\ Office of Inspector General
» v| Office of Inspecto
^|^/ Report of Review
MBE UTILIZATION IN EPA'S
FINANCIAL ASSISTANCE PROGRAMS
Report No. E1FMB5-05-0035-5400068
May 4, 1995
EPA
350/
1995.7
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Inspector General Division
Conducting the Audit:
Northern Audit Division
Chicago, Illinois
Regions Covered:
EPA Regions 1, 5, and 7
Program Offices Involved:
Office of Small and Disadvantaged
Business Utilization
Headquarters Iiibrary
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
MAY t 1995
OFFICE OF
THE INSPECTOR GENERAL
5V
MEMORANDUM
SUBJECT: Report Number E1FMB5-05-0035-5400068
MBE Utilization in EPA's Financial
Assistance Programs
FROM: ^Kenneth A. Konz^-44w^~ 0
l\ Acting Deputy Irrepector General
<*' 'J
TO: Peter D. Robertson
Chief of Staff
Office of the Administrator
Attached ~is the final report titled MBE Utilization in
EPA^sFinancial Assistance Program. Our objectives were to
determine whether (1) State and local governments awarded
and monitored contracts in compliance with EPA's Minority
Business Enterprise {MBE) requirements, (2) State and local
government prime contractors met the MBE program
requirements, and (3) EPA's utilization data for the MBE
program were accurate.
This report contains findings that describe the results
of our review. It represents the opinion of the Office of
the Inspector General (OIG). Final determinations on matters
in the report will be made by EPA managers in accordance with
established EPA audit resolution procedures. Accordingly,
the findings described in this report do not necessarily
represent the final EPA position.
The report also contains a proposal to change the basis
for reporting MBE utilization data (See "Matters for
Congressional Consideration", page 14). EPA's current
practice is consistent with the direction provided in several
EPA Appropriations acts. However, we do not believe that
this practice accurately measures the program's annual
performance. To encourage attention to this issue, we will
distribute this report to members of the U.S. House of
Representatives Committee on Appropriations.
Recycled/Recyclable __
Printed with Soy/Canola Inkon paper Wat
contain at least S0% recycled fiber
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Your response to our draft report is included as
Appendix I. Based on that response and discussions at the
exit conference, we made appropriate changes to this final
report.
Action Required • ••/••
In accordance with EPA Order 2750, we have designated
you as the Action Official for this report. The Action
Official is required to provide this office with a written
response to the report within 90 days of the final report
date. For corrective actions planned, please include
details, supporting documentation, and reference the actions
to specific milestone dates. These actions will assist this
office in deciding whether to close this report. Also,
please track all action plans and milestones in the
Management Audit Tracking System.
We have no objections to further release of this report
to the public. Should you or your staff have any questions
regarding this report, please contact Charles Allberry, Audit
Manager, Northern Audit Division at (312) 353-4222.
Attachment
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MBE Utilization
EXECUTIVE SUMMARY
PURPOSE
The U.S. House of Representatives Committee on Appropriations
(Committee), in House Report 103-555, expressed a continuing
concern that prime contractors do not comply with the U.S.
Environmental Protection Agency's (EPA) Minority Business •
Enterprise (MBE)1 requirements. The Committee requested the
Office of Inspector General (OIG) to:
...determine the extent to which this disregard of
a Federal mandate (underscoring added) prevails
within the contracting community ... [and] to the
extent possible ... review the process by which
state and local governments award and monitor
contracts.
We, therefore, reviewed the MBE activities of EPA financial
assistance recipients. Our objectives were to determine
whether:
• State and local governments awarded and monitored
contracts in compliance with EPA's MBE requirements.
• State and local government prime contractors were
meeting the MBE program requirements.
* EPA's utilization data for the MBE program were
accurate.
BACKGROUND
In response to President Carter's National Urban Policy of
March 1978, EPA established goals for MBE use in the
Wastewater Treatment Construction Program. In March 1983,
EPA implemented "Procurement Under Assistance Agreements
Regulation" (40 Code of Federal Regulations, Part 33). The
regulations require recipients to follow six affirmative
steps in achieving the goal of awarding a "fair share" of
subagreements to MBEs, whenever possible.
'•For purposes of this report, the term "MBE" includes
both minority-owned -and women-owned businesses, unless
otherwise noted.
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MBE Utilization
The fiscal 1991 Appropriations Act temporarily authorized EPA
to establish a minimum 8 percent goal for the use of "prime
and subcontracts awarded in support of authorized programs."
Congress also directed the Administrator to annually report
the Agency's efforts in achieving the 8 percent goal. EPA's
fiscal 1993 Appropriations Act made the 8 percent goal
permanent.
EPA's Office of Small and Disadvantaged Business Utilization
(OSDBU) is responsible for establishing policy and providing
procedural guidance for the utilization of MBEs under the
Agency's financial assistance programs. EPA reported
distributing over $9 billion in financial assistance to
states during fiscal 1991 through 1993. Of this total, EPA
reported the states obtained over $6 billion in goods and
services, about $868 million from MBEs. This results in a
reported MBE utilization rate for the three-year period of
about 14 percent. For the ten-year period ended September
30, 1993, EPA financial assistance recipients reported an
average MBE utilization rate of 15 percent.
