INTERNAL CONTROL REVIEW REPORT
on the
MUNICIPAL WASTEWATER TREATMENT WORKS
CONSTRUCTION GRANTS PROGRAM
\
ui
September, 1984
OFFICE OF WATER PROGRAM OPERATIONS
and
REGIONAL WATER MANAGEMENT DIVISIONS
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.J**">
* ** \ UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
SEP 2 5 1984
OFFICE OF
WATER
MEMORANDUM
Annual Certification of Construction Grants Program Compliance
With the 1982 Federal Managers' Financ/a'l Integrity Act
Ravan, Assistant Ada
Office of Water (WH-556)
William Ruckelshaus, Administrator
Last fall I forwarded a preliminary internal control review of the
construction grants program The results and measures from this review
were included in your December 1983 report to the President on the status
of compliance of the Agency's internal accounting and administrative
controls with the applicable requirements. You will recall that you
informed the President that material weaknesses, as defined under the OMB
guidelines, had been identified in the construction grants program.
During the year, I initiated a joint Headquarters and Regional evaluation
of our internal controls. The attached report concludes my 1984 assess-
ment of our priority reviews, outlines my plans for 1985, and certifies
our compliance with the Federal Managers' Financial Integrity Act.
The 1984 report contains the findings and recommendations of the
seven review teams that conducted direct performance reviews and evalua-
tions. The recommendations contained a number of significant opportunities
for management improvements, and we have an action plan for 1985 that
implements most of the recommendations.
The decentralized nature of the construction grants program requires
that we manage this program as- effectively as possible to protect the
considerable Federal investment. I am, therefore, establishing a contin-
uing process for conducting an annual internal control review to address
selected program areas that are perceived as highly vulnerable to fraud,
waste, and mismanagement.
During 1984, we evaluated priority area management controls in 27
States. In 1985, we plan to focus particularly on grantee project
management controls. We believe that we are most vulnerable at the
grantee level and will evaluate their implementation and understanding
of controls in the areas of construction management, land acquisition,
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financial management and operation and maintenance. We plan to involve
the delegated States and, also, to conduct a national review of the
integrity of the data base for our biennial Construction Grants Needs
Survey for Congress.
I would appreciate your comments on this report and our plans to
improve program management.
Attachment
cc: Howard Messner
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON. D.C. 20460
OFFICE OF
2 5 K:® WATER
MEMORANDUM
SUBJECT: Annual Certification of Construction Grants Program Compliance
With the 1982^Federal, Managers' Financial Integrity Act
FROM: William A. Whitting'tdn, Acting Director
Office of Water Program Operations (WH-546)
TO: Jack E. Ravan, Assistant Administrator
Office of Water (WH-556)
I have completed our annual review of the internal controls for the
construction grants program. In the priority review areas that we
evaluated, we did not find any evidence of major fraud, waste or mismanage-
ment. However, the review teams offered several significant recommendations
to improve pre-award management, design and construction management, and
project operation. The Executive Summary of our report contains the
review team findings, management decisions, and action plans.
I am very pleased with this initial review; the results are particu-
larly notable in view of the "first time" planning and resource constraints
on the teams. I also want to commend the Regional Water Management
Divisions for their tremendous participation in this effort.
I believe the ICR review process offers a valuable tool for taking
an in-depth look, on a priority basis, at vulnerable areas of program
management. This year, we focused our review on State and EPA management.
Next year, we will sample grantees and test the integrity and usefulness
of our requirements at that level of management.
Recognizing the highly delegated nature of the construction grants
program and the large amount of Federal funds invested, we expect to
remain highly vulnerable to fraud, waste, and mismanagement. I have
been moving to integrate the ICR review process into budget planning and
annual work plan development. I am also coordinating the ICR process
and schedule with the Office of Water Accountability System (OWAS).
While OWAS provides a mechanism for broad Regional management (built on
delegated State management) tracking, reporting, and goal setting, the
ICR process offers a more targeted opportunity to focus in detail on a
few priority areas to identify and resolve management problems.
