'$&.
Office of Inspector General
Report of Review
Special Review Report on
EPA's Management of Emergency
Response Cleanup Services (ERCS) Contracts
E1SHG3-18-0045-4400112
September 29, 1994
EPA
350/
1994.7
HN
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Inspector General Division
Conducting the Audit:
Acquisition and Assistance Staff
Program Offices Involved:
Office of Acquisition Management
Office of Emergency and
Remedial Response (Superfund)
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 2046O
/ V \
September 29, 1994
OFFICE OF
THE INSPECTOR GENERAL
MEMORANDUM
SUBJECT: Special Review Report on EPA's Management of
Emergency Response Cleanup Services (ERCS) Contracts
Report No. E1SHG3-18-0045-4400112
FROM:
TO:
Elissa R. Karpf
Associate Assis'tant Inspeotdty General
for Acquisition and Assistance Audits (2421)
Jonathan Z. Cannon
Assistant Administrator for Administration
and Resources Management (3101)
Elliott P. Laws
Assistant Administrator for Solid Waste
and Emergency Response (5101)
Attached is the final special review report on EPA's
management of ERCS contracts. Our overall objective was to
evaluate EPA's actions to resolve ERCS contract management
issues, including the basis of EPA's acceptance of ERCS
contractor costs.
This report contains findings that describe deficiencies the
Office of Inspector General (OIG) has identified and corrective
actions the OIG recommends. This report represents the opinion
of the OIG. Final determinations on matters in this report will
be made by EPA managers in accordance with established EPA audit
resolution procedures. Accordingly, the findings contained in
this audit report do not necessarily represent the final EPA
position.
ACTION REQUIRED
In accordance with EPA Directive 2750, the action officials
are required to provide this office with a written response to
the audit report within 90 days of the final audit report date.
For corrective actions planned but not completed by your response
date, reference to specific milestone dates will assist this
office in deciding whether to close this report.
LO
01
cn
CXI
EPA Headquarters Library
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We have no objections to the further release of this report
to the public. Should you have any questions about this report,
please contact Elissa R. Karpf, Associate Assistant Inspector
General for Acquisition and Assistance Audits on (202) 260-8380
or Robert Coia, Audit Manager, at (215) 597-9130.
Attachment
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TABLE OF CONTENTS
PURPOSE 1
SCOPE AND METHODOLOGY 1
BACKGROUND 2
EPA CORRECTIVE MANAGEMENT ACTIONS NOT FULLY EXECUTED .... 5
Background 5
EPA Contractors Did Not Fully Comply With Contract
Accounting System Requirements 7
Contract Accounting System Requirement Clause
Enforcement Needs Strengthening 23
Conclusion 26
Recommendations 28
OARM Response 29
OIG Evaluation 29
EPA RELIANCE ON RCMS NULLIFIES CONTRACTOR INVOICING
REQUIREMENTS 33
Background 33
EPA Accepts EPA Form 1900-55 As Substantiation For ERCS
Contractor Charges 35
OSC Verification Of EPA Form 1900-55 May Obligate EPA
to Pay The Contractor 41
Conclusion 45
Recommendations 46
OARM Response 47
OIG Evaluation Of OARM Response 47
OSWER Response 48
OIG Evaluation To OSWER Response 49
APPENDIX 1: OARM RESPONSE 51
APPENDIX 2: OSWER RESPONSE 61
APPENDIX 3: DISTRIBUTION 64
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Review Report on EPA's Management of ERGS Contracts
SPECIAL REVIEW REPORT
EPA MANAGEMENT OF EMERGENCY
RESPONSE CLEANUP SERVICES CONTRACTS
PURPOSE
The purpose of this review is to:
o advise EPA of continuing Emergency Response Cleanup
Services (ERGS) contract management issues;
o evaluate EPA's actions to resolve ERCS contract
management issues previously identified in EPA Office
of Inspector General (OIG) audit and special review
reports; and
o evaluate the basis of EPA's acceptance of ERCS
contractor costs.
SCOPE AND METHODOLOGY
This review was conducted from March 1993 through September
1994. It covered fiscal years 1989 through 1994. We reviewed
applicable Federal regulations pertaining to the administration
of EPA contracts and the Federal Acquisition Regulation (FAR)
contractor accounting system requirements for cost type
contracts. ERCS contracts are indefinite quantity/indefinite
delivery contracts which feature a mixture of fixed rate and cost
reimbursable services. Rates are fixed for labor and equipment
while the majority of the costs, such as subcontracts, program
management labor and certain other direct costs specified in the
contract, are reimbursed at cost. We selected and,reviewed 4 of
the 13 ERCS contracts that were active during the period of
review. The four contracts were selected because they contained
contractor accounting system requirements clauses. We also
reviewed Office of Solid Waste and Emergency Response (OSWER)
directives pertinent to ERCS removal cost management.
Additionally, we reviewed OIG reports and Headquarters Office of
Acquisition Management (OAM) financial monitoring reports (FMR)
issued during fiscal years 1989 through 1993 to discern the
nature and occurrence of ERCS contract management deficiencies
and EPA's actions to correct the cited deficiencies.
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_ Review Report on EPA 'a Management of ERGS Contracts
We interviewed CAM personnel and contracting officers (COs)
in Regions 1, 3, 5 and 7 to determine their manner of
administering the selected current ERGS contracts. Discussions
were also held with the Department of Transportation, United
States Coast Guard, Department of Energy and Department of Navy
personnel familiar with emergency cleanup policies and practices
within their respective organizations. OSWER personnel were
interviewed to determine current removal cost management
procedures, visits were made to two active removal sites in
Region 3 to assess the methods employed to document on-scene
activities and costs.
Special reviews are short-term studies of EPA activities.
They are not designed to be statistical research studies or
detailed audits. Rather, they are information-gathering studies
that seek to identify issue areas for top management attention.
The goal of a special review is to produce constructive
change while minimizing the resources invested in studying and
documenting the issue areas. This work was not conducted as part
of an audit, and accordingly was not done in accordance with
Government Auditing Standards. Instead, the work represented a
special review which was conducted in accordance with provisions
of OIG Manual chapter 150.
We issued a draft report on June 24, 1994. We received
separate responses from the Assistant Administrator for OARM and
the Deputy Assistant Administrator for OSWER dated September 2,
1994, and August 11, 1994, respectively. Both offices declined
exit conferences. OARM agreed with our findings and generally
agreed with our recommendations. OSWER agreed with our findings
and recommendations. The comments received are summarized at the
conclusion of each finding. The complete OARM and OSWER
responses are included as Appendix 1 and 2 to this report,
respectively.
BACKGROUND
Previously Reported
Contrac Manaement Issues
During the period covered by this review, the OIG and OAM's
Cost Advisory and Financial Analysis Division have repeatedly
reported ERCS contractor accounting deficiencies. We have
questioned ERCS contractor charges that were not adequately
supported by FAR required contractor internal accounting systems
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Review Report on EPA's Management of ERGS Contracts
and records. EPA responses to these findings agreed that a lack
of acceptable contractor accounting systems amongst its ERCS
contractors was a major deficiency. Nevertheless, EPA has relied
on the regional on-scene coordinator's (OSC) daily confirmations
of EPA Form 1900-55, Hazardous Substance Response Fund Contractor
Cost Reports and certification of contractor invoices as adequate
documentation to support contractor billed costs and activities.
similarly, OAM has disclosed contractor accounting system
deficiencies in its FNR reports. Among other things, the FMR
reports stated that some contractors' accounting systems were
unacceptable for accumulating, segregating and reporting costs
for ERCS contracts. The FMR reports also stated that contractors
vere using the EPA Form 1900-55 as a basis for billing EPA
instead of billing from its own accounting systems, as required
by ERCS contract clauses and the FAR.
feRCS Contractor Acconirtinp System Requirements
Subpart 31.201-1 and 31.201-2 of the FAR defines the total
cost of a commercial contract to be the sum of the allowable
direct and indirect costs allocable to the contract. The factors
to be considered in determining whether a cost is allowable
include:
(1) reasonableness;
(2) allocability;
(3) standards promulgated by the Cost Accounting Standards
(CAS) Board, if applicable; otherwise, generally
accepted accounting principles (GAAP) and practices;
and
(4) terms of the contract.
Government commercial contractors are therefore bound to
establish and maintain an acceptable cost accounting system in
order to comply with CAS and GAAP. It is important to note that
all ERCS contractors are subject to GAAP, and some are subject to
CAS. CAS applies to some negotiated Federal government contracts
over $500,000; CAS rules are codified in title 48 of Federal
Regulations, chapter 99. Also, ERCS contracts awarded after
March 31, 1992, include a specific accounting system requirements
clause, and clauses that require that invoices be generated from
the contractor's accounting system and that invoiced costs be
reconciled with the contractor's accounting system and to the EPA
Form 1900-55 recorded costs. ERCS contractor accounting/billing
3
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Review Report on EPA*a Management of ERGS Contracts
system requirements are also set forth in detail in final
guidance issued by OAM on September 24, 1992, entitled ERGS
Contractor Accounting/Billing system Guidance.
These requirements translate the need for contractors to
establish and maintain an accounting system to account for ERGS
cost type contracts. Among other things, an adequate accounting
system must provide for the:
o Chart of Accounts which address ERCS specific
accounting requirements for the recordation of direct
and indirect costs that must be segregated by contract
and incorporated in a job cost ledger.
o Job Cost Ledger which accumulates direct costs by cost
element by contract and delivery order for the current
and cumulative contract periods.
o Labor Distribution system which outlines the
distribution of direct and indirect labor hours and
actual cost by employee.
o General Ledger which includes a separate record of
transactions for each account that appears in the
financial statements.
o Identification and segregation of unallowable costs.
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Reviev Report on EPA's Management of ERGS Contracts
FINDINGS AND
SPA
MANAGlflVil£NT ACTIONS NOT FnTJ.
EPA's Office of Administration and Resources Management
(OARM) August 1992 action plan to correct some contract
management deficiencies identified in 1986 and 1992 OIG audits of
ERGS contracts was not always effective. OAM's administration
and management of the ERGS contracts continues to allow
contractor non-compliance with FAR and contract accounting system
requirements. Despite a decade of doing business with EPA, ERCS
contractors reviewed in this report still do not have approved
accounting systems for cost type contracts. Except for one
instance, sanctions for contractor non-compliance were not
exercised. OAM and regional contracting personnel expressed a
collective sense of reservation regarding complete enforcement of
FAR and current contract accounting systems requirements for ERCS
contractors based on their belief that enforcement would drive
away ERCS contractors and limit future competition. They further
expressed that Super fund program mission versus contract
management considerations makes enforcement of FAR and contract
accounting requirement clauses a difficult and sometimes
compromising task. Because of the unfulfilled commitment to the
O ARM'S corrective action plan, inadequate ERCS contractor
accounting systems continue to complicate the CD's validation of
contractor provided documentation in major phases of contract
administration; namely, contract negotiation, invoice review,
finalization of provisional rates, delivery order definitization,
contract close out and cost recovery actions. Moreover, without
adequate independent contractor accounting system support, there
are no assurances that contractor billings reflect actual,
allowable incurred costs. Further, unsanctioned cpntractor non-
compliance with FAR and contract terms cast doubt on EPA's
resolve to improve contract and fiscal management.
Background
We issued an audit report in 1986 that evaluated how well
the former Emergency Response Branch within the Procurement and
Contracts Management Division (PCMD)1 planned, negotiated,
*Now called Office of Acquisition Management (OAM)
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Review Report on EPA's Management ot ERGS Contracts
awarded and administered certain aspects of the initial ERGS
contracts. One major aspect of the report related to contractor
furnished equipment. In response to the audit, PCMD developed a
corrective action plan, dated April 13, 1987, to improve the
negotiation and administration of ERGS contracts. In early 1991,
we conducted a follow-up audit to evaluate the implementation and
effectiveness of corrective actions taken as a result of the 1986
audit. The follow-up audit focused on ERGS contract management
and the methodology used to negotiate equipment rates. On March
27, 1992, we issued an audit report entitled Followup Audit of
EPA's Negotiation. Award and Management of Contractor-Owned
Equipment On Emergency Response Cleanup Services Contract.
(report No. 2100292). This report noted, among other things,
that ERCS contractors, after 10 years of doing business with EPA,
still had not developed adequate accounting systems that could
provide accurate cost data and equipment utilization data.
Accordingly, we recommended that EPA review contractor accounting
systems before awarding contracts. When inadequate accounting
systems are found, EPA should require that contractors correct
their systems before awarding the contract, or condition the
contract so that contractors correct accounting system
deficiencies within a specified time.
In response to this recommendation, the Assistant
Administrator (AA) for OARM in his August 10, 1992, memorandum to
the Assistant Inspector General for Audit stated that the
Regional contract Management Branch, (RCMB), PCMD had developed
four special clauses for inclusion in ERCS contracts. The four
clauses were transmitted to Headquarters and regional contracting
personnel on March 31, 1992, by the Acting Associate Director for
Superfund/RCRA Procurement Operations. These four mandatory
clauses were to be included in all ERCS contracts awarded
subsequent to the date of the memorandum where contractor
accounting systems are determined to be deficient, inadequate, or
needing improvement. The four clauses, to be inserted in Section
H of applicable ERCS contracts were entitled:
o Accounting System Requirements (Costs Reimbursement
Contracts). This clause would be modified to address
specific deficiencies of individual contractors.
o Limitation on Reimbursement for Rental Equipment.
o Limitation on Fixed-Rate Equipment Charges.
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Review Report on EPA's Management of ERCS Contracts
o Fixed Equipment Rate Redetenaination.
We selected and reviewed 4 of 13 active ERCS contracts.
These four contracts were awarded to three contractors: Riedel
Environmental Services, Inc.(RES); Environmental Technology of
North America, Inc (ETI); and OHM Remediation Services Corp.
(OHM). The four contracts were selected because they each
contained a contractor accounting system requirements clause.
This special review concentrates onlv on this clause.
The four contracts are:
Contractor Contract No.