RESULTS IN BRIEF
Alleged Abuses Within the MBE Program
The Committee had received allegations of various abuses
within the MBE program. The Committee requested that we
determine whether: (!) recipients of EPA financial
assistance agreements encouraged use of MBEs through their
contract procedures, (2) prime contractors used MBEs as pass
throughs for money, (3). prime contractors named MBEs on bid
documents without their knowledge, and (4) prime contractors
awarded MBEs large dollar contracts, but only exercised a
fraction of the available contract. For two of three states
examined, recipients had proactive contracting procedures
which encouraged the use of MBEs. There were indications of
MBEs being used as pass throughs for one of the six projects
we reviewed. We only became aware of the situation because a
recipient had taken proactive steps to identify and correct
the abuse. We did not find that prime contractors named MBEs
on bid documents without their knowledge nor that prime
contractors exercised less than the full value of MBE
contracts.
EPA's MBE Utilization Data
For the 10 year period ended September 30, 1993, EPA reported
that its financial assistance recipients awarded 15 percent
11
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MBE Utilization
of their contracting dollars to MBEs. The Committee
requested that we determine the reliability of the MBE
utilization data being reported to Congress. We determined
that the reported data were incomplete, inconsistent,
untimely, and filled with significant errors. The problems
were the result of: (1) a poorly designed reporting form
(prescribed by the U.S. Department of Commerce), (2) a lack
of clear data definitions and reporting guidance from EPA,
and (3) little or no data validation throughout the reporting
process. Consequently, the information reported to Congress
by the Administrator did not provide an accurate picture of
EPA's MBE accomplishments.
RSCOMMENDATIONS
We recommend that the Director, OSDBU:
1. Modify the SF-334 and related guidance to collect
utilization data based on actual, rather than planned,
awards.
2. Work with EPA regions and state agencies to develop
specific and consistent reporting definitions.
3. Institute data validation procedures throughout the
reporting process.
MATTERS FOR CONGRESSIONAL CONSIDERATION
EPA's MBE goal, as authorized in the fiscal 1991 and 1993
Appropriation Acts, is based on the value of contracts
awarded, not the amounts paid to MBEs. Computing MBE
utilization based on contract awards does not accurately
reflect MBE accomplishments. The amount of a contract award
represents potential, not actual, utilization. It would be
more accurate to require recipients to report MBE utilization
based on actual payments.
EPA's current practice is consistent with the direction
provided in the Appropriation Acts. However, this practice
does not accurately measure the program's annual performance.
We will, therefore, refer this matter to the Committee for
consideration in revising the legislative requirement.
iii
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AGENCY COMMENTS
EPA generally agreed with our findings and recommendations.
The Agency stated that the areas highlighted in the report
"raise sufficient concerns that require immediate attention".
EPA has proposed general corrective actions, which when
developed in further detail and implemented should improve
the reliability of its MBE utilization data.
IV
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY i
CHAPTERS
1 INTRODUCTION ..... 1
PURPOSE 1
BACKGROUND 1
SCOPE AND METHODOLOGY 3
PRIOR AUDIT COVERAGE 4
2 ALLEGED ABUSES WITHIN THE MBE PROGRAM 5
CONTRACTING METHODS GENERALLY ENCOURAGED
USE OF MBES . 5
MBES NOT USED AS PASS THROUGHS 6
MBES KNOWINGLY NAMED ON BID DOCUMENTS 7
CONTRACTORS FULLY EXERCISED MBE AWARDS 7
CONCLUSION 8
3 EPA'S MBE UTILIZATION DATA 9
THE REPORTING FORM AND PROCESS 9
DATA DEFINITIONS AND REPORTING GUIDANCE 11
DATA VALIDATION 12
CONCLUSION .14
RECOMMENDATIONS 14
MATTERS FOR CONGRESSIONAL CONSIDERATION 14
AGENCY COMMENTS 15
OIG EVALUATION OF AGENCY COMMENTS 16
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TABLE OF CONTENTS (Continued)
APPENDICES
APPENDIX
OFFICE OF THE ADMINISTRATOR'S
RESPONSE TO OIG DRAFT REPORT
APPENDIX II: ABBREVIATIONS
17
21
APPENDIX III: DISTRIBUTION 23
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MBE Utilization
CHAPTER 1
INTRODUCTION
PURPOSE
The U.S. House of Representatives Committee on Appropriations
(Committee), in House Report 103-555, expressed a continuing
concern that prime contractors do not comply with the U.S.
Environmental Protection Agency's (EPA) Minority Business
Enterprise (MBE)2 requirements. The Committee requested the
Office of Inspector General (OIG) to:
...determine the extent to which this disregard of
a Federal mandate (underscoring added) prevails
within the contracting community ... [and] to the
extent possible ... review the process by which
state and local governments award and monitor
contracts.
We, therefore, reviewed the MBE activities of EPA financial
assistance recipients. Our objectives were to determine
whether:
* State and local governments awarded and monitored
contracts in compliance with EPA's MBE requirements.
• State and local government prime contractors were
meeting the MBE program requirements.