I am available to brief you on this year's review and to outline
our plans for next year. If you have any questions, please contact
me, or have your staff contact Steve Allbee (382-5856).
Attachment
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CONTENTS
EXECUTIVE SUMMARY
CHAPTER
I
II
III
IV
Page
i
VI
VII
VIII
EXHIBIT
I
II
III
IV
INTRODUCTION
STATE PRIORITY SYSTEMS
Team Findings and Recommendations
COST EFFECTIVENESS AND FACILITY SIZING
Team Findings and Recommendations
LOCAL FINANCIAL CAPABILITY
Team Findings
Recommendations
VALUE ENGINEERING ANALYSIS
Team Findings
Recommendat ions
SPECIFYING AND BIDDING
Team Findings and Recommendations
CLAIMS AND CHANGE ORDERS MANAGEMENT
Team Findings and Recommendations
OPERATION AND MAINTENANCE
Team Findings and Recommendations
PARTICIPATING REGIONS AND STATES
SCHEDULE FOR FY 1984 INTERNAL CONTROL REVIEW
MANAGEMENT ACTION PLANS
FY 1985 INTERNAL CONTROL REVIEW PLAN
1-1
II-1
II-4
III-l
III-ll
IV-1
IV-3
IV-7
V-l
V-3
V-5
VI-1
VI-3
VII-1
VII-15
VIII-1
VIII-4
v
vi
vii
xiv
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EXECUTIVE SUMMARY
The Federal Managers' Financial Integrity Act (FMFIA) directs the
assessment of internal controls for areas identified as highly vulnerable to
waste, loss, unauthorized use or mismanagement of Federal program funds. This
executive summary provides a brief overview of our Internal Control Review (ICR)
process for EPA's construction grants program, highlights the findings of our
first seven priority reviews, establishes our management action plan resulting
from these reviews, and outlines our FY 1985 ICR program.
Our approach to complying with FMFIA was to establish the ICR process as
part of our basic management system and to conduct integrated Headquarters and
Regional reviews. The purpose of our reviews was to determine the efficiency
and effectiveness of the EPA program management controls in meeting statutory
and program objectives and to identify needed changes in EPA regulations,
policies, or guidance. We are using the ICR program to help us maintain the
overall administrative and programmatic integrity of the highly delegated
construction grants program.
THE CONSTRUCTION GRANTS PROGRAM IS EXTREMELY VULNERABLE
BECAUSE OF THE LARGE NUMBER OF DOLLARS AND PROJECTS
AND THE HIGHLY DECENTRALIZED NATURE OF PROJECT MANAGEMENT.
From 1973 through 1983, Congress appropriated approximately $40 billion
for construction grants. We have disbursed approximately $30 billion since
1973, completing construction on around 3,500 plants. We have an additional
8,000 projects under planning, design or construction. The construction grants
program represents about 60% of EPA's FY 1984 budget.
The statutory and regulatory framework for construction grants management
encourages full State delegation. EPA and States share in management overview,
evaluation, and planning. EPA's overview policy emphasizes achievement of
environmental and program results, rather than routine process reviews.
Therefore, management controls are principally assessed by measuring the extent
of State and grantee implementation of EPA requirements and by evaluating the
progress in achieving National environmental program objectives.
In FY 1983 we participated in the Agency-wide preliminary Internal Control
Review that listed and assessed management control techniques. This preliminary
review effort resulted in a list of 57 issues that we then ranked, prioritized,
and summarized to establish our priority issues for full scale review. At the
beginning of this FY 1984 ICR effort we reexamined the priority issues and
identified seven specific subject areas in which there was significant potential
for mismanagement of Federal, State, and local funds. The first four issues
were scheduled for reviews of one-year duration, and the final three issues
were tentatively scheduled for two-year studies.
Seven Headquarters/Regional Office review teams were established,
with 10 representatives from the Office of Water Program Operations (OWPO)
and 22 representatives from the Regions. All the Regions participated
in one or more reviews. Using EPA and OMB guidelines and GAO standards,
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each team developed study-specific questionnaires and chose a sample of projects
to review that would help assure the validity and applicability of the findings.