RES 68-WO-0035
RES 68-S2-5001
ETI 68-S2-3002
OHM 68-W3-0012
Performance
Period
2/04/91-2/03/96
9/29/92-9/28/97
1/31/92-1731/97
3/01/93-12/31/97
Approx.
S Value
Admin.
Bv
$125.1M Region 7
$ 92.2M Region 5
$147.9M Region 3
S100.4M Region 1
EPA Contractors Did Not Fnlty dimply With Contract
Systems Xcooiranmts
1.
RIEDEL ENVIRONMENTAL SERVICES fRESl
RES was awarded two ERCS contracts. Both contracts are
indefinite delivery/indefinite quantity contracts with a mixture
of fixed rate and cost reimbursable services. RES' is paid a base
fee, and an award fee based on performance. Contract number
68-WO-0035 was awarded on February 4, 1991, to provide emergency
cleanup services to EPA Zone 4A, which covers EPA Regions 6, 7
and 8. Contract number 68-S2-5001 was awarded on September 29,
1992, to provide emergency cleanup services to EPA Region 5.
RES Zone 4A Contract Number 68-WO-0035
This contract included an advance agreement clause requiring
the contractor to comply with eight conditions regarding its
accounting system. The conditions were included in clause H.41,
which states, in part, that "The contractor shall, within 180
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Review Report on EPA'a Management of ERGS Contracts
calendar days after the effective date of this contract,
demonstrate that in the following areas of their accounting
system, procedures and policies exist that ensure costs billed to
the government are in accordance with federal acquisition
regulations, and generally accepted accounting principles,
consistently applied1*. RES' compliance with the following eight
conditions was required by August 4, 1991.
1) Allocation of costs in the G&A indirect cost pool shall
be allocated in accordance with FAR 30.403.
2) The applicable portion of any income, rebate,
allowance, or other credit relating to any allowable
cost and received by or accruing to RES shall be
credited to the Government either as a cost reduction
or by cash refund in accordance with FAR 31.201-5.
3) The contractor shall refine its written policies and
procedures to include instructions covering the
preparation, submission and correction of time cards
and/or time sheets. Such written policies and
procedures shall be distributed to all employees.
4) The contractor shall develop written policies and
procedures that document their system of classifying
and accounting for bid and proposal costs.
5) The contractor shall reconcile the amounts billed to
the job cost system. For the fixed rate portion of the
contract (labor and equipment), the contractor shall
reconcile the labor hours billed to the hours recorded
in the labor distribution report and the equipment
hours billed to the equipment hours recorded in the
fixed assets system. For the cost reimbursable portion
of the contract, the contractor shall reconcile all
amounts billed to the job cost system. These
reconciliations shall be done no less than quarterly.
6) The contractor shall develop written policies and
procedures to ensure that hours billed by labor
category are performed by personnel who meet the labor
qualifications as specified in the contract or labor
determinations, which ever prevails.
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7) Pricing of materials from in-house must be consistent
with FAR 31.205-26.
8) Complete records for owned equipment shall be
maintained and shall include the purchase price,
depreciation schedules and cumulative hours.used per
piece of equipment. The cost and hours of equipment
utilized shall be verifiable to the accounting system.
The H.41 clause further stipulated that if the contractor
does not demonstrate a diligent effort to implement the above
specified provisions within the specified time, the Government
may pursue remedies, including termination of the contract for
default.
Recent audit and FUR reports found that RES had not
satisfied all the H.41 clause conditions. The Financial
Monitoring Report on Contract 68-WO-0035 with Riedel
Environmental Services. Inc.. fFASASSNO 1DFM060V. dated May 7,
1992, concluded that the contractor had made an active effort to
comply with the clause, but had not completed steps required for
conditions 2, 4, 5, 6, and 7. The report's first finding
specifically disclosed that the contractor did not have an
adequate accounting and billing system and therefore could not
reconcile costs billed to its accounting records. Condition 5
requires RES.to reconcile the amounts billed to its job cost
system on a quarterly basis. The FHR further stated that the
contractor was billing directly from the Removal Cost Management
System (ROMS) and not from its accounting system. Section F.3
A.l.c of the contract also required that "...all invoices shall
be generated from the contractors accounting system. All billed
costs shall be reconciled to the contractor's job cost system on
a quarterly basis. All invoiced costs should be reconciled to
the RCMS on a quarterly basis." The FMR recommended that the CO
should consider withholding payment or adjusting the award fee if
the contractor did not comply with the H.41 clause condition and
Section F.3 A.l.c of the contract.
An OIG audit report entitled Special Review of Compliance
with Clause H.41 of Contract No. 68-WO-0035. Riedel Environmental
Services. (report No. 2400078), dated January 15, 1993, found
that RES still had not complied with conditions 2, 5 and 7 of
Clause H.41. The audit report indicated, among other things,
that RES had not performed the billing reconciliations required
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Review Report on EPA's Management of ERGS Contracts
in a timely and consistent manner. At the time of review, RES
could only provide one of the six required reconciliations. RES
in its response to the draft report, stated that 48 of 91
projects under the contract were not completely reconciled. RES
generally agreed with the facts of the report but disagreed with
the OI6 recommendations that EPA pursue such remedies, in
accordance with the terms of Clause H.41, as will compel the
contractor to implement all the provisions of the advance
agreement. An EPA determination on the findings and
recommendations of the audit report was forwarded to the DIG on
March 18, 1993, by the Chief, Cost Policy and Rate Negotiation
(CPRN) Branch, Cost Advisory and Financial Analysis Division.
The Chief, CPRN stated that while there is still work to be done
by RES to comply with conditions 2, 5 and 7 of the H.41 clause,
sufficient progress was being made by the contractor in that
adequate policies and procedures were in place on all eight
contract conditions. He stated that monitoring for compliance
will continue through additional audit reporting on RES' billing
and job costing systems.
In response to the Hay 7, 1992, FHR recommendation to pursue
remedies for non-compliance with Clause H.41, the Region 7
Performance Evaluation Board (PEB) recommended that RES not
receive its contract management award fee for the fourth
evaluation period (February 4, 1992 through February 3, 1993).
The EPA Fee Determination Official (FDO) in a letter to RES on
July 7, 1993, announced the PEB assessment of the firm's
performance under the contract. The available award fee pool for
contract management for the period was $310,202. The PEB rated
the contractor's performance in contract management in the
deficient range and recommended zero percent of the award fee
pool in order to send a strong message of the seriousness of non-
compliance with the H.41 clause two years after contract award.
The FDO adopted the PEB recommendation and further reduced the
award fee amount by $47,000, for a total reduction of $357,202.
The FDO stated in his letter that the award fee reduction was
attributable to the firm's deficiencies in the accounting
systems, untimely submission of contract required reports, and
the lack of final resolution and full compliance with contract
clause H.41.
Following this action, the Region 7 PEB recommended to the
FDO on November 3, 1993, that RES be given a conditional
satisfactory rating for contract management for the fifth
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Review Report on EPA's Management of ERGS contracts
evaluation period (February 4, 1993 through August 3, 1993). The
PEB proposed that the interim contract management avard fee
should be conditional and vould be revisited at the annual
evaluation based on RES' compliance with contract clause H.41,
The Region 7 CO stated that a conditional satisfactory rating was
granted in the fifth evaluation period because RES had only one
month to react to the deficient rating of July 7, 1993, for the
fourth evaluation period. The fifth evaluation period ended on
August 3, 1993.
We recently performed an audit of RES' billing system and
its procedures for the preparation of billings under fixed rate
and cost reimbursable portions of ERGS contracts. Our audit
Report on Evaluation of RES Billing System, (report No. 410022}
dated March 25, 1994 found, among other things, that RES prepared
its billings on delivery orders under ERGS contracts based on the
hour and cost data recorded in the RCMS, rather than from its
accounting system. RES' Zone 4A and Region 5 contracts both
contain clauses that require all RES invoices be generated from
the contractor's accounting system. The audit report also
disclosed that RES was not completing its reconciliation of
amounts billed to the job cost system in a timely manner. Clause
H.41 of the Zone 4A contract requires that reconciliations shall
be done no less than quarterly. The audit indicated that many
1991 delivery orders under the Zone 4A contract were not
reconciled until the completion of the delivery order. Other
delivery orders in process through July 1992 were reconciled
during the last four months of 1992.
The above cited FMR and audit reports revealed that RES has
not yet complied with FAR Subpart 31.201-2 and contract clauses
F.3.A.1.C and H.41 of the Zone 4A contract. The effective
compliance date for these clauses was August 4, 1991. The
Financial Administrative Contracting Officer (FACO), Region 7 CO
and OIG auditors agree that RES had made progress toward full
compliance. The FACO and CO made repeated attempts to get RES to
fully comply. The PEB and FDO provided the contractor enough
latitude prior to reducing the contractor's available contract
management award fee by $357,202 on July 7, 1993. Still the
contractor was reportedly not complying with key contract
conditions and FAR Subpart 31.201-2. The firm was not billing
from its accounting system and not completing its*reconciliation
of amounts billed to the job cost system in a timely manner. FAR
31.201-2(c> states that:
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When contractor accounting practices are inconsistent with
this Subpart 31.2, costs resulting from such inconsistent
practices shall not be allowed in excess of the amount that
would have resulted from using practices consistent with
this subpart.
The H.41 clause states that:
If the contractor does not demonstrate a diligent effort to
implement the provisions specified in a. above, within the
specified time or such other time as may be approved by the
Contracting Officer (emphasis added), the government may
pursue such remedies as may be permitted by law for breach
of contract, including termination of the contract for
default.
To our knowledge, no costs have been disallowed under FAR
Subpart 31.2.; nor has the CO allowed RES an extension to the
August 4, 1991, H.41 clause compliance date. We commend the
Region 7 PEB* for reducing RES' award fee in July 1993. We
question, however, whether the PEB's recommended conditional
satisfactory contract management rating following the previous
deficient rating was appropriate or effective, especially when
the OZ6 reported continued RES accounting deficiencies in the
same contract evaluation period. Allowing the contractor so much
time past the August 4, 1991, clause implementation date to fully
comply with FAR and contract terms questions the resolve of EPA.
Surely, allowing ERGS contractors, after 10 years of doing
business with EPA, to not adopt Federally-mandated accounting
requirements and generally accepted accounting principles
subjects the Agency to serious vulnerabilities.
RES Contract Number 68-52-5001
r
This contract for Region 5 was awarded on September 29,
1992, and also included an advance agreement clause requiring the
contractor to comply with ten conditions regarding deficiencies
in its accounting system. The conditions were included in clause
H.10. Clause H.10(b) states, in part, that should the contractor
fail to submit an acceptable plan to remedy the cited accounting
deficiencies and implement the remedies within 180 calendar days,
or a later date determined by the CO, the contractor may be
considered in breach of the contract and the contract may be
terminated for default. Further, in lieu of termination, it
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states that the CO may consider other remedies such as suspension
of payment for use of contractor-owned equipment. Compliance by
RES with the following ten conditions was required by March 29,
1993:
1) All invoices should be generated from the accounting
system and not from the RCMS. (This requirement is
also stipulated in clause F.6 A. I.e.)
2) Allocation of costs in the G&A indirect cost pool
should be allocated in accordance with FAR 30.403 and
30.410.
3) The applicable portion of any income, rebate,
allowance, or other credit relating to any allowable
cost and received by or accruing to RES shall be
credited to the Government either as a cost reduction
or by cash refund in accordance with FAR 31.201-5.
4) The contractor shall refine its written policies and
procedures to include instructions covering the
preparation, submission and correction of time cards
and/ or time sheets. Such written policies and
procedures shall be distributed to all employees.
5) The contractor shall develop written policies and
procedures that document their system of classifying
and accounting for bid and proposal costs.
6} The contractor shall reconcile the amounts
billed to the job cost system. For the fixed
rate portion of the contract (labor and .
equipment) , the contractor shall reconcile
the labor hours billed to the hours recorded
in the labor distribution report and the
equipment hours billed to the equipment hours
recorded in the fixed assets system. For the
cost reimbursable portion of the contract,
the contractor shall reconcile all amounts
billed to the job cost system. These
reconciliations shall be done no less than
quarterly.
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7) The contractor will develop written policies
and procedures to ensure that hours billed by
labor category are performed by personnel who
meet the labor qualifications as specified in
the contract or labor determinations, which
ever prevails.
8) Pricing of materials from in-house must be
consistent with FAR 31.205-26.
9) Complete records for owned equipment shall be
maintained and shall include the purchase
price, depreciation schedules and cumulative
hours used per piece of equipment. The cost
and hours of equipment utilized shall be
verifiable to the accounting system.
10) A CAS Disclosure Statement should be filed within 60
days in accordance with FAR 52.230-3.
All the above cited conditions, except for condition 10,
were also included in contract 68-WO-0035, awarded approximately
19 months earlier on February 4, 1991. Also, clause B.3.F.3,
pertaining to negotiation of additional fixed rates and use of
provisional rates, was included in contract
68-S2-5001. This clause restricted billing rates to 90 percent
of the full proposed provisional rate set for all the labor and
equipment line items in the contract until the rates are
converted to fixed rates. Establishment of final rates would be
based on acceptable cost or pricing information made available to
the CO. This clause was inserted because of the extent of RES'
accounting deficiencies.
As reported on contract no. 68-WO-0035, the OIG issued its
audit report, Report on Evaluation of RES Billing System, on
March 25, 1994. Since this report was a review of RES' billing
system under ERGS contracts, all findings would be applicable to
both EPA ERCS contracts. The OIG found, among other things, that
RES prepared its billings on delivery orders under ERCS contracts
based on the hour and cost data recorded in the RCMS, rather than
from its accounting system. The H.10 and F.6 A.l.c clauses of
the contract requires all invoices be generated from the
contractor's accounting system. The audit report also disclosed
that RES' internal controls were not adequate to ensure that all
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equipment hours were consistently identified, accumulated and
recorded in its accounting system. Numerous instances were found
vhere equipment hours identified and billed through the RCMS were
not recorded in the job cost system. The H.10 clause requires
that equipment hour utilization be verifiable to the accounting
system. The clause also requires that the contractor reconcile
the billed equipment hours to the hours recorded in the fixed
asset system. The contractor cannot comply with the requirement
if all equipment usage is not identified and recorded in the job
cost system.