* EPA's utilization data for the MBE program were
accurate.
BACKGROUND
In response to President Carter's National Urban Policy of
March 1978, EPA established goals for MBE use in the
Wastewater Treatment Construction Program. The Agency policy
required regional offices to establish goals to ensure
participation of minority-owned businesses. Simultaneously,
EPA set a separate national goal of 2 percent for use of
2For purposes of this report, the term "MBE" includes
both minority-owned and women-owned businesses, unless
otherwise noted.
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MBE Utilization.
women business enterprises
Program.
(WBE) in the Construction Grants
In March 1983, EPA implemented "Procurement Under Assistance
Agreements Regulation" (40 Code of Federal Regulations, Part
33). The regulation requires recipients of EPA financial
assistance to award a "fair share" of subagreements to MBEs,
whenever possible. EPA's fair share policy is a numeric
objective derived through negotiations between EPA officials
and state environmental agencies or recipients of EPA funds.
The regulations also require recipients to follow six
affirmative steps toward achieving these goals. The six
steps include:
• placing qualified MBEs on solicitation lists;
• assuring that MBEs .are solicited whenever they are
potential sources;
• dividing total requirements, when economically feasible,
into small tasks or quantities to permit maximum MBE
participation;
• establishing delivery schedules, where the requirements
allow, which encourage MBE participation;
• using the services and assistance of the U.S. Department
of Commerce's Office of Minority Business Enterprise, as
appropriate; and
• requiring the prime contractor, if subcontracts are to
be awarded, to take the affirmative steps listed above.
The fiscal 1991 Appropriations Act temporarily authorized EPA
to establish a minimum 8 percent goal for the use of "prime
and subcontracts awarded in support of authorized programs,
including grants, loans, and contracts for wastewater
treatment and leaking underground storage tanks grants."
Congress also directed the Administrator to annually report
the Agency's efforts in achieving the 8 percent goal. EPA's
fiscal 1993 Appropriations Act made the 8 percent goal
permanent.
EPA's Office of Small and Disadvantaged Business Utilization
(OSDBU) is responsible for establishing policy and providing
procedural guidance for the utilization of minority and
women-owned businesses under the Agency's financial
assistance program. EPA reported distributing over $9
billion in financial assistance to states from fiscal 1991
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MBE Utilization
through 1993. Of this total, EPA reported the states
obtained over $6 billion in goods and services, about $868
million from MBEs. This results in a reported MBE
utilization rate for the three-year period of about 14 •
percent. For the ten-year period ended September 30, 1993,
EPA financial assistance recipients reported an average MBE
utilization rate of 15 percent.
SCOPE AND METHODOLOGY
Our review focused on MBE activities within financial
assistance programs during fiscal 1991 to 1993. Recipients
awarded the majority of procurement dollars during this
period in the State Revolving Fund and Construction Grant
programs. Therefore, we focused our review on these two
program areas.
The number of locations included in our fieldwork was set
based on the reporting deadline established by the Committee
(April 1995). We selected three states based on one or more
of the following criteria:
• the amount of EPA financial assistance provided to the
state from fiscal 1991 to 1993,
• the MBE utilization data reported from fiscal 1991 to
1993,
• suggestions from selected national minority
organizations and EPA's OSDBU, and
• the amount of time dedicated to the MBE program by EPA's
regional coordinators.
We reviewed Massachusetts (EPA Region 1) because it was a
major recipient of EPA financial assistance. Massachusetts'
fiscal 1991 to 1993 reports showed a significant increase in
the percent of contract dollars awarded to MBEs. Also, OSDBU
reported MBE compliance problems and was concerned that this
state's utilization reports were inaccurate. We included
Ohio (EPA Region 5) because of specific interest by the
Committee. Also, Ohio's level of EPA financial assistance
and procurement activities ranked it in the top five states
nationwide. Finally, we examined Kansas (EPA Region 7)
because it was one of the few states that reported more
contract dollars awarded to women-owned businesses than
minority-owned businesses. Also, over a three-year period,
the state's reported MBE use ranged from 58 percent to less
3
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HBE Utilization
than l percent. Finally, Regions l and 7 have part-time MBE
Coordinators, while Region 5 has a full-time Coordinator.
We conducted fieldwork at the EPA regional office responsible
for each selected state. We reviewed Federal regulations and
conducted interviews with officials from EPA's OSDBU and
Regions 1, 5, and 7. We also interviewed individuals from
state and local offices, national minority organizations, and
contractors. Finally, we analyzed statistical information
reported to Congress and reviewed bid and proposal documents.
On April 17, 1995, we issued a draft report to the Chief of
Staff, Office of the Administrator. We held an exit
conference and received the Agency's response on May 2, 1995
(see Appendix 1). Based on their response and discussions at
the exit conference, we made appropriate changes for this
final report.
This review was a short term study of EPA activities. It was
not designed to be a statistical research study or a detailed
audit. The results of our review, unless specifically stated
in the report, cannot be projected to a national level. The
review was more limited in scope than an audit and, as such,
did not necessarily encompass all generally accepted
governmental auditing standards. We conducted this review
according to the provisions of OIG Manual Chapter 150,
Special Reports. We conducted our fieldwork from October 19,
1994 through April 11, 1995.