Each issue area included 3-4 Regions and 6-8 States. (See reviewers and States
in Exhibit I.) Although the number of States in each area under review was
limited, the selection was carefully made to represent the States within the
reviewers' Regions. A total of 27 States were reviewed. The reviewers sampled
project files to see how grantees were implementing established guidance and
procedures. OWPO worked closely with the Office of Administration's Internal
Control Review Task Force and, as appropriate, with the Grants Administration
Division and the Office of the Inspector General (OIG). The reviewers also
looked for State-specific guidance, procedures, and management innovations that
might be useful to other States and EPA Regions. (See review schedule, Exhibit II.)
THE FY 1984 ICR DID NOT FIND MAJOR PROBLEMS WITH WASTE,
FRAUD OR MISMANAGEMENT IN THE PRIORITY AREAS WE EXAMINED.
No evidence of major fraud, waste or mismanagement was documented as a
result of this year's effort. However, the review teams identified significant
opportunities to improve program management, and some teams perceived resource
requirements, chiefly for improved delegation oversight. The recommendations
are specified in the individual team reports (Chapters II - VIII). Our action
plan for implementing accepted ICR recommendations is contained in Exhibit III.
The construction grants program will continue to be a highly vulnerable
program due to the extent of program delegation, the highly decentralized manage-
ment and the amount of public funds involved. Therefore, we have developed a
FY 1985 ICR program that involves following up on our FY 1984 ICR recommendations
and identifying a selective list of additional priority areas to be reviewed in
FY 1985. This year, we evaluated delegated States. Next year, we plan to evaluate
grantee communities. (See our FY 1985 ICR program action plan, Exhibit IV.)
PRE-AWARD MANAGEMENT COULD BE IMPROVED.
I. Priority Lists — State priority systems usually direct funds to high priority
projects, except under pressure of reallotment where "by-passing" may preclude
optimum achievement of water quality and public health objectives.
The eight State priority systems that we reviewed appeared to direct grant
funds to high priority water quality and public health projects as required by
law, regulation and guidance. Direct and indirect water quality and public
health factors are present and assigned proportionally high weightings in the
priority ranking formula, but the basis for the values supporting the weightings
is often not evident. Each State's system contained "by-pass" procedures that
allow funding of lower priority projects. Generally, by-passing has followed
the established priority; therefore, it does not appear to have a highly negative
impact on overall water quality and public health priorities. However, there
was also evidence that States have initiated large scale by-pass procedures to
avoid the imminent loss of funds to reallotment. Under reallotment pressures
by-passing may have been detrimental to achieving the highest priority
public health and water quality objectives.
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II. Cost-Effectiveness and POTW Facility Sizing — EPA could do more to prevent
high-cost, problem projects and to encourage better, cheaper alternatives.
The team members found that the majority of the projects reviewed appeared to
be cost-effective and appropriately sized. However, they also found that most of
the States and Regions seemed to misunderstand the term "appropriate technology".
The State facility planning review process could allow some potential problem
projects to be approved, and State facility design codes (e.g., limitations on
the minimum size of sewer lines), among other restrictions, apparently were
influential in preventing the use of some less-costly technologies. States
and Regions lack mechanisms to identify potential problem projects early and
to feed back information on constructed projects experiencing generic design
and O&M problems into facility planning for proposed projects. The team advocated
a systematic method for early updating of older facility plans.
Ill. Local Financial Management Capability — EPA could do more to
prepare commmunities to support the increasing burden of costs to
build, operate, maintain and replace a treatment facility.
The team found that specific requirements of the Financial Capability
Policy were not yet incorporated into delegation agreements or workplans for most
States in the three Regions. Regions have transmitted the policy and HQ guidance
to the States, but have not developed a State oversight system nor begun conduct-
ing reviews. States and Regions have not developed specific screening procedures
for early identification of high cost projects, but were screening informally
as part of their other review activities. Most Regions were not distributing
the EPA screening computer printout, "Possible High Cost Projects". Problem
projects were being resolved on a case-by-case basis.