The audit findings signify that RES has not yet fully
complied with contract clause H.10 of the contract and FAR
subpart 31.2. The effective compliance date for this clause was
March 29, 1993. While the FACO, Region 5 CO and OIG auditors
agree that RES has made progress toward full compliance, no costs
were disallowed under FAR Subpart 31.2 or remedies levied under
the H.10 clause. The CO stated that labor and equipment billing
rates equivalent to 90 percent of the provisional rates were
established at the time of the contract award and will remain in
effect until such time fixed rates are established. The 10
percent withholding would continue until the CO is assured that
RES has adequate accounting for its labor and equipment rates.
The CO has since finalized labor rates and restored the amounts
withheld for labor charges. The CO also stated he was awaiting
the results of the OIG audit report on RES' billing system and
the OIG adequacy and compliance review of RES' CAS Disclosure
statement before deciding on whether to institute remedies under
the H.10 clause.
We also issued two reports on RES' compliance with CAS. We
issued a special review report Review of the Cost Accounting
Standards Board Disclosure Statement Submitted by Riedel
Environmental Services (report No. 3400061) on June 4, 1993. The
purpose of the review was to evaluate whether RES' initial
Disclosure Statement dated January 20, 1993, adequately described
the cost accounting practices used by RES in the performance of
Government contracts covered by CAS. RES' contract number
68-S2-5001 met the requirements of 48 CFR 9903.201-2(a) for full
CAS coverage. The report found that RES' Disclosure Statement
did not adequately describe 19 cost accounting practices and 6
practices were in non-compliance with CAS. The OIG reviewed the
RES' revised Disclosure statement dated Hay 20, 1993, at the
request of the FACO.
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In our special review report dated December 20, 1993, Review of
the Cost Accounting Standards Board Disclosure Statement
Submitted by Riedel Environmental Services (report No. 4400013),
we found that the revised Disclosure Statement did not adequately
describe RES' cost accounting practices. RES submitted a revised
Disclosure Statement in August, 1994. Our review report dated
September 22, 1994, Review on the Adequacy ofthe Cost Accounting
Standards Board Revised Disclosure StatementSubmitted bv Riedel
Environmental Services (report No.4400109V found that RES
adequately described its cost accounting practices.
The FDO reduced RES' award fee in July, 1993, by $357,202
for not complying with the H.41 clause of contract 68-WO-0035 for
the evaluation period of February 4, 1992, through February 3,
1993. The H.10 clause has accounting system compliance
conditions identical to the H.41 conditions. Both contracts
overlap in contract management evaluation periods. Still, the
FDO and the Region 5 FEB awarded RES a satisfactory rating in
July 1993 for contract management under contract 68-S2-5001 for
the evaluation period ending March 31, 1993, the same timeframe
in which the FDO rated RES' contract performance under contract
68-WO-0035 in the deficient range. The same FDO rated RES'
contract management performance in dissimilar ways in the same
month, July 1993. These actions clearly send a conflicting
message to RES and underscores incongruous administration of RES'
contracts with identical contract accounting system requirements
provisions.
2. ENVIRONMENTAL TECHNOLOGY OF NORTH AMERICA fETI)
Contract number 68-S2-3002 was awarded to ETI on January 31,
1992, for the purpose of providing emergency cleanup services to
EPA Region 3. The contract is an indefinite delivery/indefinite
quantity contract with a mixture of fixed rate and cost
reimbursable services. Rates are fixed for labor and equipment;
other direct costs are reimbursed at actual costs. The
contractor is paid a base fee, and an award fee based on the
contractor's performance.
Modification No. 3 to the contract, effective July 1, 1992,
cited "...accounting system deficiencies in the areas of
equipment utilization records and development of equipment rates,
and reconciling Removal Cost Management System costs with actual
payments of incurred costs as recorded in the contractor's
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accounting system.1* Because of these deficiencies, the CO had
determined that the contractor's accounting system was inadequate
for the purposes of this contract. The CO required ETI to
demonstrate by August 1, 1992, to the CO's satisfaction, that
deficiencies were corrected or that there was sufficient progress
in correcting the deficiencies. This modification added,clause
H.50, Accounting System Requirement (Cost Reimbursement
Contracts) to ensure that costs billed to the Government are
accounted for and billed in accordance with generally accepted
accounting.standards. The clause required that ETI establish an
acceptable accounting system, including, but not limited to
n...complete records for owned equipment to include
identification numbers, acquisition cost, depreciation schedules,
maintenance records, and utilization records unique to each item
of equipment owned "or leased on a long-term basis (12 months or
more) by the contractor.1* The clause further stipulated that in
the event the contractor fails to demonstrate to the Contracting
Officer sufficient progress in correcting these deficiencies,
within 120 days, the Government may apply remedies as it
determines appropriate. Compliance was required by November 1,
1992. Remedies may include withholding of any and all amounts
due the contractor under the contract upon notification by the
Contracting Officer or termination of the contract for default.
ETI provided a status report dated July 31, 1992, to the CO
citing the progress it was making in correcting accounting system
deficiencies noted in Modification 3 to the contract. The status
report was submitted within the time frame required by the
modification. The CO said she submitted the status report to the
Chief, Financial Analysis Branch (FAB) in OAM for his review
prior to initiation of his scheduled follow-up FMR on ETI
contract 68-S2-3002. The CO forwarded the plan to.the FAB
because she relied on the Branch analysts to advise her on the
acceptability of ETI's accounting system. ETI also provided the
FACO on January 7, 1993, a Plan of Action to correct the
deficiencies reported in an FMR dated June 29, 1992, entitled
Financial Monitoring Report on Contract Numbers 68—W9-0026 and
68-S1-4002 with Environmental Technology Incorporated (FASASSNO
2DFM020 and 2DFM021). This FMR noted, among other things, that
ETI's accounting system was deficient and needed improvement.
The Plan of Action indicated that the firm was making progress
and improvements have been made to the accounting system. The
FACO has stated that his knowledge of the ETI accounting
deficiencies was limited because he recently acquired the
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responsibility to review and resolve financial aspects of the
contract from the previous FACO. He stated that he was awaiting
the issuance of the follow-up FMR on contract 68-S2-3002 before
assessing the progress ETI was making to improve its accounting
system deficiencies.
The Follow-Up Financial Monitoring Review onContract
68~S2~3002 with Environmental Technology of North America. Inc
(FABASSNO 3DFM010), dated September 29, 1993, reported that ETl's
accounting system was not fully operational and that clause H.50
requirements, effective July 1, 1992, were not met. The report
states that ETI has had ERGS contracts since the award of
contract 68-W9-0026 in April 1989. That contract, with
extensions, was completed July 1993, without ETI having corrected
its accounting system problems. The FMR further reports that:
1} ETI has no comprehensive written accounting
policies and procedures manual. The report
states that the lack of written policies
inhibits the government's ability to ensure
consistency in the way costs are charged and
makes it difficult to detect changes in cost
classification or methods of cost allocation;
2) ETI does not have an inventory accounting
system;
3) ETI has not established a system to track equipment
utilization; and
4) ETI is billing from the RCMS, and not from its
accounting system. Clause F.3 A.l.c requires that all
invoices shall be generated from the contractor's
accounting system and reconciled on a monthly basis
with RCMS costs. The report states that the RCMS is
not a substitute for an adequate accounting system and
the RCMS does not ensure compliance with FAR Part 31
and the allowable cost payments clause of the contract.
This deficiency was previously reported in the above
cited June 29, 1992, FMR. The FMR also notes that ETI
has installed an accounting system software package but
the system was not fully operational at the time of
review.
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The FMR recommended that the CO establish a timetable for
ETI to begin billing from its accounting system rather than from
the RCHS and that failure to meet the timetable should result in
reduced award fees. The FMR also recommended that the FACO
require ETI to provide timetables for drafting comprehensive
accounting policies and procedures, and for having inventory
accounting and equipment utilization systems in place. The
contractor's failure to meet these timetables should also result
in reduced award fees.
The September 29, 1993, FMR on contract 68-S2-3002 clearly
established that ETI was not in compliance with clauses F.3 A.l.c
and H.50. Both FMRs noted that ETI had not corrected its
accounting system problems since the award of its first ERCS
contract in April 1989. OAM officials were aware of this fact.
Yet, the only remedy applied to the ETI contract was for non-
compliance with clause G.ll. This clause requires that team
subcontractors have an adequate accounting system to support the
application of a team subcontractor G&A charge to Other Direct
Costs (ODCs). In a March 3, 1993, memo to ETI, the CO allowed a
zero rate instead of a 5 percent G&A charge to subcontractor
incurred ODCs until the team subcontractors demonstrated
implementation of an acceptable job cost system. However, no
effective action was demonstrated to provide ETI with an
incentive to comply with clause H.50 and applicable FAR
provisions. In fact, the Region 3 PEB did not address ETI's
known accounting system deficiencies in its June 28, 1993,
evaluation letter covering the annual evaluation period of
January 31, 1992, through January 30, 1993, for contract
68-S2-3002.
In summary, ETI had not implemented a fully acceptable
accounting system since its first contract, awarded in April
1989. ETI is still not complying with FAR Part 31 accounting
requirements and the July 1, 1992, H.50 clause. EPA assessed no
remedies under the provisions of clause H.50, which includes
"withholding of any and all amounts due the contractor.,.or
termination of the contract for default11. The lack of
enforcement of contract and FAR contractor accounting provisions
questions the Agency's commitment to good contract and financial
management and causes the contractor to doubt the Agency's will
to enforce compliance.
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3. OHM REMEDIATION SERVICES CORP fOHMl
A Letter Contract, number 68-W3-0012, was awarded to OHM
March 5, 1993, to provide emergency cleanup services to EPA
Region l. The contract is a combination indefinite
delivery/indefinite quantity. Cost Plus Fixed Fee contract with
fixed rates for labor, equipment and other items. A letter
contract was awarded because it was not possible to negotiate and
issue a definitive contract in time to provide the necessary
removal support needed for Region 1. As stated in the
Determination and Findings. Issuance of Letter Contract under
Solicitation^^). WO-800001-F1. Region 1 ERGS Recompete dated
January 25, 1993, the procurement action was delayed since
July 1, 1991, because of several major issues that arose during
negotiations with OHM. These issues centered on OHM's accounting
system problems, particularly with equipment utilization tracking
and compliance with CAS. OHM became fully covered under CAS
during the negotiation process. To comply with CAS, OHM had to
completely restructure its accounting system. Consequently, the
Agency's ability to evaluate OHM's proposed fixed rates had been
impaired. As a result, Clause 1.27, Contract Definitization, was
added to the contract for purposes of definitizing proposed fixed
rates. The clause required OHM to submit a pricing proposal and
cost and pricing data supporting its proposed rates by April 1,
1993. The definitization target date was set at July 16, 1993.
The letter contract was definitized on December 30, 1993, even
though accounting system deficiencies still existed. Because of
the deficiencies, the provisional labor and equipment rates in
the letter contract were definitized to fixed rates on the basis
of price analysis.
The letter contract also included clause H.50, Accounting
System Requirements, which cited the OHM accounting -system as
being deficient and required substantial improvements in
complying with CAS coverage and equipment utilization tracking.
The definitized contract contains the Accounting System
Requirement at clause H.52. The clauses required the contractor
to submit a plan to remedy these deficiencies. The plan would
include a detailed schedule for remedy of the deficiencies within
180 days following the acceptance of the plan by the Government.
The clause further states that:
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...should the contractor fail to submit a plan acceptable to
the Contracting Officer or fail to implement the remedies
within 180 days, or later date as may be determined by the
Contracting Officer, or fail to make sufficient progress as
may be determined by the Contracting Officer, in correcting
deficiencies, the contractor may be considered in breach of
the contract and the contract may be terminated for default.
In lieu of a termination for default, the Contracting
Officer may consider other remedies such as suspension of
payment for use of contractor-owned equipment.
OHH's remedial plan was submitted as required. The FACO
believes, as do the cognizant OIG auditors, that OHM is making
progress towards complying with the accounting system
requirements. The OIG's special review report. Data Reliability
of OHM Corporation*s Project Accounting System, (report No.
3400069), issued August 23, 1993, recognized that OHM had
invested significant resources to improve the quality of its
automated project accounting system. Significant strengths of
the system included a superior conceptual system design,
effective automated data reconciliations and strong controls over
accounts payable data. The report did note, however, several
application control weaknesses, including equipment transaction
recording. We are in the process of a comprehensive review of
OHM's Equipment Use System. We anticipate a report to be issued
in September, 1994.
We also issued two reports on OHM's compliance with CAS. We
issued a special report, Review of Initial Adeo^iacv of Disclosure
Statement Submitted bv OHM Remediation Services Corporation
(report No. 3400015), on January 21, 1993. The purpose of the
review was to evaluate whether OHM's amended Disclosure Statement
filing of April 24, 1992, adequately described the cost
accounting practices which OHM proposes to use to abide by the
Cost Accounting Standards prescribed for use in Government
contracts. The report showed that OHM's Disclosure Statement did
not adequately describe its cost accounting practices and
recommended that OHM submit a revised Disclosure statement. 48
CFR 9903.303 requires disclosures to be current, accurate and
complete. The contractor submitted its revised Disclosure
Statement to the FACO, who asked the OIG to review the revisions
for adequacy. The Defense Contract Audit Agency (DCAA) assumed
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audit cognizance of OHM on October 1, 1993, and is working with
OHM in the development of an adequate Disclosure Statement.
We issued a report. Review of CAS 401 Noncompliance of OHM
Remediation Services Corporation, (report No. 3400081), on
September 2, 1993. The purpose of this review was to evaluate
whether OHM's accounting practices changed from the time it was
awarded its first fully-CAS covered contract on December 27,
1991, to the time of the above mentioned amended Disclosure
Statement filing on April 24, 1992. The auditors found that OHM
was not in compliance with CAS Number 401, Consistency in
Estimating, Accumulating and Reporting Costs. Specifically, OHM
was non-compliant with CAS 401.1, consistency between Estimating
and Accumulating Costs. The contractor estimated costs of its
fully-CAS covered Navy contract under established accounting
practices and accumulated costs under significantly restructured
disclosed practices without obtaining the required prior
agreement from the Government. In addition, OHM was non-
compliant with CAS 401.2, Consistency in Reporting Costs, in that
disclosed accounting reporting practices were not consistent with
the way costs were estimated under established accounting
practices.