PRIOR AUDIT COVERAGE
There were no recent audits of EPA's MBE Program.
4
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MBE Utilization
CHAPTER 2
ALLEGED ABUSES WITHIN THE MBE PROGRAM
The Committee had received allegations of various abuses
within the MBE program. The Committee requested that we
determine whether: (1) recipients of EPA financial
assistance agreements encouraged use of MBEs through their
contract procedures, (2) prime contractors used MBEs as pass
throughs for money, (3) prime contractors named MBEs on bid
documents without their knowledge, and (4) prime contractors
awarded MBEs large dollar contracts, but.only exercised a
fraction of the available contract. For two of three states
examined, recipients had proactive contracting procedures
which encouraged the use of MBEs. There were indications of
MBEs being used as pass throughs for one of the six projects
we reviewed. We only became aware of the situation because a
recipient had taken proactive steps to identify and correct
the abuse. We did not find that prime contractors named MBEs
on bid documents without their knowledge nor that prime
contractors exercised less than the full value of MBE
contracts.
CONTRACTING METHODS GENERALLY ENCOURAGED USE OF MBES
There appears to be a connection between state requirements
for MBE utilization and the effort expended in meeting EPA's
goal. Massachusetts and Ohio have their own requirements for
the use of MBEs in state procurement activities. In these
two cases, the state requirement for MBE participation is
greater than EPA's 8 percent goal. Meeting state
requirements, therefore, tends to assure the EPA goal is
addressed. Kansas, on the other hand, does not have a state
requirement for MBE utilization. Its use of MBEs is
accomplished without formal, proactive efforts.
EPA regulations include six affirmative steps to use for
achieving MBE goals. One step requires contractors to
include MBEs on solicitation lists. Ohio and Massachusetts
use state organizations to certify and maintain lists of
MBEs. Recipients and their prime "contractors use the state
list to identify MBEs for solicitation. Kansas, in contrast,
does not have an MBE certification program or a centralized
listing of MBE firms. Kansas looks at bid documents to see
if certification information was provided for MBEs. If not,
MBEs are requested to self-certify their eligibility.
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All three states require the prime contractor to identify,
during the proposal process, specific MBE firms to be used as
subcontractors. Ohio verifies the MBEs' minority status and
project participation by phone or letter. Massachusetts
requires the prime contractor to provide evidence of MBE
certification and letters of intent from the MBE
subcontractors. In Kansas, steps are taken to verify MBE
certification only,
Kansas officials described their attitude towards EPA's MBE
requirements as "laissez-faire". In 1991, EPA Region 7
issued a report stating that Kansas was in noncompliance with
MBE requirements. In 1992, Kansas hired a consultant who
also concluded that the state was in noncompliance. However,
neither EPA nor Kansas took any corrective actions. Kansas
officials stated that they assume their activities are
acceptable since no penalties have been assessed for
noncompliance.
MBES NOT USED AS PASS THROUGHS
The Committee and a national minority business organization
expressed concerns that prime contractors were using MBEs as
pass throughs. That is, after receiving a subcontract, the
MBE, in turn, subcontracted the work to a non-MBE. Thus,
money was passed from the prime contractor, through the MBE,
to a non-MBE contractor and, therefore, the MBE performed no
actual service.
There were indications of MBEs used as pass throughs in one
of six projects we reviewed. However, we only became aware
of this situation because the recipient had taken proactive
steps to identify and correct the abuse. The Massachusetts
Water Resources Authority (MWRA), an EPA recipient, had
identified and taken action against this type of abuse. MWRA
is responsible for the Boston Harbor Tunnel project. Of the
total project cost of about $4.3 billion, EPA provided about
$529 million through financial assistance agreements. MWRA
hired a consultant (Coast and Harbor) to monitor prime
contractors' compliance with MBE issues. When Coast and
Harbor identified or suspected noncompliance with MBE
requirements, it performed a review and presented MWRA with
its conclusions. Since 1990, Coast and Harbor performed
about 50 reviews on 20 contracts. As a result, MWRA fined
contractors over $600,000 for noncompliance with MBE
requirements. In most instances MWRA reported that prime
contractors hired MBEs, but the MBEs did not use their own
work force.
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Because this type of abuse usually involves collusion of two
or more parties, discovering it through standard audit tasks
is time consuming and uncertain. We, therefore, relied on
recipients, MBEs, and others to provide us specific
allegations to pursue. Although several sources expressed a
belief that pass throughs were a problem, we received only
one specific allegation to investigate. Based on subsequent
fieldwork, we concluded that there was no support for the
allegation.
MBES KNOWINGLY NAMED ON BID DOCUMENTS
Contract proposals usually include a list of subcontractors.
This list identifies specific MBE firms the1 prime contractor
intends to use in meeting MBE requirements. The Committee
received complaints that prime contractors-were naming MBEs
on bid documents without the MBEs' knowledge. Then, after
receiving the award, prime contractors were either performing
the work themselves or using non-MBE firms. This practice
gives the appearance of MBE use in order to obtain awards,
when in fact there is none.
