
25 Indirect Rates

PRIME

Contractor A




Material
Handling

4.80%
                            107

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                         APPENDIX VI
                            Page 2 of 3
RACS TEAM SUBs OVERHEAD RATES
PRIME

Contractor A
Contractor C
Contractor G
Contractor A
Contractor F
Contractor F
Contractor H
Contractor H
Contractor A
Contractor H
Contractor F
Contractor D
Contractor C
Contractor H
Contractor B
Contractor E
Contractor A
Contractor D
Contractor J
Contractor G
Contractor G
Contractor E
Contractor J
Contractor J
Contractor 1
Contractor 1
Contractor F
Contractor B
Contractor F
Contractor A
Contractor C
Contractor D
Contractor H
Contractor J
Contractor J
Contractor A
Contractor G
Contractor B
Contractor C
Contractor G
Contractor A
Contractor A
Contractor B













































TEAM Sub

Team Sub A
Team Sub B
Team Sub C
Team Sub D
Team Sub E
Team Sub F
Team Sub G
Team Sub H
Team Sub 1
Team Sub J
Team Sub K
Team Sub L
Team Sub M
Team Sub N
Team Sub O
Team Sub P
Team Sub Q
Team Sub R
Team Sub S
Team Sub T
Team Sub U
Team Sub V
Team Sub W
Team Sub X
Team Sub Y
Team Sub Z
Team Sub AA
Team Sub BB
Team Sub CC
Team Sub DD
Team Sub EE
Team Sub FF
Team Sub GG
Team Sub HH
Team Sub II
Team Sub JJ
Team SubKK
Team Sub LL
Team Sub MM
Team Sub NN
Team Sub OO
Team Sub PP
Team Sub QQ













































Overhead

1.00%
39.05%
39.83%
46.49%
49.00%
49.00%
49.00%
49.00%
50.16%
54.00%
54.00%
61.00%
65.01%
70.80%
80.00%
84.40%
96.77%
98.00%
99.61%
107.06%
110.24%
112.90%
119.00%
121.10%
126.00%
128.78%
132.24%
140.00%
140.00%
140.00%
140.00%
146.00%
165.00%
165.00%
166.00%
170.80%
170.80%
173.80%
174.50%
175.90%
176.00%
185.75%
228.85%
108

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                                                                    APPENDIX VI
                                                                        Page 3 of 3
RACS TEAM SUBs G&A RATES
PRIME

Contractor J
Contractor A
Contractor H
Contractor J
Contractor E
Contractor E
Contractor A
Contractor C
Contractor A
Contractor C
Contractor F
Contractor H
Contractor G
Contractor J
Contractor D
Contractor A


















TEAM Sub

Team Sub II
Team Sub D
Team Sub N
Team Sub W
Team Sub P
Team Sub V
Team Sub Q
Team Sub M
Team Sub 1
Team Sub B
Team Sub RR
Team Sub S
Team Sub C
Team Sub X
Team Sub L
Team Sub A


















G&A

3.20%
9.15%
9.55%
10.00%
10.30%
12.78%
14.12%
14.91%
17.90%
18.30%
18.75%
18.75%
19.95%
30.00%
32.50%
40.00%
RACS TEAM SUBs FRINGE RATES
PRIME

Contractor G
Contractor A
Contractor D
Contractor A
Contractor A
Contractor C
Contractor F
Contractor H
Contractor G
Contractor E
Contractor C
Contractor E
Contractor G















TEAM Sub

Team Sub T
Team Sub A
Team Sub L
Team Sub I
Team Sub D
Team Sub M
Team Sub RR
Team Sub SS
Team Sub C
Team Sub V
Team Sub B
Team Sub P
Team Sub NN















Fringe
Benefits
23.23%
27.00%
30.10%
32.34%
32.55%
33.14%
34.00%
34.00%
35.68%
35.90%
37.23%
38.20%
49.30%
RACS TEAM SUBs Sub-G&A RATES
PRIME
Contractor C


TEAM Sub
Team Sub B


SUB-G&A
5.41%
RACS TEAM SUBs MTL HANDLING RATES
PRIME

Contractor G



TEAM Sub

Team Sub C



Material
Handling
4.65%
74 Indirect Rates
                                         109