IV. Value Engineering Analysis (VE) — EPA could improve the environment
for VE to stretch grant funds further.
The team reviewed 17 VE studies and existing statistical data. They found
that the capital and 0,M,&R savings from the approximately 75 annual VE studies
far outweigh the cost of conducting these evaluations. The review team recommended
VE reviews on projects costing under $10 million, although such reviews are not
required by the Act. Twenty percent of all VE study cost saving recommendations
are actually implemented by the grantees. Life-cycle (O.M&R) cost savings are
especially significant to communities since they pay 100 percent of these costs.
The team reported that EPA Regional and State personnel assigned responsibility
for VE program oversight have had much of their time diverted to other program
activities.
PRE-CONSTRUCTION AND CONSTRUCTION ARE STILL
VULNERABLE TO WASTE, FRAUD, AND MISMANAGEMENT.
V. Design Specifying and Bidding — EPA can tighten procedures and instruct
other levels of management in fraud prevention during these periods.
The team found that the States and Corps of Engineers (COE) are performing
timely bidding and procurement process reviews consistent with EPA guidance.
State performance was rated "excellent" by recently completed Section 205(g)
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delegation reviews. However, level of effort in biddability and constructability
(B&C) reviews did not vary in proportion to project size or complexity (i.e.,
large, complex projects warrant much more reviewer attention than small, standard
projects). Also, State checklists for review of bidding documents and the
local procurement process are out of date; State follow-up of deficiencies is
insufficient. Regional oversight of the minority business enterprise/womens'
business enterprise (MBE/WBE) certification process would appear inadequate.
The required, written grantee codes of conduct are not addressed in EPA program
guidance, and requiring non-collusion certification by grantees would reduce
the possibility of bidder collusion. Regional and State program personnel do
not have a formal process to identify fraud, collusion and bid rigging and lack
the Inspector General's "trained eye". Bidding laws in a significant percentage
of the States sampled do not allow self certification by grantees of their
procurement systems. The majority of these States do not encourage the process,
viewing it as a "blind approval". (In six States only one grantee procurement
system was self certified.)
VI. Claims and Change Orders Management — Project reviewers seem to be adequately
protecting EPA from faulty change orders, but EPA could act to protect the
grantees from loss. We could do more to prevent claims and speed resolution.
The team found that State and COE reviews of change orders and claims were
sufficiently thorough to determine necessity and reasonableness of costs.
However, the basis for many determinations on grant allowability was not uniformly
documented. EPA has no specific requirement for reviewers to document the basis
for these decisions in the project file or to inform the grantee in writing of the
reason for denial of funds. HQ has not yet issued national guidance, although it
is currently being drafted, to assist grantees and reviewers to deal with
contractor claims. Initial documentation submitted by grantees was insufficient
for approximately 40-50 percent of change orders reviewed and 60-70 percent of
claims reviewed. In all cases, the reviewing agency requested and ultimately
received the missing documentation, or the grant cost was not allowed. However,
the additional time spent in obtaining complete information could cause future
contractor claims. States and Regions timely reviewed all change orders.
But, States and COE had difficulty reviewing contractor claims; in some cases,
claims review took years to complete. The State and COE reviewers appeared to
consider respective liabilities of the parties in their determinations.
COMPLETION AND OPERATION PHASE
CHALLENGES EPA MANAGERS.
VII. Project Operation and Maintenance (O&M) — EPA has not developed sufficient
new management methods to help public treatment works function as designed.
The team found that EPA and State guidance and procedures are adequate for
the development, review, and approval of plans of operation and O&M manuals.
State use O&M manuals for technical assistance; however, States are not using
plans of operation to manage projects. EPA HQ has not issued final guidance
and Regions and States have not established procedures for POTW project performance
certifications. (EPA HQ will provide project performance certification guidance
in the construction grants guidance manual "CG 1985" to be issued at the beginning
of FY 1985.)