All three states require prime contractors to include, on the
bid documents, the names of MBE firms to be used as
subcontractors. We selected a sample of MBEs included on bid
documents in each of the three states reviewed. These MBEs
confirmed that they were aware of their firm being included
on the bid documents.
During our review, we found examples of specific controls
used to prevent this type of abuse. For recipients who do
not have a defined MBE program, Ohio contacts all of the MBEs
listed to verify project participation. Massachusetts
requires the winning prime contractor to provide letters of
intent signed by the MBE subcontractors attesting to their
participation.
Our work did not support the allegation that prime
contractors were naming MBEs in contract proposals without
their knowledge.
CONTRACTORS FULLY EXERCISED MBE AWARDS
Recipients report MBE utilization based on the total
potential value of a contract at the time an award is made.
The Committee received complaints that contractors were
awarding large subcontracts to MBEs, but exercising only a
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fraction of the contract's potential value. This practice
would inflate a contractor's actual MBE utilization rate and
overstate the financial benefits MBEs received.
In all three states reviewed, a sample of MBEs confirmed that
they received at least, if not more than, the original
contract amount. Our review provided no evidence that
contractors were manipulating the system by exercising less
than the contract awards.
CONCLUSION
Widespread abuses of the MBE requirements were not evident in
our three state review. In two of the three states,
recipients encourage the use of MBEs through their contract
procedures. There were limited indications that MBEs were
used as pass throughs in one project. However, the recipient
took proactive steps to identify and correct these instances.
We did not find indications of MBEs being named on bid
documents without their knowledge nor MBEs being paid a small
portion of the potential contract value.
8
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CHAPTER 3
EPA'S MBE UTILIZATION DATA
For the 10 year period ended September 30, 1993, EPA reported
that its financial assistance recipients awarded 15 percent
of their contracting dollars to MBEs. The Committee
requested that we determine the reliability of the MBE
utilization data being reported to Congress. We determined •
that the reported data were incomplete, inconsistent,
untimely, and filled with significant errors. The problems
were the result of: (1) a poorly designed reporting form
(prescribed by the U.S. Department of Commerce), (2) a lack
of clear data definitions and reporting guidance from EPA,
and (3) little or no data validation throughout the reporting
process. Consequently, the information reported to Congress
by the Administrator may have understated or overstated the
actual utilization rates. In either case, the data did not
provide an accurate picture of EPA's MBE accomplishments. •
We identified numerous errors, in the reporting and compiling
of data, at all levels (i.e., contractors, recipients,
states, regions, and OSDBU). The errors identified did not
appear to be an intentional misrepresentation of the numbers,
but rather the result of a defective reporting process,
misunderstood requirements, or human error. The Director,
OSDBU does not believe the data collection system is a
material weakness. He stated that data problems are related
to the manner in which regional staff approach and carry out
their responsibilities.
THE REPORTING FORM AND PROCESS
EPA's MBE utilization data are the result of an information
stream that begins at the recipient level and flows upward
through the regional offices, to OSDBU, and ultimately to
Congress. Recipients complete Standard Form 334 "MBE/WBE
Utilization Under Federal Grants, Cooperative Agreements, and
Other Federal Financial Assistance" (SF-334) for each
assistance agreement on a quarterly basis. EPA's MBE
Coordinators then summarize the information, for all states
in their region, onto EPA Form 6005-2 "Quarterly MBE/WBE
Consolidation Report" and submit the summary to OSDBU. Once
a year, OSDBU consolidates the data into a report to
Congress.
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In addition to information identifying the individual
financial assistance agreement, SF-334 requests data on (1)
MBE Procurements Accomplished this Quarter and (2) Total
Project Dollars Planned for Procurement this Fiscal Year.
EPA Regions 1 and 5 are using these two data elements to
calculate the MBE utilization rate as follows:
Procurement Dollars Awarded
to MBEs for the Quarter
Procurement Dollars Planned
for the Fiscal Year
= MBE Utilization Rate
However, Procurement Dollars Planned for the Fiscal Year
represents expectations and not actual awards. As such, the
level of actual procurement dollars awarded may be
understated or overstated. In addition, the two data
elements used in the calculation are not compatible. As a
result, the utilization percentages the Administrator reports
have no meaning.
Calculating an MBE utilization rate based on contract awards
for any particular period requires dividing the total
procurement dollars awarded to MBEs during that period by the
total procurement dollars awarded to all firms during that
same period as follows:
Procurement Dollars
Awarded to MBEs
Procurement Dollars
Awarded to All Firms
MBE Utilization Rate
The data which EPA requests from recipients does not include
the appropriate information needed to produce the denominator
in this calculation.
The Region 7 MBE Coordinator recognized the error in the data
requested on the SF-334. In an effort to collect the
appropriate data, the Coordinator modified the form by adding
a field requesting total procurements awarded during the
quarter. A Region 7 official subsequently advised the
Coordinator that it was improper to revise the official form.
Consequently, the Region requested recipients to report
procurements awarded during the quarter in Section 6
[Comments] of the SF-334.