The effective compliance date for the H.50 letter contract
clause was. September 5, 1993; the effective compliance date for
the H.53 clause is June 30, 1994. Additionally, the letter
contract, scheduled for definitization by July 16, 1993, was
definitized December 30, 1993. FAR 16.603-2(c) requires
definitization of the contract within 180 days .after the date of
the letter contract or a later date if the CO authorizes an
additional period in extreme cases. The CO had not formally
authorized an extended date. The reason for not being able to
award a definitive contract in the first instance related to
deficiencies in OHM's equipment usage tracking system and the
difficulties OHM had in complying with CAS. The above cited OIG
audit reports show that more than two years after initial
negotiations took place on September 17, 1991, OHM has still not
fully complied with CAS, and therefore, clauses H.50 and H.53.
Also, the Agency is still unsure of the suitability of OHMs
equipment usage tracking system. Therefore, the Agency's ability
to evaluate OHM's proposed rates continues to be impaired.
Entering into a contract with a contractor with known
accounting system deficiencies and then allowing the deficiencies
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_ Review Report OB EPA 'a Management of ERGS Contracts
to go uncorrected for a period spanning more than one year
without sanctioning the contractor or seriously considering
contract termination casts doubt on the earnestness of the Agency
to improve its contracts management. Equally inexplicable is the
fact that after doing business with EPA for over 10 years, OHM
still had not fully complied with the FAR mandated accounting
provisions. Permitting these conditions to continue with this,
and other contractors, deters the Agency from fulfilling its
financial and contract management responsibilities.
Contmct A
com
m
Rcomrcmcirt
In the OARM Assistant Administrator's final determination
memorandum of August 10, 1992, to an OIG March 27, 1992 report,
Followup Audit of EPA's Negotiation. Award and Management of
Contractor-Owned Equipment on Emergency Response Cleanup Services
Contract. he announced his plan to correct contractor accounting
system deficiencies. He stated, among other things, that the
Regional Contract Management Branch (RCMB) had developed a
special mandatory Accounting Systems Requirements Clause for
inclusion in all subsequent ERCS contracts. Contracts would be
managed in the regions with oversight provided by OAM. He also
stated that OARM would pursue sanctions for non-compliance of the
special clauses where appropriate.
The Acting Associate Director for Superfund Procurement
Operations, OARM issued a special Accounting systems Requirements
Clause in a memorandum of March 31, 1992, to Headquarters and
regional contracting personnel for inclusion in ERCS contracts.
The clause was modified to address the accounting system
deficiencies associated with the four contracts reviewed in this
report. According to the Explanation, Applicability and
Deviations paragraphs related to the Accounting System
Requirements Clause, the clause is intended to provide EPA with
rights and remedies to correct accounting system deficiencies and
to assure that the deficiencies will be corrected within a
reasonable time period. Substantive deviations from the
provisions of the clause require OAM approval. The Applicability
paragraph stated "... awards should not be made to firms
determined by EPA to be inadequate or contain substantive
deficiencies".
As discussed in the report's previous section on the four
contracts reviewed, the Agency awarded four contracts to three
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contractors who, according to declarations in each contract
clause, had inadequate or substantive accounting system
deficiencies. We found that deficiencies were not corrected
within the prescribed time frames and still were not corrected
during the time of review. EPA's rights and remedies provided by
the clauses were not exercised, except in one evaluation period
for one contractor. Also, no known substantive deviations from
the Headquarters standard clause were requested by EPA's
contracting personnel.
We attribute the overall contractor non-compliance with the
Accounting System Requirements Clause in part to a general lack
of serious enforcement by contracting personnel and by OAH.
During discussions between the OI6 auditor and Headquarters and
regional contracting personnel, a collective sense of reluctance
was expressed regarding complete enforcement of the clause
requirements and remedies. The regional COs all expressed
various reasons for not enforcing these contract clauses. The
four principal reasons expressed were:
1) The clauses are ambiguous in stipulating the remedies
for non-compliance. Remedies in each contract range
from termination for default to "withholding of any and
all amounts due the contractor". The remedies, they
believe, must be more specific to be enforceable. The
COs further believed that contract termination was not
a serious deterrent since, due to limited competition,
the Agency needed its small pool of ERCS contractors to
perform the extensive cleanup efforts required. They
suggested that stipulation of a specific remedy
instead, such as award fee reduction, would be more
effective in stimulating compliance because the
contractors would take the accounting systems
requirement more seriously. '
2) The clauses were difficult to enforce because the
contractors were technically qualified and performed
their services in an acceptable to commendable manner.
OSWER was generally satisfied with the contractors'
technical competence. Therefore, COs were placed in
the untenable position of satisfying OSWER, their
customer, and exercising good contract management.
"Mission vs. Management" considerations make contract
administration a formidable task and can affect the
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manner in which COs enforce the accounting requirements
clause.
3) Contracting .Officers were concerned that strict
enforcement of the clause might prompt EPA's limited
pool of ERCS contractors to seek cleanup work
elsewhere. They pointed out that potential responsible
parties and other Government agencies, such as the
Departments of Defense and Energy, have increased needs
for cleanup services also.
4) Finally, the regional COs expressed a need for OAM
support in the administration of the mandated
accounting system requirements clause. They believe
that OAM guidance is necessary for the uniform
administration and enforcement of the clause throughout
all regions, particularly when a contractor is
simultaneously performing under different contracts.
Effective administration requires uniform
implementation. Each contract clause should be
consistently applied to and levied against non-
compliant contractors. For this to occur, they say,
requires OAK guidance and support. The CO, without
full and consistent OAM support, does not have enough
control over the contractors to successfully enforce
the clause after the contract is awarded.
In discussions with the then Acting Chief, RCMB, he stated
that he disagreed that the regional COs needed specific OAM
guidance to properly administer the accounting system
requirements clauses. He stated that Headquarters role is to
broadly define procurement policy. Specific administration and
enforcement of contract clauses is the responsibility of the.
individual regional COs. He admitted that RCMB was not providing
much oversight. To do .so, he believes would undercut program
support. He stated that the clauses should be consistent in
national application on cross-cutting issues, such as equipment
utilization tracking. However, remedies need not be standardized
but should be broad to allow COs the discretion of instituting
specific remedies. As the FDO, he supported the Region 7 PEB in
their recommendation to reduce RES' award fee for non-compliance
with its accounting systems requirements clause. He recognizes
that enforcement of the clause by the regional COs and RCMB was
difficult. Enforcement might impair the mission of OSWER and
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Review Report on EPA's Management of ERC8 Contracts
perhaps limit competition further by driving EPA contractors to
other Government agencies, such as the Departments of Energy and
Defense, who are now building a need for cleanup services.
Nevertheless, he stated that the clauses are meaningful only if
the COs are aggressive in enforcing the clauses. However, we
found no evidence that aggressive oversight on clause compliance
and enforcement was undertaken by the RCMB, as promised in the
aforementioned OARM Assistant Administrators' action plan.
We agree that aggressive enforcement is required. Moreover,
enforcement was not the sole responsibility of the regional COs.
OAM must assure that enforcement actions are undertaken to
promote clause compliance. Except for the one instance when the
Agency reduced a contractor's award fee for non-compliance, no
other remedies were levied. Moreover, the RES remedy was applied
23 months after RES' scheduled compliance date. The award fee
was not withheld in the following evaluation period even though
RES was still non-compliant. We agree that there are valid
concerns about the possible effects of clause enforcement. No
evidence or documentation was provided to substantiate the bases
for the concerns, however. There seems to be no foundation for
the premise that enforcement of contract clauses will limit
competition, drive EPA contractors to DOD or DOE (who also have
to enforce FAR contractor accounting requirements) or impair
EPA's mission to cleanup the environment. When RES' award fee
was reduced by $357,202 in July 1993, there was no apparent
disruption in mission thereafter, or contractor threat to do
business elsewhere. Further, the award fee was reduced even
though the contract clause did not specify award fee reduction
for non-compliance. FAR accounting system requirements are
applicable to, and adhered to, by many other EPA contractors with
no apparent detriment to EPA's mission fulfillment. To require
and expect less of ERGS contractors after 10 years of doing
business with them exhibits differential treatment to a singular
class of contractors and is clearly discriminatory.
Conclusion
Management action promulgated by the AA, OARM in March 1992
to correct contract management deficiencies identified in 1986
and 1992 OIG audits of ERGS contracts have not attained the
intended results. OAM and regional COs continue to allow
contractor non-compliance with FAR and contract accounting system
requirements for ERGS cost type contracts. Despite a decade of
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doing business with EPA, some ERGS contractors still do not have
approved accounting and billing systems capabilities needed for
the ERCS contracts.
The four contracts reviewed were awarded to three
contractors, who according to declarations in each mandatory
contract accounting system requirements clause, had inadequate or
substantive accounting system deficiencies. Effective compliance
dates for each contract ranged from August 1991, to September
1993. None of the three contractors have fully complied,
although OI6 and procurement personnel believe that the
contractors were making efforts to adopt acceptable accounting
systems. Recent OIG and FHR reports continue to identify
weaknesses in the contractors' systems. OHM, an ERGS contractor
since the early 1980s, still does not have an acceptable
equipment utilization tracking system and was not in full
compliance with CAS. Moreover, OHM was awarded a letter contract
on March 5, 1993, because of the accounting system problems
identified during initial negotiations .in July 1991. The letter
contract was definitized on December 30, 1993, even though OHM
still had not resolved its'accounting system problems. ETI, an
EPA contractor since April 1989, still has accounting problems.
Lastly, RES' accounting system was still deficient, two years
after the effective clause compliance date.
We attribute contractor non-compliance with the Accounting
System Requirements Clause in part to a general lack of serious
enforcement of the clause by OAM and regional COs. RCMB and
regional COs expressed a collective sense of reluctance to
completely enforce the clause requirements and remedies. To do
so, they claim, might drive contractors away, lessen competition
and place contracting personnel in the untenable position of not
satisfying their customer's mission needs by applying good
contract management precepts. No evidence was presented,
however, to support these claims.
OAM and regional COs should require ERGS contractors to
fulfill all FAR and contract accounting system requirements.
These requirements are not discretionary. EPA procurement
officials recognize the benefit of good contractor accounting
systems. It aids the CO immensely in contract negotiation,
delivery order administration, definitization and close out and
cost recovery actions. Without contractor job cost support data,
the CO has to use other less effective and more time consuming
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methods such as price analyses and market surveys to negotiate
fixed and provisional rates. These alternate methods are of
questionable value in ERGS contracting because of the admitted
limited number of major ERCS contractors. Moreover, without
adequate independent contractor accounting system cost support
and verification, there were no assurances that contractor
billings reflect actual, allowable incurred costs. Therefore, it
is puzzling why the Agency has allowed ERCS contractors latitude
over the past ten years not to fully implement FAR mandated
accounting provisions and generally accepted accounting
principles. Unsanctioned contractor non-compliance casts doubt
on EPA's resolve to improve contract and fiscal management.
We recommend that the Assistant Administrator for
Administration and Resources Management require:
1* OAM and regional ERCS contracting officers to enforce
FAR accounting system requirements for all current and
future ERCS cost type contracts.
2. Contractors to correct inadequate accounting systems
before EPA awards the contract.
3. Regional ERCS contracting officers to expeditiously and
uniformly enforce contract accounting system
requirements clauses in the current ERCS contracts.
Significant remedies should be pursued when contractors
are not making sufficient, timely progress toward
clause compliance.
4. OAM to provide the needed oversight and assistance to
ensure consistent and uniform regional implementation
and enforcement of FAR and contract accounting system
requirements.
5. OAM review the necessity for stipulation of specific
remedies, such as award fee reduction, when contractors
are in non-compliance with contract clauses.
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O ARM Response
OARM concurs with the basic findings and recommendation
numbers 1, 2 and 3 and disagreed with recommendation numbers 4
and 5. OAM is taking actions to address contractor accounting
system issues. One of the three contractors reviewed in the
report, RES, has received no award fee for contract management in
Regions 5, 6 and 7 for the first year of the contract. The other
two contractors are making diligent efforts to modify their
accounting systems, with DCAA expected to report in the near
.future that OHM's accounting system is acceptable for cost type
contracts. OAM will be issuing a memorandum to the regional COs
by September 1, 1994, reminding them of their fiduciary
responsibilities to manage existing contracts prudently and
encouraging them to aggressively pursue remedies permitted under
the contract to cure contract accounting system failures or
violations. Further, the FDO will continue to consider
contractors progress in complying with accounting system
requirements in the award fee evaluations.
Additionally, OAM will encourage the use of Time and
Materials (T&M) type contacts with fixed rates that are
determined to be fair and reasonable for labor and equipment for
the next generation of Emergency and Rapid Response Services
(ERRS) contracts. The fixed rates will be based on standard
commercial prices, existing market conditions or adequate
competition, and price and cost analysis. OARM believes that T&M
type contacts will alleviate the ERCS contractor accounting
systems issue, since after ten years, no ERCS contractor has an
accounting system considered fully adequate for cost
reimbursement contracts. Instead of trying to get ERCS
contractors, who were spawned out of the heavy construction
industry, to change how they do business, T&M 'type-contracts with
fixed rates for labor and equipment is a preferable alternative.