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EXHIBIT I
ICR Review
I. Priority Systems
II. Cost-Effectivness/
Facility Sizing
III. Financial Capability
IV. Value Engineering
V. Specifying & Bidding
Regions Participating
III, IV, V, IX
III, IV, VI, VIII
III, IV, VII
IV, VI, VII
II, V, X
VI. Claims & Change Orders I, V, IX
VII. Operation & Maintenance I, II, III, IV
States Included
California, Florida, Illinois,
Maryland, Minnesota, Nevada,
Pennsylvania, Tennessee
Georgia, Maryland, Montana,
North Carolina, Oklahoma,
Pennsylvania, Texas, Wyoming
Iowa, Kentucky, Missouri,
North Carolina, Oklahoma, Texas
Minnesota, New Jersey, New York,
Ohio, Oregon, Washington
California, Massachusetts,
Minnesota, Nevada, Ohio, Vermont
Maine, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
West Virginia
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vi
EXHIBIT II
SCHEDULE FOR FY 1984 ICR REVIEW
0 Conference call with Regional Water Division Directors 3/23
and Branch Chiefs describing plans for conducting ICR, seven
subject areas to be covered, and Regional involvement
o
o
Branch Chiefs' meeting, Indianapolis, with further discussion 4/3-5
of ICR plans, schedule, resource needs, HQ/RO roles, review
process and issues
HQ team leaders and RO members designated. 3/23-4/10
HQ team leaders from Municipal Construction and Facility
Requirements Divisions briefed by Office of Program Management
and Evaluation. Team leaders identify internal control
documentation for their studies.
0 Regional staff to HQ to plan and develop study procedures 4/10-12
and test materials; select States and grantee issues for
evaluation
0 Regions invite States to participate. 4/15-30
0 HQ/Regional field visits (to Regions and States) to conduct 5/1-6/20
reviews; team member findings circulated within teams
0 Team members meet at HQ; analyze findings; agree on findings 6/28-29
and recommendations; present oral reports to HQ managers.
0 HQ team leaders draft reports; brief HQ Division Directors. 7/2-8/10
0 Brief OWPO Director & AA, OW on ICR issues related to 7/10
FY 1986 budget decisions
0 Detailed briefing of OWPO Director by ICR team leaders on 7/17-20
recommended actions in draft ICR reports
0 Route draft reports for Regional Division Directors' comments 8/15-30
0 OWPO managers select priority implementation needs and 9/3-17
establish action plan.
0 Modified/consolidated report draft to OWPO Director 9/21
0 Transmit report to Ravan 9/24
0 Transmit report for Administrator 10/31
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EXHIBIT III
OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
STATE PRIORITY SYSTEMS
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
o
0
Evaluate the extent of the discrepancies between the
various priority lists and funded projects.
Develop guidance for priority system and list management,
continuing
10/84
9/85
2/85
FRD/Byron
FRD/Byron and
and a process to routinely advise permits compliance
personnel when priority grant projects are "by-passed"
for funding.
Re-examine Agency role in the review/approval of priority 10/84
systems and lists and include, through a workgroup to be
established early involvement by State and EPA Regional
offices in policy and guidance development. Short report
to be submitted to Director, OWPO.
(Note: In the spirit and intent of the FY '84 ICR, this
activity will be audited through independent EPA
contractor reports during FY '85.)
Require States to provide a "hard copy" of the final,
fully accepted list to Regions.**
Ensure delegated States input to the GICS system the final
"hard copy" list; ensure correlation between the GICS
priority list and grant awards.**
(**Note: OWPO/FRD has issued Supplemental Guidance to the Regions.)
2/85
OWPO/RO workgroup
FRD/Byron and
OWPO/RO workgroup
1/85
1/85
Regional Water
Management Divisions
Regional Water
Management Divisions
RECOMMENDED BUT NOT PLANNED
FOR FOLLOW-UP ACTION
REASON
Establish a work group to determine how to improve the correlation
between State priority systems, lists and the Needs Survey.