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DATA DEFINITIONS AND REPORTING GUIDANCE
Protecting the quality of data reported from hundreds of
individual sources requires a high level of consistency in
defining what is or is not reported. EPA's reporting
instructions are contained in its (1) Guidance for
Utilization of Small. Minority and Women's Business
Enterprises in Procurement Under Assistance Agreements (May
1986) and (2) instructions attached to SF-334. In reviewing
the reporting process, we observed a wide variety of
interpretations of what data to report.
OSDBU has not established clear definitions for reporting the
data. Definition issues include determining the level of
award activity which must be reported and reporting awarded
amounts versus actual expended amounts. Additional
definition issues include reporting amounts outside the
fiscal year in which the activity occurred and reporting
activity for projects which have no EPA funding.
The problems of inconsistent data definitions and reporting
practices are known among states and EPA regions. However,
efforts to obtain improved direction from OSDBU have not been
successful. In August 1994, OSDBU sponsored a national
conference attended by representatives from EPA regions and
states receiving EPA assistance agreements. During the
conference,, attendees formed work groups to identify and
discuss problems in the MBE program. Conference participants
identified inconsistent data definitions and reporting
practices as problem areas. EPA's Acting Deputy Regional
Administrator for Region 1 supported the need to correct the
problems identified at the national conference in a
memorandum to the OSDBU Director in September 1994. However,
as of March 31, 1995, OSDBU had not resolved the concerns
addressed at the conference and in-Region 1's memorandum.
We observed that individuals preparing the reporting forms at
the recipient and regional levels had problems similar to the
issues raised at the national conference. For example:
• Recipients do not report based on a consistent universe
of activity. The instructions for the SF-334 contain
separate reporting thresholds for both financial
assistance and procurement awards (i.e., below certain '
dollar levels reporting is not required). A footnote to
these instructions states "There is no reporting
threshold for...EPA. Recipients...must report under all
assistance agreements regardless of the size of the
award". Recipients' reports indicate there is confusion
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MBE Utilization
as to the applicability of thresholds for reporting.
Region 7 sends letters to all its recipients advising
that all procurement activity must be reported
regardless of dollar amount.
• Recipients do not consistently report on MBE
accomplishments. Recipients are not consistently
reporting on projects that contain both Federal and
state funding. Massachusetts reports the Federal
portion, while Ohio and Kansas report on both the
Federal and state portions. Also, we observed that
Kansas reported on a project that does not have any
Federal funding.
• Recipients do not timely report MBE utilization. At the
direction of OSDBU, recipients include previously
unreported data from prior periods in current period
reports. For example, one recipient reported a
procurement which had occurred more than a year prior to
being reported.
• Recipients do not consistently report MBE utilization.
Some recipients report total contract value at the time
it is awarded. Others report actual contract
disbursements at the time of payment. Some recipients
reported a combination of awarded and disbursed amounts.
These types of errors may result in either an understatement
or an overstatement of the MBE utilization rate. During our
review, we identified errors which, when corrected, would
increase or decrease the reported utilization rates. The
limited scope of our review and the number and variety of
errors prevented us from determining the cumulative effect of
the errors. In any event, the errors resulted in inaccurate
reporting of MBE accomplishments.
DATA VALIDATION
Data validation is essential to the process of ensuring the
information from the recipients is supportable and accurately
compiled by EPA. Validation of data, performed on a regular
basis, is designed to detect errors which procedural controls
did not prevent. Without validation, there is no reasonable
assurance that the data reported are reliable.
We discussed procedures with people involved in the reporting
process at the state, regional, and OSDBU levels. The
Director, OSDBU stated that regional staff are responsible
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for examining and analyzing data for reasonableness.
However, our review found that their efforts primarily
focused on collecting and summarizing data reported to them.
Little or no efforts were made to examine or analyze the data
for reasonableness. The OSDBU employee responsible for
compiling the data at a national level stated that her review
consists of checking for mathematical accuracy and
transposition of numbers from one quarter to the next. As a
result, errors go undetected and are passed through the
reporting process.
Our examination of utilization data reported in three states
identified numerous reporting errors, even though our efforts
were limited in time and scope. Reasonable data validation
efforts would likely have identified and corrected the
following errors:
* In fiscal 1992, Kansas reported $21 million in
procurements with WBE firms. This was significantly
higher than had ever been reported in past periods and
resulted in an unusually high MBE utilization rate of 58
percent. We reviewed supporting documentation and
identified a typographical error in the report. Kansas
should have reported about $2 million in awards,- a $19
million discrepancy. We recalculated the figures
correcting errors identified during our review. The
result was 8 percent utilization versus the 58 percent
originally reported.
• In fiscal 1993, an Ohio recipient reported a $299,672-
award to an MBE in the second quarter and again in the
fourth quarter.
• In fiscal 1992, a .Kansas recipient reported a $71,733
award to an MBE in the third quarter and again in the
first and second quarters of fiscal 1993.
• In fiscal 1993, Ohio's fourth quarter consolidation
report did not include all of the recipients reported
data. As a result, about $1.3 million in MBE awards
were not reported to OSDBU.
• In fiscal 1993, the Region 1 MBE Coordinator switched
Maine's and Massachusetts' MBE awards. These figures
were 'incorrectly reported to OSDBU on the second quarter
consolidation report.