OIG Evaluation
We commend OAM for the actions taken to require RES to
comply with its accounting systems requirements clauses. We can
not evaluate the potential effectiveness of the other planned
action for existing contracts since we have not received a copy
of the expected September 1, 1994, memorandum to the regional
COs. Reminding the COs of their contract management
responsibilities is a positive step, but we still maintain that
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Review Report oa EPA's Management of ERGS Contracts
accounting system requirements clause enforcement is not the sole
responsibility of the COs. However, no action plan was provided
outlining steps that OAM will undertake to ensure prudent
regional contract management. OAM, as Senior Procurement
Managers, also have a fiduciary responsibility to oversee and
ensure that contract management is prudently exercised and that
cure remedies are aggressively pursued. O ARM'S August 10, 1992,
action plan to correct ERGS contract management deficiencies
identified in 1986 and 1992 OIG audits of ERCS contracts promised
that sanctions would be pursued for non-compliance and that
Headquarters would provide the necessary oversight on ERCS
contacts management. This report shows that ERCS contract
management deficiencies still exist. We have seen no evidence of
effective Headquarters oversight. Also, only one contractor to
our knowledge, RES, had sanctions imposed since implementation of
the corrective action plan. Yet, the four contracts reviewed had
effective accounting clause compliance dates ranging from August,
1991 to September, 1993. OAM's Superfund contract listing dated
September, 1994, shows that 16 current ERCS contracts are held by
9 different ERCS contractors. The total approximate dollar value
of the 16 contracts is $933.5 million. Performance periods run
from July, 1995 to July, 1998. To our knowledge, none of the 9
contractors now have fully acceptable accounting systems for ERCS
cost type contracts. OARM agrees that no ERCS contractor, after
10 years of doing business with EPA, has met all of EPA's
accounting and billing system needs. Clearly, the Agency must
take deliberate, expedited actions to compel the ERCS contractors
to adopt the accounting systems that are mandated by the FAR.
Until that occurs, contractor invoices will not be auditable and
the Agency will have no assurance that contractor billings
reflect actual, allowable incurred costs.
OARM believes that using a T&M type contract with fixed
rates for labor and equipment in future ERRS contracts will
alleviate the accounting system issues. We agree that fixed
rates based on adequate price competition or established catalog
or market prices could reduce contractor accounting system
demands. However, if contractor exemption from submission of
cost or pricing data is not appropriate and EPA must contract by
negotiation, contractors will have to submit cost or pricing
data. When cost and pricing data are required, contractor
accounting system requirements are effectively the same for T&M
and cost type contacts. Moreover, in accordance with FAR 16.601,
T&M contracts provide for acquiring materials at cost. Charging
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for materials must be on a cost basis if the estimated price of
materials exceeds 20 percent of the estimated contact price or if
the total estimated contract price exceeds $25,000. Materials,
as defined at FAR Table 15-2, includes services to be produced or
performed by others. Subcontracted services, and other direct
costs, under ERGS contract traditionally exceed $25,000 and
exceed 20 percent of the estimated contract price. Therefore,
contractor accounting systems will be required for the costing of
subcontracts, and other direct costs. Further, the use of T&M
contracts with fixed rates will not eliminate reliance on
contractor accounting systems, because those systems will be
the accounting and audit determination basis of quantities billed
for labor hours, materials quantities and other resource
utilization.
Even though QARM disagreed with recommendation Number 5, it
has proposed acceptable actions that satisfies the intent of the
recommendation. OARM disagreed with recommendation Number 4,
stating that uniform regional implementation of the FAR and
contract accounting system requirements cannot be accomplished
because there are multiple types of ERGS contracts in the
regions. We still maintain that uniform implementation of FAR
accounting system requirements can be accomplished, since the
requirements are the same for all cost type contracts.
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EPA R1J JANTTC ON RCMS NULLIFIES CONTRACTOR
INVOICING REOUIRFMFNTS
CAM and regional contracting personnel continue to allow
ERGS contractors to use the Removal Cost Management System (RCMS)
as a billing mechanism despite contract requirements for ERGS
contractors to generate invoices from, and reconcile them to, its
accounting system. EPA acceptance of this practice can be
attributed to its historical reliance on the RCMS and the OSC-
verified EPA Form 1900-55 as the primary cost documentation
system for contractor charges. Because OAM had not enforced
contractor compliance with contract accounting system and
invoicing requirements, there was no assurance that billed
charges were actually incurred and paid by the contractor.
Further, EPA's reliance on the RCMS to validate the contractor's
claim did not provide the necessary internal controls to
reasonably assure that the Agency's contract expenditures were
properly accounted for. In addition, reliance by EPA and the
contractor on the RCMS and OSC-verified EPA Form 1900-55 may
provide a legal basis for reimbursement of contractor charges,
even though the charges may not be supported by internal
contractor accounting systems and records.
BackOTonnd
OSWER Directive 9360.0-02B, dated April 1988, entitled
Removal Cost Management Manual, outlines a comprehensive cost
management system for use by EPA at CERCLA/SARA authorized
removal actions. This system requires the OSC to document
specific on-site and off-site information on a daily basis. The
required documentation tool is the EPA computerized RCMS. The
RCMS is a database software package developed by EPA. The RCMS
is used to generate EPA Form 1900-55, Hazardous Substance
Response Fund Contractor Cost Reports, the form required by the
OSWER directive and designed to document daily contractor cleanup
activities and charges. The RCMS is provided to the ERGS
contractor who must use it to prepare and submit EPA Form 1900-55
during contract performance. The information included on the EPA
Form 1900-55 includes estimated or actual daily cost information
on contractor personnel, equipment, expendable materials and
subcontract and other direct charges. Data entry is usually
performed daily by the ERGS contractor, either directly or
through a contractor-specific software interface. The OSC
verifies and signs the EPA Form 1900-55, as does the contractor
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representative, to confirm that contractor services were rendered
as stated. In so doing, the OSC validates that the hours and
quantities of work charged for personnel, equipment, and any
other services are correct. The ROMS also provides a
computerized mechanism for the preparation of ERGS invoices and
reports, which include, among other things, detailed daily
project cost reports, equipment usage reports and project summary
reports. The RCMS allows the OSC to review a draft invoice prior
to receiving the contractor's invoice. The OSC then knows what
should be charged to the site from actual on-site estimates.
When contractor invoices are submitted, the OSC reviews and
certifies it for payment. However, certification of an invoice
implies only that the services were rendered. Certification does
not represent that invoiced costs are accurate, complete or
reasonable. Substantiation of the invoiced costs must come from
the contractor's job cost accounting system. The RCMS has no
mechanism to verify that the EPA Form 1900-55 recorded costs were
incurred and paid by the contractor, a necessary condition before
costs are billed to EPA.
Interim and final incurred costs audits will utilize the
contractor's accounting system, not the RCMS, as a basis for
determining allowability of costs incurred by the ERCS
contractor. In the past, our reports have repeatedly questioned
ERCS contractor charges because the charges were not adequately
supported by contractor internal accounting systems and records.
OAM's FMR reviews have also found ERCS contractor accounting
systems to be deficient and unable to adequately support invoiced
costs. Yet, well founded cost exceptions generally were not
sustained primarily because of the reliance the Agency placed on
the OSC's confirmation of EPA Form 1900-55 as evidence of cost
incurrence at removal sites. Moreover, there is some question
whether the bilateral endorsement of EPA Form 1900-55 by the OSC
and the contractor's on-site representative obligates EPA to pay
the fixed rate charges recorded thereon, even though such charges
may not be supportable by the contractor's internal accounting
systems and records. As a result, we issued a memorandum to the
Acting Director of OAM, dated December 11, 1992, that financial
audits of fixed rate items under the ERCS contracts shall be
suspended until these issues are resolved. Future contract audit
work will be limited to a review of cost reimbursable and
provisional rate items; and to a review of contractor accounting
systems and applicable cost accounting standards. Site specific
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cost incurred audits will be not be performed, unless there are
indications of fraud.
EPA Accepts EPA Form 1900-55 As Snbstanfiafift11 F°r ERCS
Contractor dun
Each of the four contracts sampled for this review required
the contractor to generate invoices from its accounting system
and to periodically reconcile the costs billed to the EPA Form
1900-55. This billing requirement signifies EPA's agreement to
past audit findings that ERCS contractor charges were not
adequately supported by FAR required contractor internal
accounting systems and records. Yet, ERCS contractors were
allowed to continue billing from the RCMS. As reported in the
previous section of this report, FMR and OIG reviews found that
some contractors were using the RCMS as a billing mechanism.
They were billing directly from the RCMS and not from their
accounting systems. He attribute EPA's acceptance of this
practice mainly to the reliance that EPA places on the RCMS and
the OSC-verified EPA Form 1900-55 as the primary cost
documentation system for contractor charges. There were several
reasons for this reliance.
Some contractors, as reported in prior FMR and OIG reports,
did not have the full capability to generate invoices from, and
reconcile them to, acceptable accounting systems and records as
the contract terms required them to do. Consequently,
contractors utilized the RCMS for billing purposes. Interviews
with COs revealed that they relied on OSC-verified EPA Form
1900-55 as the primary source documentation during the- invoice
review and delivery order definitization processes because ERCS
contractor accounting and billing systems were deficient. The
OSC's verification of the EPA Form 1900-55 and certification of
the corresponding contractor invoice attests that the goods and
services were received in the quantities ordered. The COs say
that a thorough review of the EPA Form 1900-55 and the documents
received from the contractor in support of its invoice provide a
good basis for acceptance of contractor charges. The Submission
of Invoice section of each ERCS contract requires the contractor
to submit an invoice "accompanied by readable copies of the
Contractor Daily Reports (RCMS generated EPA Form 1900-55) and
other documentation (sales receipts, charge tickets, invoices,
etc.) to substantiate all costs for which reimbursement is
requested". The COs also stated that some OSCs will not certify
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Review Report on EPA's Management of ERGScontracts
the invoice for payment unless the invoice matches the EPA Form
1900-55 exactly. This further illustrates the Agency's
acceptance of EPA Form 1900-55 as reliable primary source
documentation for billing purposes.
Another illustration of Agency reliance on OSC-verifications
of EPA Form 1900-55 was evidenced in responses to OIG audit
reports that question contractor charges unsupported by
independent accounting systems. Contractor accounting
deficiencies were reported in OIG Report of Interim Audit of S&D
Engineering Services. Inc.r (report No. 2100586) on September 9,
1992. The auditor questioned $313,437 of S&D's direct labor
charges at four sites because of significant deficiencies with
S&D's timekeeping system. The company policy requiring time
reports be prepared by all employees and approved by immediate
supervisors was not followed, since employees' timesheets were
not prepared. S&D agreed that company policy was not followed
and stated that on EPA jobs, the EPA Form 1900-55 functioned as a
daily time card. Region 2 responded to the draft and final audit
reports. In response to the draft report dated April 7, 1992,
the Region 2 Assistant Regional Administrator for Policy and
Management (ARA) stated:
...contrary to the auditor's position, the contractor's
timecards are not the appropriate vehicle for providing
assurance that hours claimed in the 1900-55 were accurate or
proper. Agency policy assigns that responsibility to the
OSC. Therefore, we request that this finding be deleted
because according to EPA policy, direct labor charges are to
be supported by OSC confirmed 1900-55 forms.
In his response to the final audit report, the ARA
determined that the $313,437 in direct labor costs were
adequately documented, even though he agreed that S&D had
timekeeping system deficiencies. He acknowledged that
differences existed between the contractor's on-site time and
attendance logs, the contractor's payroll time cards and the osc-
verified EPA Form 1900-55. He contended that "the required daily
certifications on EPA Form 1900-55, signed by both the
contractor's representative and the EPA On-Scene Coordinator
(OSC), provide the most reliable and fully documented assurance
that the billed labor services were actually rendered."
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We do agree that OSC-verified EPA Form 1900-55 provides some
evidence that ordered goods and services were actually rendered.
We agree also that the OSC-verified EPA Form 1900-55, coupled
with accompanying documentation provided by the contractor with
its invoice, provides a good basis for the current invoice review
process. We do not agree, however, that EPA acceptance of
contractor claims based only on a review of ROMS generated data
and the documentation required under the Submission of Invoice
contract clause is an acceptable practice. There are various
reasons why the ROMS is not an acceptable substitute for
contractor charges not supported by its accounting system.
Assurances that billed charges were actually incurred and paid
can only come from the contractor's accounting system. The RCMS
can not provide that assurance, nor was it intended to do so.
The documentation required by the Submission of Invoice clause of
each ERCS contact (sales receipts, invoices, etc.) and the
Reports of Work clause (off-site disposal reports, monthly and
yearly status reports, ODC and fixed rate reports, etc.) does not
substantiate that the billed charges have been, or will be paid.
The confirmation by the OSC of the EPA Form 1900-55 and its
corresponding invoice was no guarantee that the OSC had witnessed
the delivery of ordered goods and services in all cases, or that
the OSC reviewed and signed the EPA Form 1900-55 on a daily
basis.
During the course of this review, two active sites were
visited. The OSC was not present at one site on the day visited.
Additionally, the July 14, 1993, FMR on Contract No. 68-S1-
4003 with OHM stated:
Our in-depth review of O.O. #21 disclosed that the OSC is
not signing the daily 1900-55s on either a daily basis,.or
within an acceptable timeframe. It appears that the OSC has
dedicated certain days for performing the task of signing
off on the 1900-55S. Our review disclosed that between
September 8, 1992 through October 31, 1992 (54 days), the
OSC signed all of them on 9. instead of 54 different dates.
The late reviews of acceptability of the proposed costs
diminishes the contract cost control oversight mechanism of
having the contractor submit 1900-55s on a daily basis.
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In another instance, the OIG Office of Investigations
investigated allegations of theft of copper by four employees of
an ERGS contractor at an active removal site. In a report of
investigations dated June 15, 1993, to the Acting Regional
Administrator for Region 8, the Divisional Inspector General for
Investigations reported that three contractor employees admitted
taking scrap copper from the site and selling it for personal
gain. All claimed that they took the copper with the permission
of the contractor's Response Manager (RH). EPA holds salvage
rights to the copper left at the site. Proceeds of the sale of
copper to a steel company under contract with EPA was to be
remitted to EPA to cover part of the cleanup costs.
Additionally, information developed during the investigation
revealed that on two occasions, contractor personnel were
directed by the RH to perform work at his personal residence.
The work encompassed snow removal, fence repair and the
construction of a dog run. All labor, equipment and materials
charges associated with these acts were recorded on the
corresponding EPA 1900-55 Forms, which were signed by the OSC,
and billed to and paid by EPA. The Region 8 CO negotiated a
reimbursement amount of $9,696 with the contractor for costs EPA
incurred in association with the activities. The CO also
requested on April 22, 1993, that the Suspension and Debarment
Division of OARM promptly initiate suspension proceedings against
the contractor personnel engaged in the criminal and fraudulent
acts. The CO stated in April 1994 that she was awaiting a
decision on her request.