Emphasize in guidance the need for State to provide
documentation for priority rankings at the time lists
vii
Resources may not be sufficient in
FY '85 to implement this.
The Paperwork Reduction Act requires
EPA to reduce the respondents' bur-
den to data requests. Also, RO re-
sources are insufficient for review.
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
COST-EFFECTIVENESS AND POTW FACILITY SIZING
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
Hold more seminars at State offices and use case 10/1/84
studies to inform State and A-E personnel
concerning technology developments and potential
benefits of technologies appropriate for small
communities.
Require and provide guidance for facility plans to be 10/1/84
reviewed and updated if they are old and in need of
updating before grant award of construction funds.
Involve State personnel responsible for O&M inspections 1/85
and NPDES permits compliance in the facility plan review
process.
Overview facilities planning more closely and encourage 10/1/84
rigorous State enforcement of CFR 35.2030.
9/30/85
1/31/85
ongoing
ongoing
FRD/Dearth and
Regional Water
Management Divisions
FRD/Dearth and
RO Water Mgt. Division
FRD/Dearth,
RO Water Mgt. Div's, &
205(g) State Managers
FRD/Dearth and
RO Water Mgt. Div's
RECOMMENDED BUT NOT PLANNED
FOR FOLLOW-UP ACTION
REASON
Hold high level discussions with States which restrict
use of alternative systems.
Change regulations to require a grant-eligible value
engineering analysis of projects in communities of less
of less than 10,000 population.
0 Other actions will be identified to
assist States in alleviating this
problem.
0 Appropriate technology implementation
should be negotiated under delegation
and State/EPA agreements. Instead,
OWPO/FRD will suggest to Regional
offices that they encourage these
reviews for smaller communities.
viii
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
LOCAL FINANCIAL MANAGEMENT CAPABILITY
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
Ensure that States are employing existing policy
and guidance and are resolving problem projects
in a systematic manner.
Establish a strategy to assist States to resolve
project problems, when appropriate.
Incorporate the policy requirement^ into State
delegation agreements and workplans in specific
terms.
Ensure that the demonstration and certification is
completed for all grant applicants.
Offer seminars to improve the ability of reviewers
to analyze and evaluate demonstrations.
ongoing
10/84
ongoing
ongoing
10/84
12/84 RO Water Mgt. Divisions
FRD/Dearth
1/85 RO Water Mgt. Divisions
FRD/Dearth
12/84 RO Water Mgt. Divisions
& delegated States
RO Water Mgt. Divisions
& delegated States
9/85 FRD/Dearth
ix
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
\LUE ENGINEERING (VE) ANALYSIS
2COMMENDED AND PLANNED FOR
DLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
Increase the amount of information available to Regional
and State managers on the utility of VE analysis in
identifying and achieving project cost reductions.
Encourage all States to designate a VE coordinator.
Assign a higher priority in Regional and State
management to VE analysis.
10/1/84
FY 1985
4/1/85
10/15/84
FY 1985
MCD/Brodtraan
RO Water Mgt.
MCD/Murphy
Divisions;
RO Water Mgt. Divisions &
delegated State managers
^COMMENDED BUT NOT PLANNED
OR FOLLOW-UP ACTION
REASON
Consider the cost effectiveness of administratively
requiring VE analysis on projects valued between
$1 million and $10 million.
Issue guidance to the Regions discouraging award
of VE contracts to the same architect-engineering (AE)
firm that produced the original design.
Consider adopting a national, annual goal greater than the
current 5 percent capital and 1 percent O.M&R savings being
achieved from VE analyses to encourage States' and communities'
acceptance of a higher percentage of VE recommendations.
This would require an initiative for a
legislative change which is not a cur-
rent priority of program management.
Recommendation is not substantiated by
analytical findings. Management of the
VE process Is the key factor in securing
adequate VE team design reviews.
Adopting a goal will not raise VE
savings; securing management attention
is more likely to do this.