• In fiscal 1993, the Region 1 MBE Coordinator submitted
the second quarter consolidation report, and supporting
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MBE Utilization
documentation, to OSDBU. The MBE awards reported on the
consolidation report were about $9 million higher than
supported by the underlying documentation.
CONCLUSION
The current and historical data which the Administrator
reports for EPA's MBE program are not reliable as a measure
of success. They are, therefore, also not useful in
monitoring the program's progress. Although EPA has reported
an average utilization rate of 15 percent for the 10 year
period through fiscal 1993, our review demonstrated
significant weaknesses in the reporting process. We also
identified numerous errors in the reported data. These
weaknesses and errors may result in the data being either
understated or overstated on a cumulative basis. Therefore,
we cannot express an opinion on the actual rate of MBE
utilization within EPA's financial assistance programs.
RECOMMENDATIONS
We recommend that the Director, OSDBU:
1. Modify the SF-334 and related guidance to collect
utilization data based on actual, rather than planned,
awards.
2. Work with EPA regions and state agencies to develop
specific and consistent reporting definitions.
3. Institute data validation procedures throughout the
reporting process.
MATTERS FOR CONGRESSIONAL CONSIDERATION
EPA's MBE goal, as authorized in the fiscal 1991 and 1993
Appropriation Acts, is based on the value of contracts
awarded, not the amounts paid to MBEs. Computing MBE
utilization based on contract awards does not accurately
reflect MBE accomplishments. The amount of a contract award
represents potential, not actual, utilization. It would be
more accurate to require recipients to report MBE utilization
based on actual payments instead of award amounts.
Consider the following hypothetical example.
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MBE Utilization
A contractor awarded a three year subcontract to an
MBE with a potential value of $1 million. During
each of the next three years, the MBE actually
performs and is paid for work valued at $250,000
annually.
Under the current practice, the prime contractor would claim
$1 million in MBE participation in the quarter during which
the subcontract was awarded. Since the subsequent payments
of $750,000 are not considered in the reporting process, the
prime contractor's utilization would ultimately be overstated
by $250,000 ($1 million - $750,000). Also, the year in which
the utilization is reported differs from the year in which
the MBE performs the work and is paid. In contrast,
reporting utilization based on actual payments to MBEs would
result in correctly claiming $750,000 in MBE use. It would
also cause the utilization to be claimed within the three
separate years in which the contract performance took place.
EPA's current practice is consistent with the direction
provided in the Appropriation Acts. However, this practice
does not accurately measure the program's annual performance.
It does, however, create the possibility that contractors
could manipulate the system by exercising only small portions
of large contract awards. Although we did not find evidence
that this abuse was occurring (see p. 7}, it would be prudent
to revise the reporting base to prevent future abuses.
Changing the reporting basis should not increase the
reporting burden on recipients. Under our proposal,
utilization reports would contain data on actual payments
made to MBEs instead of data on awards. Contractors should
be able to easily obtain a summary of payments to MBEs from
their accounting systems.
We will refer this matter to the Committee for consideration
in revising the legislative requirement.
AGENCY COMMENTS
EPA generally agreed with our findings and recommendations.
The Agency stated that the areas highlighted in the report
"raise sufficient concerns that require immediate attention".
EPA's response proposed several general corrective actions
including (1} development of an automated data collection
system, (2) working with regional staffs to develop new
reporting definitions, (3) implementing an Oversight and
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MBE Utilization
Analysis Workgroup, and (4) developing a certification
program for. regional staffs and state representatives.
PIG EVALUATION OF AGENCY COMMENTS
The actions proposed, when developed in further detail and
implemented, should improve the reliability of EPA's MBE
utilization data. For corrective actions planned, please
provide details, supporting documentation, and reference the
actions to specific milestone dates.
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KBE Utilization
APPENDIX 1
Page 1 of 3
OFFICE OF THE ADMINISTRATOR'S
RESPONSE TO PIG DRAFT REPORT
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHtNCTON. O.C. 20460
ornct or
TM| ADMIMIftTMATOft
SUBJECT: Draft Report of Review - MBE Utilization in EPA's
Financial Assistance Programs
FROM: Peter D. RobertsonV&S
Chief of Staff /***"
TO: Kenneth A. Konz
Acting Deputy Inspector General
This responds to your memorandum of April 7, 1995,
requesting that we consolidate comments from the various
interested parties regarding the above report. The Office of
Small and Disadvantaged Business Utilization (OSDBU) received and
consolidated the comments for this report.
The draft report was sent to eighteen recipients. Of the
eighteen, only six responded as requested. The responses were
from Regions 5 and 7; the States of Massachusetts, Ohio, and
Kansas; and the headquarters Grants Administration Division.
Generally, there was consensus that the overall
recommendations contained in the IG report had merit. Although
there were some disagreements with the general findings, these
focused on specific actions and did not adversely impact the
recommendations as such. EPA Region V took great exception to
the findings made relative to the MBE/WBE programs in Ohio. We
also noted the sense of frustration with the reporting
requirements and characterization of the program as an unfunded
mandate by the State of Kansas. Additionally, the State
indicated that the legislature terminated funding for the MBE/WBE
program because of poor participation by MBE/WBE participants as
well as the high cost of maintaining the program. This is an
area that will require further discussion with the State.