In an interview with an auditor, the OSC said that these
activities went undetected because he was not always at the site.
He had 5 or 6 other sites going at the time that the activities
took place. He also stated that even if he were at-the site on a
daily basis, it was difficult to monitor all activities at the
200 acre site because the site cleanup ran over 9 months with
approximately 30 workers. He entrusted the Bureau of Reclamation
representative with oversight during his absence. The OSC signed
the EPA Form 1900-55 after the Bureau representative verified the
form's entries with his initials. The OSC stated that the Bureau
representative was not aggressive in his oversight role.
Reliance on OSC confirmations was not realistic when the OSC
is off-site or when the EPA Form 1900-55 was not reviewed and
signed by the OSC on a daily basis. Contractor activities
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Review Report on EPA*a Management of ERCS Contracts
performed off-site, which can be significant, can not be
legitimately witnessed by the OSC, either. The OSC can not
personally oversee, and verify, all aspects of cleanup operations
on a daily basis for the full term of the cleanup. It may be
physically impossible to do so. Similarly, the same physical
limitations may apply to non-EPA personnel who are delegated site
monitoring activities in the OSC's absence. For these reasons,
EPA's reliance on the contractor operated RCMS to validate the
accuracy and allowability of the contractor's invoices maybe an
internal control weakness. We believe that assurance over the
proper accounting and reporting of contractor expenditures can
only come from validation of contractor charges that are
substantiated by contractor independent accounting systems and
records.
Continued reliance on the RCMS may have diminished the
Agency's will and necessity to enforce timely compliance with the
contractor accounting system invoicing and billing reconciliation
requirements. Contract requirements for the daily use of the
RCMS and the Agency's acceptance of the vouchers generated from
it may have caused the contractors to question the necessity for
devising internal accounting.and billing systems. The contractor
must comply with contract invoicing terms that are resource
intensive. Each ERCS contract requires that invoices be:
1) accompanied by Contractor Daily Cost Reports (EPA Form
1900-55) and other documentation to substantiate all costs for
which reimbursement is requested; 2) generated from the
contractor's accounting system, and not from the RCMS, which
produces the EPA Form 1900-55 that is required to accompany the
invoice; 3) reconciled to the contractor's job cost system; 4)
reconciled to the RCMS; and 5) prepared and submitted using the
RCMS invoice module program. These are cumbersome,and apparent
conflicting requirements. All the FAR requires is, that ERCS, and
other EPA contractors, generate invoices from its internal
accounting system. If the ERCS contractor can abide by all of
the above five invoicing requirements, and thevinvoice does not
match the EPA Form 1900-55 exactly, there is the possibility that
the OSC might not certify the invoice. When this condition
exists, it could further discourage the contractor to bill from
its independent accounting system.
RES, in response to the previously discussed OIG draft audit
report of August 12, 1993, on its billing system, stated that
there were conflicts between EPA guidance and the requirements
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Review Report; on EPA's Management of ERCS Contracts
imposed by EPA contract personnel. In particular, RES agreed
that billings should be based on its accounting system. EPA
contract personnel, however, required RES to submit its invoices
based on the RCMS data. RES also expressed the opinion that the
reconciliations between the billings and the job cost system
would not be necessary if the billings were based upon the
accounting system. He agree with RES. Moreover, it should be
recognized that invoices can not be readily matched or reconciled
to the RCMS and the contractor's job cost system. If costs were
billed from the contractor's accounting system, the costs may
differ from costs recorded on the EPA Form 1900-55 for any given
period due to timing differences in the recording of costs in the
RCMS and the contractor's job cost system* Generally, costs are
recorded in the RCMS before they are booked on the contractor's
job cost system. For that reason, costs billed from the RCMS can
not be readily matched or reconciled with the job cost system.
Therefore, we believe that cost information generated by the RCMS
should only be used to ascertain that the amounts billed are
reasonable.
We recognize and commend EFA's desire to document and
closely monitor cleanup costs under ERCS contracts. EPA's
requirements, however, that the billings be prepared from the
contractor's accounting system but also be supported by daily
cost information from the EPA Form 1900-55 and supporting
documentation for all costs billed do not result in cost
effective contract and fiscal management. The RCMS is not an
integral part of the contractor's accounting system. If the
contractor prepares its billing from an acceptable accounting
system with adequate internal administrative and accounting
controls, it need not provide documentary support for every cost
claimed and to reconcile claimed costs to the EPA Form 1900-55.
To require the contractor to do so will inflate its'contract
administration costs unnecessarily; these costs will be paid as
direct or indirect costs by the Agency as legitimate reimbursable
expenses. Invoices prepared from the accounting system.should be
supported by appropriate contractor source documents, such as
timesheets, equipment usage and material, distribution reports,
paid invoices, check registers, etc. Audit verification of
allowable costs incurred will be based on a review of supporting
source documentation generated from the contractor's accounting
system and not from the RCMS.
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In summary, we maintain that the contractor's accounting
system must be the primary source basis to support incurred
cleanup costs. EPA must assure that contractors account for
costs through an acceptable and approved accounting system. The
FAR and GAAP require it. Adherence to the FAR is not
discretionary. Utilization of the ROMS as an acceptable
substitute for contractor accounting and billing system can make
the Agency vulnerable to fraud and abuse. EPA pays the
contractor for its accounting system costs through reimbursement
of its indirect charges. Not requiring the contractor to support
its invoices with its accounting system therefore, is a waste of
Agency funds. Reliance on the OSCs' confirmations of every daily
activity recorded by the contractor that they may not have
personally witnessed subjects the ROMS to potential serious
internal control weaknesses. Lastly, successful cost recovery
actions from responsible parties depends on defensible
evidentiary source supporting documentation of site cleanup costs
actually incurred and paid by the contractor. Cost information
developed in accordance with generally accepted . accounting
principles can be better defended than data created by internal
Agency software packages that have doubtful cost accounting
application.
OSC Verification Of EPA Form 1900-55 Mqy fMyKCafc F**A to
Contractor
The EPA Form 1900-55, completed daily by the contractor,
delineates fixed rate and cost reimbursable services and charges
expended at a particular site on a particular day. Rates are
fixed for labor and equipment, while other direct costs are
reimbursed at cost. The Form is reviewed, verified and signed by
the EPA OSC and the contractor's authorized representative,
usually the Response Manager. Their signatures certify that the
EPA Form 1900-55 is a true and complete record that the services
enumerated were ordered, authorized and rendered. The EPA Form
1900-55 required by OSWER Directive 9242. 2-1A, ERGS User's Manual
of June 1986, contains a signature block for the OSC and
contractor's representative. Above the OSC signature block is
certification language that reads:
I certify that this report is a true and complete record of
the labor, supervision, travel, equipment, materials, and
subcontractors which I ordered and authorized from the
contractor in the performance of the above cited contract.
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In response to the OI6 interim audit of S&D Engineering
Services, Inc. discussed in the previous section of this report,
S&D took the position that the EPA Form 1900-55 as reviewed,
agreed upon and signed by the EPA OSC and their Response Manager
provides a legal basis for reimbursement for the specified
services rendered. S&D believes that the process of preparing a
daily EPA Form 1900-55 and obtaining the OSC signature and
approval of the hours charged provides assurance that the hours
billed by S&D were not materially misstated. S&D further stated
that:
It appears that the Inspector General's office and Auditors
have decided to apply accounting standards and practices
that go beyond what S&D understood to be generally accepted
accounting practices between the EPA ERGS Program
Operational people, EPA Contract people and itself utilizing
the 1900-55 daily sheets as adequate documentation for
substantiating the labor hours, equipment hours and
materials, and other ODC's for each day. The very act of
S&D's representative (Supervisor, RM) and EPA's
representative (OSC plus TAT assistance) agreeing to and
attesting to the veracity of the daily 1900-55 for work done
on-site and off-site for that day is considered a worthy
source document. This was the way EPA personnel
(Operational and Contracting) taught us to do it at our
post-award conference on October 13, 1988, and it is the way
we were continuously instructed to do it throughout the 3+
year contract period.
We believe that reliance by S&D, and other ERCS contractors,
on OSC and contractor representative certified EPA Form 1900-55
as adequate support for its charges is legally defensible. The
certified forms, and EPA's historical practice of reliance and
acceptance of the Form as primary source documentation for
contractor billings, could provide a legal basis for
reimbursement of contractor charges. Each ERCS contract requires
the contractor to support its invoices with the EPA Form 190O-55.
The Agency's internal guidance is proof of the obvious emphasis
the Agency has chosen to place on the EPA Form 1900-55.
Furthermore, the instructions the Agency routinely has given
contractors at pre- or post-award conferences focus on the
importance of these forms. Such emphasis can strengthen the
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legitimacy of a contractor's argument that its generation of EPA
Form 1900-55 was sufficient to satisfy its contractual obligation
to support its charges. Moreover, the EPA Form 1900-55 maybe the
type of supplemental evidence that a Board of Contract Appeals or
Claims Court would favorably consider, absent the contractor's
failure to adequately support its incurred costs with internal
accounting records. We further recognize that both EPA and
contractors could argue that historically the EPA Form 1900-55
has been regarded as an adequate source document to support the
quantities of work hours and equipment supplied at contractually
fixed rates to a Superfund site. Under the fixed rate portion of
ERCS contracts, contractors are paid based on a fixed rate, and
only the time to be applied to that rate is at issue.
Consequently, the OSC endorsed EPA Form 1900-55, which
validates that time, can and has been regarded as sufficient
record to justify payment for billed quantities for fixed rate
items. Contractors and EPA personnel therefore can interpret
that services provided at fixed rates do not require the
maintenance of any other accounting records. This
interpretation, and the Agency's acceptance of the OSC-certified
quantities, has forced us to discontinue audit work designed to
verify the OSC-certified quantities of fixed rate items since
such work would be unproductive.
All COs and OSWER personnel interviewed during this special
review agree that the OSC verification of the EPA Form 1900-55
only attests that OSC ordered goods and services were received.
Accordingly, they believe the EPA Form 1900-55 is a receiving
report. They state that the OSC signs the Form to confirm that
contractor services were rendered as stated. In doing so, the
OSC confirms that the hours of work charged for personnel,
equipment and any other services are correct. They also say that
the OSC's signature does not and can not represent that the
recorded costs are accurate.
We agree with these statements. The EPA Form 1900-55 is a
receiving report. Its function is to provide documentation of
daily site activities ordered and received by the EPA's
authorized on-site representative, the OSC. The Form is useful
for the determination of reasonableness verification of billed
rates and quantities of fixed rate service items. However, the
EPA Form 1900-55, although entitled a contractor cost report, is
not a cost accounting report. Third party costs recorded on the
43
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Review Report on EPA'a Management of ERGS Contracts
EPA Form 1900-55 are cost estimates. Reliance on it as a cost
accounting report that authenticates contractor costs on the
basis of OSC verification contradicts generally accepted
accounting principles. Each ERGS contract reviewed contains a
clause that stipulates that all costs must be incurred and paid
by the contractor as a pre-condition to Government payment. OSC
verification of a receiving report can not satisfy this
requirement. Assurance of the allowability of the costs billed
can only come from an audit process that verifies the incurrence
and payment of allowable costs by a review of contractor internal
accounting systems and supporting accounting records.
In summary, we believe that OSC verifications of EPA Form
1900-55 potentially binds the Agency to pay the estimated costs
recorded on the Form. We know that there is agreement within EPA
that the OSC signature does not certify the incurrence of actual,
allocable and allowable costs. The OSC signature can only verify
that ordered goods and services have been rendered by the
contractor and received and accepted by the OSC. Agency
personnel should acknowledge that the EPA Form 1900-55 is a
receiving report and not a cost accounting report; OAH and OSWER
must affirm and publicize that determination. The Agency should
begin to strongly emphasize the requirement for internal
contractor accounting documentation to validate all site cleanup
costs. If EPA does communicate this message to EPA and
contractor personnel and de-emphasizes the significance of the
EPA Form 1900-55, then a stronger case could be made that OSC-
certified EPA Form 1900-55 alone should not encumber the Agency
to pay the contractor's claim. Such an interpretation would
likely no longer stand if OAM's contractual accounting system
requirements were aggressively conveyed to contractors. In such
a .case, an ERGS contractor would be on notice that it had a
specific contractual obligation to support all its costs through
internal accounting records and could not rely on the certified
EPA Form 1900-55 alone to satisfy the requirement. Modification
of the EPA Form 1900-55 may be necessary to convey that it is not
a document designed to support a contractor's claim. The title
of the EPA Form 1900-55 signifies that it is a cost report. The
counterpart U.S. Coast Guard form is entitled Pollution Incident
Resource Report. We believe that the re-titling of the EPA Form
1900—55 to Hazardous Substance Response Fund Contractor Resources
Report is advisable since the EPA Form 1900-55 was designed to
report the daily contractor resources ordered and received by the
OSC. The OSC certification wording required by OSWER Directive
44
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Review Report on EPA'a Management of ERGS Contracts
9242.2-1A certifies the contractor resources utilized, not
contract rates or costs, we believe that the required OSC
certification wording also needs to be modified to clearly
disclaim certification or acceptance of the contract rates and
costs recorded on the EPA Form 1900-55. The. OSC's cost
disclaimer, along with stronger Agency emphasis and enforcement
of contractual requirements for contractor internal accounting
and billing system requirements, should convey that the EPA Form
1900-55 cannot be used exclusively to verify and obligate payment
of a contractor's cost claim.
OAM and regional procurement personnel allow ERGS
contractors to continue billing from the ROMS despite contract
requirements for ERGS contractors to generate invoices from, and
reconcile them to, its internal accounting systems. Recent FMR
and OIG reviews reported that some ERGS contractors continue to
use the RCMS as a billing mechanism even though their contracts
awarded more than two years ago required them to do otherwise*
The contractors are still billing directly from the RCMS and not
from its accounting systems. EPA's acceptance of this practice
was mainly attributable to EPA and the contractors' historic
reliance on the RCMS and OSC-verified EPA Form 1900-55 as the
primary source cost documentation system for contractor charges.