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
DESIGN SPECIFYING AND BIDDING
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
Encourage States, the COE, and grantee communities,
where feasible, to establish their own Q/A, oversight,
and internal control programs, and disseminate
information on New York States' program to EPA & States.
Consult with COE and jointly consider ways to optimize
COE participation in plans and specifications review.
Develop and issue national guidance on:
(1) use of a non-collusion certification;
(2) a written, community code of conduct.
Continue to inform RO, State, local managers on procedures
to detect/prevent fraud, collusion & bid rigging.
Issue regulations or guidance requiring grantees to
retain no less than the 12 items recommended by the DOJ
in their bidding records for review by State and EPA.
11/1/84 MCD/Hanlon and
RO Water Management Div's
11/1/84
10/1/84 4/1/85
10/1/84 11/1/84
Ongoing
10/1/84
OPME/Hardaker &
MCD/Brodtman
MCD/Murphy
MCD/Murphy
MCD/Hanlon, GAD/Pippen,
OIG & Justice Dept.
4/1/85 GAD/Pippen
(OWPO representative:
MCD/Murphy)
RECOMMENDED BUT NOT PLANNED
FOR FOLLOW-UP ACTION
REASON
Develop and issue national guidance on Minority Business
Enterprise/Women's Business Enterprise (MBE/WBE)
bidding document inserts.
The ICR review should be continued another year & expanded
to include self certification & debarment, since these
activities are potentially vulnerable & sufficient project
specific documentation is unavailable for review in FY 1984.
Under the "fair share" philosophy
currently being applied, a national
specification would be inappropriate,
Disagree. These are not highly
vulnerable areas within the program.
xi
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
CLAIMS AND CHANGE ORDERS MANAGEMENT
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
Advise grantees of the information required to be
submitted with a request for approval of a change order
or settlement of a contractor claim, and direct grantees
to submit all the necessary information at one time.
(HQ inform RO's that this could be done in the grantee
Information package, during a Project Management
Conference (PMC) or included in a State publication.)
Expedite issuance of the "Management of Claims" guidance
currently being developed.
Require reviewing agencies to follow the "Change Orders
Guidance" ("Documenting the Project File", p. 15).
Suggest that reviewing agencies document the basis for
each "allowability/unallowability" decision in the project
file and include the basis for each decision denying
additional funds in the letter to the grantee.
10/1/84
1/1/85
MCD/Murphy;
Regions; delegated
States
ongoing
10/1/84
1/1/85
(immediately) 10/1/84
MCD/Brodtman
MCD/Brodtman
MCD/Brodtman
xii
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OWPO CONSTRUCTION GRANTS PROGRAM ACTION PLAN BASED ON
FY 1984 INTERNAL CONTROL REVIEW (ICR) RECOMMENDATIONS
PROJECT OPERATION AND MAINTENANCE (O&M)
RECOMMENDED AND PLANNED FOR
FOLLOW-UP ACTION
DATES FOR ACTION
INITIATION
COMPLETION
RESPONSIBLE OFFICE
AND/OR PERSON
0 Help States to establish project performance
certification procedures.
Designate staff members to coordinate and manage
performance certification procedures.
FY 1985
FY 1985
RO Water Mgt. Divisions
RO Water Mgt. Divisions
RECOMMENDED BUT NOT PLANNED
FOR FOLLOW-UP ACTION
REASON
Issue guidance on procedures for project performance
certification review and assistance.
"CG-85" will soon be issued and will
provide sufficient guidance. No
additional guidance is needed.
xiii
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EXHIBIT IV
FY 1985 INTERNAL CONTROL REVIEW PROGRAM SCHEDULE
PRIORITY ISSUES SCHEDULED
FOR REVIEW
OCT.
JAN.
,APR.