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               110

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                                                                    APPENDIX VII
                                                                         Page 1 of 2
                                ABBREVIATIONS

A&E         Architectural and Engineering
ARCS        Alternative Remedial Contract Services
CCMD       Cincinnati Contract Management Division
CFR         Code of Federal Regulations
CICA        Competition In Contracting Act
CIS          Contract Information System
CMD        Contract Management Division
CO          Contracting Officer
COE         Army Corps of Engineers
CPAF        Cost-Plus-Award-Fee
CPFF        Cost-Plus-Fixed-Fee
CR          Cost-Reimbursable
CS          Cost-Sharing
DCAA       Defense Contract Audit Agency
DO          Delivery Order
DOE         Department of Energy
EPA         Environmental Protection Agency
ESS         Enforcement Support Services
ESAT        Environmental Services Assistance Teams
FAR         Federal Acquisition Regulation
FMFIA       Federal Managers' Financial Integrity Act
FP          Fixed-Price
FPIF         Fixed-Price-Incentive-Fee
FY          Fiscal Year
GAO         General Accounting Office
HPOD       Headquarters Procurement Operations Division
IDIQ         Indefinite Delivery Indefinite Quantity
IGCE        Independent Government Cost Estimate
IGD         Inspector General Division
LOE         Level of Effort
MPV         Maximum Potential Value
NASA       National Aeronautical and Space Administration
OAM        Office of Acquisition Management
OARM       Office of Administration and Resources Management
ODC         Other Direct Costs
OERR       Office of Emergency and Remedial Response
OFPP        Office of Federal Procurement Policy
OGC         Office of General Counsel
OIG         Office of Inspector General
OMB        Office of Management and Budget
                                        111

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                                                                   APPENDIX VII
                                                                        Page 2 of 2
OSWER      Office Solid Waste and Emergency Response
PBSC        Performance-Based Service Contracts
PCO         Placement Contracting Officer
PEB         Performance Evaluation Board
PO          Project Officer
PRP         Potential Responsible Party
PWS         Performance Work Statement
QAP         Quality Assurance Plan
RAC         Response Action Contract
REM         Remedial Engineering and Management
RTF         Research Triangle Park, North Carolina
SOW         Statement of Work
SRRPOD     Superfund/RCRA Procurement Operations Division
TERC        Total Environmental Restoration Contracts
TES         Technical Enforcement Services
TO          Task Order
WA         Work Assignment
WAM        Work Assignment Manager
WBS         Work Breakdown Structure
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                                                                      APPENDIX VIII
                                   DISTRIBUTION

Office of the Inspector General

       Acting Inspector General (2410)

Headquarters Office

       Acting Assistant Administrator for Administration and Resources Management (3101)
       Director, Office of Policy and Resources Management (3102)
       Acting Chief Financial Officer  (3101)
       General Counsel (2310)
       Director, Office Of Acquisition Management (3 80 IF )
       Director, Contracts Management Division - Research Triangle Park, NC (MD 33)
       Director, Contracts Management Division - Cincinnati, OH (MS-CMD)
       Agency Followup Coordinator  (3304 )
       Agency Audit Followup Official (3101 )
       Comptroller (3301)
       Director, Financial Management Division (3303F)
       Director, Budget Division (3302)
       Special Assistant to the Deputy Administrator for Management Issues (1103)
       Associate Administrator for Regional Operations and Stat/Local Relations (1501)
       Associate Administrator for Congressional and Legislative Affairs (1301)
       Associate Administrator for Communications, Education and Public Affairs  (1701)
       Audit Follow-up Coordinator - OARM (3102)

Regional Offices

       Regional Administrator, Region 1
       Regional Administrator, Region 2
       Regional Administrator, Region 3
       Regional Administrator, Region 4
       Regional Administrator, Region 5
       Regional Administrator, Region 6
       Regional Administrator, Region 7
       Regional Administrator, Region 8
       Regional Administrator, Region 9
       Regional Administrator, Region 10
External
       General Accounting Office
       Office of Management and Budget
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