There are several reasons for this reliance. Some contractors do
not have the capability to generate invoices from, and reconcile
them to internal accounting systems and records and the EPA Form
1900-55. Consequently, contractors must utilize the RCMS for
billing purposes. Moreover, contractor incentive to adopt
prescribed accounting and billing systems maybe lessened because
of EPA's historical acceptance of vouchers generated from the
RCMS. Current contracts require the contractor to' use the RCMS
on a daily basis and to submit invoices accompanied by copies of
the EPA Form 1900-55. Furthermore, OSC's may not approve
invoices unless it matches the corresponding EPA Form 1900-55
exactly. EPA personnel were also comfortable with using the RCMS
as a cost documentation tool. They have been doing so for nearly
a decade. COs stated that they must rely on the OSC-verified EPA
Form 1900-55 as primary source documentatipn during the invoice
review and delivery order definitization processes because ERGS
contractor accounting and billing systems are deficient. The COs
believe that a thorough review of the OSC-verified EPA Form 1900-
55 and the documents received from the contractor in support of
45
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Review Report on EPA'a Management of ERGS contracts
its invoice offer a good basis for acceptance of contractor
charges.
)
Continued Agency reliance on the RCMS nay have diminished
the Agency's will and necessity to enforce timely compliance with
contractor accounting system invoicing and billing reconciliation
requirements. Long term EPA promotion and acceptance of the RCMS
as a cost reporting system coupled with the contractors'
deficient accounting systems are the key reasons for continued
reliance on the RCMS as an expedient cost reporting system.
These factors are central to potential legally defensible
contractor rationale that the OSC and contractor certified EPA
Form 1900-55 encumbers the Agency to pay the recorded charges
even though the charges are unsupported by internal contractor
accounting systems and records. The Agency's internal guidance
and historical requirement for the contractor's daily use of the
certified EPA Form 1900-55 emphasizes the importance the Agency
has chosen to place on the EPA Form 1900-55. We believe that
this emphasis can strengthen the legitimacy of a contractor's
reasoning that its generation of the EPA Form 1900-55 is
sufficient to satisfy its contractual obligation to support its
charges, and thus justifies payment of its billed charges.
CAM and regional CDs had not enforced ERGS contractor
compliance of all FAR and contract accounting and billing system
requirements. These requirements are non-discretionary.
Unsanctioned contractor non-compliance nullifies EPA's efforts to
improve ERCS contract and fiscal management. Continued reliance
on the RCMS as an adequate substitute for contractor accounting
system supported invoices is an internal control weakness that
makes the Agency vulnerable to fiscal abuses and holds the Agency
up to Congressional criticism. Without independent contractor
accounting system cost verification, there are no assurances that
contractor billings disclose actual, allowable incurred costs and
that Agency expenditures are properly accounted for.
We recommend that the Assistant Administrator for
Administration and Resources Management require:
1. QAM to enforce contract clauses and contractor
compliance with FAR and contract requirements for
contractor accounting and billing systems.
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ReviewReport on EPA'a Management of ERGS Contracts
2. Contractors to generate invoices from, and supported
by, contractor accounting systems. When contractors
can demonstrate acceptable accounting controls and
systems, the current contractual requirements to
reconcile invoices and substantiate them with EPA Form
1900-55 and other documentation should be re-assessed
by OAM in the interest of cost efficiency.
3. The RCMS not be utilized as a substitute for required
contractor accounting systems.
OARM Response
OARM agrees that the Agency has improperly relied on the EPA
Form 1900-55 to substantiate contractor claims for reimbursement.
They believe that the EPA Form 1900-55 is a receiving report and
not a cost certification voucher or invoice. OARM further agrees
that the RCMS should not be utilized as a substitute for required
contractor accounting systems. OAM has requested OSWER ERD in a
memorandum dated March 24, 1994, to issue a memorandum (to be
jointly signed by OSWER and OAM) to all ERCS contract and program
personnel identifying the need to require ERCS contractors to
invoice from their accounting systems. OAM will also issue a
memorandum to regional COs by September 1, 1994, instructing them
to advise the contractors to refrain from using the RCMS to bill
the Agency. OARM disagrees that it needs to require OAM to
enforce contractor compliance with FAR and contract requirements
for contractor accounting and billing systems because the
regional COs are responsible for contract management. Even so,
OAM will issue a memorandum to regional COs by September 1, 1994,
reminding them of their contract management fiduciary
responsibilities and encouraging them to be aggressive in their
enforcement of contractual provisions. At OAM Headquarters, the
FDO will continue to use the award fee as a tool to enforce
contractor compliance with FAR and contract accounting and
billing systems requirements.
OIG Evaluation Of OARM Response
The OARM response is responsive to the intent of the
recommendations. Even though OARM disagreed with recommendation
number 1, it has proposed actions to enforce contract clause
compliance. We request that OARM provide in its response to the
47
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Review Report on EPA'a Management of ERGS Contracts
final report a copy of the memorandum to the regional COs so that
we may evaluate the corrective action.
Recoinn»e«
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Review Report on EPA7 3 Management of ERC8 Contracts
OIG Evaluation To OSWFR
OSWER agreed with the recommendations. In order to evaluate
the planned corrective actions, we request OSWER provide
documentation in a response to the final report that it has
either implemented the corrective actions, or established
milestone dates for implementation of the actions.
49
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APPENDIX 1
Page 1 of 1O
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
SEP 2 I99A
OFFICE OF
ADMINISTRATION
AND RESOURCES
MANAGEMENT
MEMORANDUM
SUBJECT:
FROM:
TO:
Draft Special Review Report No. E1SHG3-18-0045-DRAFT
EPA's Management of Emergency Response
Cleanup Services Contracts
r
' WW^.
Jonathan Z. Cannon ^
Assistant Administrator ^or Administration
and Resources Management
Elissa R. Karpf
Associate Assistant Inspector General
for Acquisition and Assistance Audits
Thank you for the opportunity to review and comment on the
subject draft special review report dated June 24, 1994.
The overall objectives of this review were to evaluate the
Office of Acquisition Management's (0AM) actions to resolve ERCS
contract management issues previously identified in Office of
Inspector General (OIG) audits and special review reports and to
evaluate the basis of EPA's acceptance of ERCS contractor costs.
Although OARM concurs with the basic findings contained in
the report, our responses clarify the context of some of the
specific issues cited and explain actions OAM is already taking
to address the issues. Specifically, these actions include no
award fee for contract management to Riedel in Regions V, VI and
VII for the firsv. year of the contract. Also, in Region V the
contracting officer has begun suspending payment for portions of
the contractor's program management costs to encourage compliance
with sccounting system requirements. In addition to these
actions already in progress, OAM will be issuing a memo to the
contracting officers in the regions reminding them of their
fiduciary responsibilities to manage contracts prudently and
encouraging chem to aggressively pursue remedies permitted under
the contract to cure failures or violations. Additionally, OAM
will encourage the use of Time and Materials (T&M) type contracts
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APPENDIX 1
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with fixed rates that are determined to be fair and reasonable
for labor and equipment for the next generation of Emergency and
Rapid Response Services (ERRS) contracts.
Our responses have been formatted to correlate to the
findings and recommendations as they are laid out in the special
report. For the sake of clarity, we have indicated either our
agreement, agreement with explanation or disagreement with the
specific fin-ling or recommendation, followed by a narrative which
eithei ^..-.-ains our position or comments on the issue.
The audit also included recommendations requiring action by
the Office of Solid Waste and Emergency Response (OSWER). The
OSWER recommendations will be addressed by that office in a
separate memorandum. The attached OARM responses have been
discussed with OSWER by OAM's SF/RCRA Procurement Operations
Division (SRPOD).
Again, OARM appreciates the opportunity to comment on this
report. Specific questions pertaining to this review should be
addressed to Pat Patterson, Chief of SRPOD's Program Management
Staff at 260-9158.
cc: Elliott P. Laws
Debor-.h Dietrich
Be::ty 3ai ley
Diane Balderson
Attachments:
(1) OARM Review Comments on OIG Special Review
(2) Memorandum to Director, Emergency Response
Division on ERGS Contractor Billing Procedures
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ATTACHMENT 1
OAJRM REVIEW COMMENTS
ON
DIG SPECIAL REVIEW E1SHG3-18-0045-DRAFT DATED JUNE 24, 1994
OIG FINDING fl: EPA CONTRACTORS DID NOT FULLY COMPLY WITH
CONTRACT ACCOUNTING SYSTEMS REQUIREMENTS.
Agree
ExDlana.ti.dns
Agree w/ Explanation
Disagree
While it is technically accurate that the ERGS contractors
did not comply fully with contract accounting systems
requirements— currently contractors are not able to account for
full equipment utilization and tracking from their accounting
systems—it should be noted that each of the contractors made
diligent efforts to modify their accounting systems in accordance
with the contract specified requirements. As of June 1994, ETI
is billing from their job cost accounting system and had
forwarded their Corporate Accounting Policies and Procedures to
OAM for review. Additionally, ETI is accounting for equipment
pricing and maintenance in accordance with.contract requirements.
DCAA has advised EPA that OHM's accounting system will be
considered acceptable for cost type contracts in the near future.
Furthermore, it is our understanding that EPA OIG has completed
an audit of OHH's equipment utilization tracking system and
recommends approval of the system. This audit is currently in
OIG headquarters. Other contractors covered by this review are
making similar efforts to comply with their contract's terms and
conditions. The industry has come far from it's beginning days
when cost accounting was virtually unknown, and close to
complying with EPA's unique accounting and billing requirements.
In its audit report of the first generation ERGS contracts
(published in September 1986) the IG alleged that EPA, by
agreeing to pay fixed rates for labor and equipment which could
not be verified as fair and reasonable by cost analysis methods,
was paying contractors exhorbitant profits. To avoid the alleged
excesses, the IG recommended that EPA pursue cost reimbursable
contracting instead of the fixed rates. The Agency agreed to
accept the IG's recommendation and immediately began using cost
analysis methods to document the reasonableness of ERGS contract
rates for labor and equipment. The ERGS contractors which were
spawned out of the heavy construction industry did not have
accounting and billing systems which were adequate to meet the
needs of ERGS contracts. The government and our contractors have
gone to great effort and expense to verify the reasonableness of
labor and equipment rates using cost analysis methods. After
numerous years, we have not yet been fully successful and we have
yet to determine a single contractor who has met all of our
complex accounting and billing system needs.
Page 1 of 7
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As a result of our inability to fully achieve our initial
objective, we have reconsidered the objective of using cost
analysis as the sole method of evaluating the reasonableness of
labor and equipment rates. We find that the current conditions
in the hazardous waste clean-up industry are quite different than
they were in 1986. EPA is no longer the dominant customer for
the removal contractors. The Department of Defense and the
Department of Energy have huge programs as do many commercial
clients. The market for removal services has expanded
dramatically and the number of firms competing for these
customers has expanded accordingly. EPA's need for heavy
equipment at clean-up sites has decreased. Equipment billings
are becoming an immaterial part of the cost of our current
contracts.
, In the future, we will encourage removal contracts that
employ a Time and Materials (T&M) type contract with fixed rates
for labor and equipment. The fixed rates will be based on
standard commercial prices, existing market conditions, or
adequate competition, as well as price and cost analysis. Rates
for needed services will be determined to be fair and reasonable
utilizing the techniques authorized by the Federal Acquisition
Regulations (FAR). We will establish prices consistent with the
manner in which business is ordinarily conducted in the hazardous
waste clean-up industry. This strategy is consistent with the
objectives of the Vice President's National Performance Review.
The Coast Guard which procures similar services for oil spills
has been successful with this approach since 1976. OAM/SRPOD is
discussing"the use of this strategy with the Emergency Response
Division of OSWER for the follow-on Emergency and Rapid Response
Services (ERRS) contract for Regions VI, VIII, and IX.
OIG FINDING #2 : CONTRACT ACCOUNTING SYSTEM REQUIREMENT CLAUSE
ENFORCEMENT NEEDS STRENGTHENING.
Agree
x Agree w/ Explanation
Disagree
Explanation;
While we agree that enforcement of the accounting system
requirement clause in the current ERCS contracts needs to be
strengthened, we believe that using a T&M type contract with
fixed rates for labor and equipment in future Emergency and Rapid
Remedial Services (ERRS) contracts will alleviate this issue,
streamline contract administration and management, and provide
relief to a ten-year old problem for both the Government and the
contractor.
Page 2 of 7
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APPENDIX 1
Pag,e 5 of 10
RECOMMENDATIONS ASSOCIATED WITH FINDINGS #1 AND #2:
OIG RECOMMENDATION fit AA/OARM require OAM and regional ERCS
contracting officers to enforce FAR accounting system
requirements for all current and future ERCS cost type contracts.
Agree
X Agree w/ Explanation
Disagree
Explanation;
Should the Agency continue with the current type of
contract, we believe that contracting officers are already fully
empowered to exact remedies under the contract as they deem
appropriate to the failure or violation. To circumscribe the
contracting officer's discretion by pre-establishing remedies
would be counter to FAR principles of contract management. For
existing contracts, contracting officers in the regions will be
reminded via memo of their fiduciary responsibilities to manage
the contracts prudently, and will be encouraged to aggressively
pursue remedies permitted under the contract to cure failures or
violations. This memorandum will be issued by September 1, 1994.
Further, the Fee Determining Official (FDO) will continue to
consider contractors progress in complying with accounting system
requirements in the award fee evaluations.
OZG RECOMMENDATION f2: AA/QARM require contractors to correct
inadequate accounting systems before EPA awards the contract.
Agree
Explanation;
Agree w/ Explanation
Disagree
While adequate accounting systems should always be a pre-
requisite goal to awarding cost reimbursement type contracts,
strict adherence to this pre-reguisite in the Superfund Removal—
emergency response cleanup—Program would leave the Agency
without any emergency response contractors, as none of them have
accounting systems which, after ten years now, are considered
fully adequate for accounting for costs incurred under cost
reimbursement contracts. Instead of continuing with the practice
of trying to get these ERCS contractors to change fundamentally
how they do business, a preferable alternative—one that
accomplishes the same end while recognizing how the industry does
its pricing, and which does not compromise the Government's
interests—is to use a T&M type contract with fixed rates for
labor and equipment.