Regarding the IG's three specific recommendations, the
following represent the consensus of the responding parties:
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APPENDIX 1
Page 2 of 3
Modify the SF-334 and related guidance to collect utilization
data baaed on actual, rather than planned, awards.
In reference to the IG recommendation to modify the SF-334 and
related guidance to collect actual rather than planned
utilization data, the Massachusetts Department of Environmental
Protection, Ohio Environmental Protection Agency, the Kansas
Department of Health and Environment and the Grants
Administration Division concurred in this recommendation. EPA
staffs in Regions 5 and 7, in addition to our OSDBU office,
recognized the need to modify the SF-334.
Changing the focus of data collection may require additional
training of state representatives. It may also require
additional accounting systems or workyears especially at the
state or local level. OSDBU anticipates some reluctance by the
states to a modification of this form because some states feel
the MBE/HBE data collection has become so time-consuming they
would prefer not collecting the data. In view of the above,
OSDBD is in the process of developing an automated data
collection system which gives them primary responsibility for
oversight and analysis of this effort. OSDBU will test the
viability of the automated data collection system with the States
prior to nationwide implementation.
Work with EPA regions and state agencies to develop specific and
consistent reporting definitions-.
In response to this IG recommendation, concurrences were received
from the Massachusetts Department of Environmental Protection and
the Kansas Department of Health and Environment as well as the
Grants Administration Division. Regions 5 and 7 took exception
to specific examples cited by the IG in the preparation of this
report such as the term "widespread11 abuses and the regional data
validation processes. The response from the Ohio Environmental
Protection Agency did not directly address the issue of reporting
definitions. However, OSDBU had already initiated plans to
develop clearer reporting definitions. At a recent training
conference, EPA regional staffs joined with OSDBU to develop the
new reporting definitions which will be shared with the states
later this year.
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HBE Utilization
APPENDIX 1
Page 3 of 3
Institute data validation procedures throughout the reporting
process .
OB 3
The Massachusetts and Kansas Departments of Environmental
Protection concur in this recommendation. The Ohio Environmental
Protection Agency in response to this recommendation indicated
they will institute an internal system of checks and balances to
validate their data. He will be working with them on this
matter.
OSDBU concurs in principle with this recommendation. They
believe that an automated data reporting system, coupled with the
implementation of their Oversight and Analysis Workgroup, will
lead to the development of a sound data validation system.
Furthermore, OSDBU' s implementation of a certification program
for regional staffs and state representatives will greatly
minimize any confusion at either the regional or state levels
regarding reporting requirements, definitions, and requisite
procedures .
In summary, we feel that the areas highlighted by the 16 raise
sufficient concerns that require immediate attention. On the
other hand, the formula used for data collection, which is
Congressionally-mandated, has served the Agency well in promoting
greater participation of minority and women contractors in the
Agency's procurement and financial assistance programs. Given
the IG's concerns, we are committed to intensifying our efforts
to ensure a greater level of efficiency and effectiveness in our
overall operations.
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APPENDIX 2
Page l of l
ABBREVIATIONS
Committee
EPA
MBE
MWRA
SF-334
DIG
OSDBU
WBE
The U.S. House of Representatives Committee
on Appropriations
U.S. Environmental Protection Agency
Minority Business Enterprise
Massachusetts Water Resources Authority
Standard Form 334 - MBE/WBE Utilization
Under Federal Grants, Cooperative
Agreements, and Other Federal Financial
Assistance
Office of Inspector General
Office of Small and Disadvantaged Business
Utilization
Women Business Enterprise
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APPENDIX 3
Page 1 of 2
DISTRIBUTION
Office of Inspector General
Inspector General (2410)
Chief, Resources Management Unit (2421)
Executive Assistant to the Inspector General (2410)
EPA Headquarters Office
Administrator (1101)
Deputy Administrator (1102)
Assistant Administrator for Administration and Resources
Management (3101)
Director, Executive Support Office (1104)
Director, Office of Small and Disadvantaged Business
Utilization (1230)
Director, Grants Administration Division (3903F)
Director, Program and Policy Coordination Office (3102)
Liaison, Office of Administration and Resources Management
(3102)
Agency Followup Official (3304)
Attention: -Assistant Administrator for the Office of
Administrations and Resources Management
Agency Followup Coordinator (3903F)
Attention: Director, Grants Administration Division
Followup Coordinator (1104)
Executive Support Office
Associate Administrator for Regional Operations and
State/Local Relations (1501)
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APPENDIX 3
Page 2 of 2
Associate Administrator for" Communications, Education, and
Public Affairs (1701)
Associate Administrator for Congressional and Legislative
Affairs (1301)
EPA Regional Offices
Regional Administrator, Region 1
Regional Administrator, Region 5
Regional Administrator, Region 7
Audit Followup Coordinator, Region 1
Audit Followup Coordinator, Region 5
Audit Followup Coordinator, Region 7
State Offices
Director, General Services, Kansas
Department of Health and Environment
Commissioner, Massachusetts Department of
Environmental Protection
Director, Ohio Environmental Protection Agency
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