The T&M type contract with fixed rates for labor and
equipment serves to accomplish the use of a contract pricing
structure where the majority of the pricing is in conformance
with current OFPP initiatives on the commercialization of
Page 3 of 7
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APPENDIX 1
Page 6 of 10
government contracts. OAM is pursuing this strategy as a pilot
for follow on ERRS contracts and will recommend its use to the
regions for their upcoming ERRS contracts.
OIG RECOMMENDATION #3: AA/OARM require regional ERGS contracting
officers to expeditiously and uniformly enforce contract
accounting system requirements clauses in the current ERCS
contracts. Significant remedies should be pursued when
contractors are not making sufficient, timely progress toward
clause compliance.
Agree
Exp1anation;
_>L_ Agree w/ Explanation
Disagree
OAM will issue a memorandum to contracting officers in the
regions by September 1, 1994 reminding them of their fiduciary
responsibilities to manage the contracts prudently, and
encouraging them to aggressively pursue remedies,permitted under
the contract to cure failures or violations. In Regions V, VI
and VII the award fee for contract management for the first year
of the contract was reduced to zero for the contractor's failure
to comply with the accounting systems clause. Additionally,
Region V has also begun partially suspending program management
costs as an added enforcement measure.
OIG RECOMMENDATION |4: AA/OARM require OAM to provide the needed
oversight and assistance to ensure consistent and uniform
regional implementation and enforcement of FAR and contract
accounting system requirements.
Agree
Agree w/ Explanation x Disagree
Comment:
OAM via the Regional Contracts Management Branch (RCMB) in
the Superfund/RCRA Procurement Operations Division (-SRPOD)
already provides oversight and assistance to the regions on
implementation and enforcement of FAR and Agency contracting
requirements. However, given that there are multiple types of
ERCS contracts in the regions, different contract types lend
themselves to different solutions. Additionally, the same
contractor may have different contract types from region to
region. Therefore, uniform regional implementation cannot be
accomplished.
Page 4 of 7
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APPENDIX 1
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OIG RECOMMENDATION f5: AA/OARM require OAM to review the
necessity for stipulation of specific remedies, such as award fee
reduction, when contractors are in non-compliance with contract
clauses.
Agree w/ Explanation
Disagree
We believe that contracting officers are already fully
empowered to exact remedies under the contract as they deem
appropriate to the failure or violation. Already two contractors
have had their award fee lowered, one is having part of it*s
program management costs withheld and, in another region, the
contracting officer is considering withholding payment if the
contractor does not improve his compliance with accounting system
requirements. In regions where the contracts are cost plus fixed
fee (CPFF), we will consider withholding payments as well as
withholding future work. For work already performed, the fixed
fee will be earned with no withholding consideration.
Differences from region to region and contractor to contractor
will require varying responses which may range from reduction in
award fee earned to termination where appropriate. Additionally,
where one contractor has different contract types in different
regions, different remedies may need to be considered.
OAM will advise the regions to revise their award fee plans
to more accurately reflect the importance of corporate system
deficiencies as a separate major element with appropriate weights
assigned. This will be done by memo to be issued by September 1.
OIG FINDING *3: EPA RELIANCE ON RCMS NULLIFIES CONTRACTOR
INVOICING REQUIREMENTS.
Agree
x Agree w/ Explanation
Disagree
Explanation;
ERGS contractors can cost account for the majority of cost
elements. The consistent and persistent problem has been with
equipment utilization and tracking. Because the daily receiving
reports (EPA Form 19OO-55) used by the On-Scene Coordinators
(OSCs) track equipment utilization, OSCs have relied on the 19OO-
55s to substantiate contractor claims for reimbursement, not only
in the area of equipment tracking and utilization, but for the
other contractual cost elements as well. Clearly, this is in
error. The 1900-55 is a receiving report, not a cost
certification voucher or invoice.
Page 5 of 7
57 •
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APPENDIX 1
Page 8 of 10
OAM issued a memo to the Emergency Response Division dated
March 24, 1994 (copy attached) discussing this problem and
requesting ERD's assistance to correct it. We will continue to
work with ERD on this issue.
RECOMMENDATIONS ASSOCIATED WITH FINDING #3:
OIG RECOMMENDATION #1: AA/OARM require OAM to enforce contract
clauses and contractor compliance with FAR and contract
requirements for contractor accounting and billing systems.
Agree
Agree w/ Explanation
x Disagree
Comment;
The regions are currently managing their contracts.
Contracting officers are using all available remedies to require
contractor compliance with contract terms and conditions. These
have included withholding award fees, and suspension of program
management payments, as well as discussions with the contractors.
The contractors have been making progress towards compliance.
Again, as previously stated, OAM will issue a memorandum to
contracting officers in the regions by September 1 reminding them
of their fiduciary responsibilities and encouraging them to be
prudently aggressive in their enforcement of contractual
provisions. At Headquarters, the FDO will continue to use the
award fee as a tool to enforce compliance.
OIG RECOMMENDATION I2: AA/OARM require contractors to generate
invoices from, and supported by, contractor accounting systems.
When contractors can demonstrate acceptable accounting controls
and systems, the current contractual requirements to reconcile
invoices and substantiate them with EPA Form 1900-55 and other
documentation should be re-assessed by OAM in the interest of
cost efficiency.
x Agree
Comment:
Agree w/ Explanation
Disagree
We agree that it is improper for contractors to invoice the
Agency by using EPA's Form 1900-55 in lieu of their own
accounting systems. However, we also believe that continuing to
pressure the ERCS contractors into accommodating our cost
accounting demands has not been fruitful. Our proposed solution
to this long-standing problem is simply to use a contract type
(T&M with fixed rates for labor and equipment) which is
considered to be more appropriate for ERCS support. In the
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APPENDIX 1
Page 9 of 10
September 1 memo to be issued to regions, we will instruct the
contracting officers to advise the contractors to refrain from
using the RCMS to bill the Agency.
It should be noted that in similar instances, the Coast
Guard defaults to its equivalent of EPA's 19OO-55 when they
verify contractors billing against Coast Guard daily reports.
OIG RECOMMENDATION #3: AA/OARM require the RCMS not be utilized
as a substitute for required contractor accounting systems.
x Agree
Comment:
Agree w/ Explanation
Disagree
By memo to the Emergency Response Division dated March 24,
1994, OAM requested their assistance in issuing a joint memo to
all ERCS contract and program personnel identifying the need to
require ERCS contractors to invoice from their accounting system
instead of daily cost reports. We will continue to work with ERD
on this issue.
Page 7 of 7
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Attachment (2)
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
APPENDIX 1
Page 10 of 10
MAR 241994
MEMORANDUM
SUBJECT: ERCS CONTKA'
FROM: Diane
Sup
OFFICE OF
AOMMSTRATIOII
*KO RESOURCES
MANAGEMENT
TO:
Operations Division
ric. Director
Cost Advisory and Financial Analysis Division
Deborah Dietrich, Director
Emergency Response Division
In April 1993, the Office of the EPA Inspector General (IG)
began a special review of what they considered to be longstanding
contract management issues associated with the Emergency Response
Cleanup Services (ERCS) contracts. After a year of field review,
the IG has completed its' review. We anticipate receipt of the
IG's draft findings some time next month.
The draft IG report will focus on two key issues:
O ERCS contractors billing the agency from the form EPA
1900-55 (ERCS daily cost reports) in lieu of using the
contractor's accounting system
O Failure of the agency to effectively enforce the terms
and conditions of the contract requiring the contractor to
have an approved cost accounting system in place.
The IG considers these two issues to be long-standing ERCS
contract issues that were previously identified in a 1986 audit
and the follow-up audit in 1991.
An agency workgroup, chaired by the Emergency Response
Division is working with OAM to make program improvements.
However, to demonstrate that we are continuing to make an effort
in implementing corrective actions identified by the two previous
audits, we recomaend that your office issue a memo (to be jointly
signed by OSWER and OAM) to all ERCS contract and program
personnel identifying the need to require ERCS contractors to
invoice from their accounting system instead of daily cost
reports (EPA 19OO-55).
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Page 1 of 3
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
AUGH1994
office of
SOLID WASTE AND EMERGENCY RESPONSE
MEMORANDUM
SUBJECT: OIG Special Review of EEA's Management of Emergency
Response Cleanup Servio^s Cojrfejkacti
FROM: Timothy Fields, Jr.
Deputy Assistant Administrate
TO: Elissa R. Karpf
Associate Assistant Inspector General
for Acquisition and Assistance Audits
The purpose of this memorandum is to respond to the subject
audit report. Thank you for the opportunity to review and
provide comments on this draft report.
The overall objective of this special review was to evaluate
the implementation and effectiveness of actions taken as a result
of contracts management issues identified in the 1992 audit of
the ERGS contracts. This review concentrated on the
acceptability of contractor's accounting systems, the Removal
Cost Management System (RCMS), and EPA's management of contract
requirements. The audit contains eight recommendations for the
Assistant Administrator of the Office of Administration and
Resource Management (OARM) and two recommendations for the
Assistant Administrator of the Office of Solid Waste and
Emergency Response (OSWER).
We agree with the two OSWER recommendations and believe that
they can be expeditiously addressed. The two recommendations are
documented below followed by brief comments:
Recommendation 1: OSC-certified EPA Form 1900-55 not be utilized
in a manner that could be reasonably interpreted to satisfy
contract cost documentation requirements and to provide a legal
basis for cost reimbursement. To neutralize this possible
interpretation, it is recommended that, through communication
with contractors and emergency response personnel, the historical
significance of the EPA Form 1900-55 as a cost report be
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APPENDIX 2
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de-emphasized and affirmation of its use as a receiving report be
emphasized.
Comment: We agree with the recommendation. We are working with
the Office of Acquisition Management (OAM) to ensure that the OSC
Warrant Officer Training Class emphasize that the EPA Form 1900-
55 be used solely as a receiving report and not as a substitute
for the contractor's internal accounting system. The Emergency-
Response Division (ERD) will work with the Office of Acquisition
Management (OAM) on guidance to our On-Scene Coordinators,
Project Officers and contractors, requiring the contractors to
invoice EPA from their accounting system and not from the daily
cost reports (EPA Form 1900-55).
Recommendation 2; The EPA Form 1900-55 be modified by
supplementing the OSC certification language with a clear
disclaimer of the authenticity and acceptance of the cost
recorded thereon.
Comment; We agree with the recommendation and will modify EPA
Form 1900-55 to distinguish this form as a work receiving report.
The current version of the EPA Form 1900-55 does not contain any
language in the OSC signature block. We are working on language
to include in the signature block that will clearly distinguish
the 1900-55 as a receiving report and not as verification of the
contractor's cost. The 1900-55 is an important tool for the OSC
to monitor the cost ceiling of the ERGS delivery order.
In the past the zone ERCS contracts were managed at
Headquarters. My staff has experience in ERCS contract
management and has worked closely with the Regions in their
award, management, and closure. They have been working on an
ongoing basis with the Regions and OAM in reviewing the
recommendations and addressing solutions to correct deficiencies.
Some of the recommendations were addressed in the February 1992
ERCS audit and progress is being made. I would like' to point put
that many of our ERCS contractors have been working 'towards
establishing acceptable accounting systems. Four Seasons
Environmental, Inc., a Region IV ERCS contractor, and GET
Environmental Services, Inc., the Zone 4B ERCS contractor, have
accounting systems that are very close to being acceptable.
Since the issuance of the audit report, ETI, the Region III ERCS
contractor, has modified its billing process to conform to our
requirements. Several other ERCS contractors are also making
progress in developing acceptable accounting systems. I am,
therefore, confident that the recommendations and findings of the
1992 ERCS audit are being addressed by the Regions, OAM, and
OERR.
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We are committed to ensuring that the ERGS contractors
comply with accounting systems requirements. We will ensure that
accounting system deficiencies are reflected in the award fee
process and will work with OAM to initiate corrective action
across all Regions.
We are discussing with OAM the form of future ERGS
contracts. This may include consideration of a classic Time and
Materials contract for removal actions. We will continue to
coordinate with OAM in making improvements to the management of
our ERCS contracts and will work with OAM to pursue sanctions for
accounting system non-compliance where appropriate.
We appreciate the audit's support of the Superfund program
and the opportunity to respond to this report. Specific
questions regarding this memorandum or the removal program should
be addressed to Mark Mjoness, Chief of the Response Operations
Branch, at (703) 603-8727.
cc: Jonathan Z. Cannon (3101)
Henry L. Longest II (5201G)
Deborah Y. Dietrich (5202G)
Diane M. Balderson (3805F)
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Review Report on EPA'a Management of ERC8 Contracts
APPENDIX 3
DISTRIBUTION
Office of Inspector General
Inspector General (2410)
Chief, Resources Management Unit (2421)
. Divisional Inspector General for Audit
Headquarters
Assistant Administrator for Administration and Resources
Management (3101)
Director, Program and Policy Coordination Office (3102)
Audit Liaison for OARM (3102)
Director, Office of Acquisition Management (3801F)
Director, Cost Advisory and Financial Analysis Division
(3804F)
Director, Superfund/RCRA Procurement Operations Division
(3805F)
Audit Liaison for OAM - Quality Assurance Branch (3802F)
Assistant Administrator for Solid Waste and Emergency
Response (5101)
Director, Office of Emergency and Remedial Response (5201)
Director, Emergency Response Division (5202G)
Audit Liaison for OSWER (5101)
Agency Followup Coordinator, Attn. Director,
Resource Management Division (3304)
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Report NO. E1SHG3-18-0045-4400112
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Review Report on EPA'a Management of ERGS Contracts
Associate Administrator for Congressional and
Legislative Affairs (1301)
Associate Administrator for Communications, Education and
Public Affairs (1701)
Headquarters Library (3401)
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Report NO. E1SHG3-18-0045-4400112
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