ULY » SEPT
Grantee Management;
0 Grantee Construction
Management
0 Financial Management
Capability
0 Operation & Maintenance
0 Land Acquisition
State Management;
0 Needs Survey Data Base
Plan/Select/Pilot
0 Establish detailed
plan for review
0 Determine statisti-
cally valid sample
0 Assign responsibil-
ity for evaluations
0 Construct pilot
test procedures &
materials
0 Acquire management
approval of method-
ology
0 Issue notice to
proceed with study
plan
Conduct Review/Draft
Report
0 Based on existing
Agency information
establish background
data file on each
sample project
0 Proceed to supple-
mental field inves-
tigations (with del-
egated States, when
possible)
0 Analyze results
0 Draft initial find-
ings & conclusions
0 Coordinate with
State delegation
reviews & operator
training diagnostic
evaluations
Peer Review/Modify
Draft/Refine Data
Base
0 Regions/HQ review/
comment
0 Input to budget
0 Input to OWAS
mid-year review
0 Submit findings &
recommendations
Management Decisions/
Report Completion
0 Managers' consider
recommendations
0 Complete FY 1986
action plan
0 Select FY 1986
ICR targets
0 Complete report for
OW to review/send
for Administrator
xiv
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I.
INTRODUCTION
Since enactment of the Federal Managers' Financial Integrity Act (FMFIA)
early in 1982, EPA managers of the municipal wastewater treatment construction
grants program have taken several steps to bring the program into compliance.
This review report is based upon the previous management efforts. It is
directed to areas identified under the Act as highly vulnerable, with the
greatest priority for attention and potential for assuring that "funds,
property, and other assets are safeguarded against waste, loss, unauthorized
use, or misappropriation." It provides the findings of the initial internal
review of EPA management controls and techniques and State implementation
in the selected areas.
HISTORY OF REVIEW
The first Vulnerability Assessment of the construction grants program
was performed in August and September, 1982 by EPA Headquarters (HQ) and
Regional (RO) offices. This was performed under OMB's initial Circular
No. A-123, "Internal Control Systems", dated October 1981.
The individual self-assessments reviewed the susceptibility of the
program to unauthorized use of resources, errors in reports or information,
illegal or unethical acts, and adverse or unfavorable opinion. The reports
were channeled to the Inspector General (IG), who issued a consolidated report
on overall Agency vulnerability in January 1983. The report identified the
construction grants program as highly vulnerable and recommended an internal
control review (ICR) be conducted during 1983 and 1984. The IG report summary
stated:
"The municipal wastewater treatment construction grants program was
ranked as having a high degree of vulnerability by the Headquarters
program office and eight regional offices. The primary reasons for
this ranking are the large number of dollars and projects involved
and the fact that 80 percent of project management is to be performed
by parties outside the Agency. The regional offices also reported
numerous perceived weaknesses involving organizational issues,
policies, procedures, personnel, and reporting."
In late FY 1983 the program participated in the Agency-wide preliminary
ICR. The Headquarters office and each Region conducted its own review; the
Regional Administrators reported individually to the Administrator. However,
Assistant Administrator Howard Messner's memorandum of August 25, 1983 designated
the Assistant Administrator for Water, Jack Ravan, as the program head
with lead responsibility to conduct the review. Office of Water Program
Operations (OWPO) managers accordingly compiled an extensive national list of
all issues identified in the 1982-1983 vulnerability assessment and all issues
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known to program managers and targeted in reports issued by the General
Accounting Office (GAO), the Inspector General's Office (OIG), and other
special studies issued in the period from 1981. The study was structured
on the program objectives, sub-objectives and activities identified in the
program budget. Management control techniques were listed and assessed.
This list was reviewed, expanded to 57 issues based on Regional input,
and ranked in order of vulnerability and priority by the HQ and Regional managers.
Each of the issues were identified by source. Because many of the issues were
somewhat redundant or overly narrow, OWPO condensed them into twelve summary
issues. These were again ranked and prioritized for study by the OWPO Director,
and reported to Assistant Administrator Ravan.
Mr. Ravan, in his letter to the Administrator of November 1983, conveyed
the preliminary review and indicated the following summary issues were selected
for in-depth 1C review during FY 1984:
0 Improve grantee financial management and control of project planning,
design, and construction (change orders, claims, and lags); completions
and closeouts (physical completions and closeouts); and procurement,
records, and accounting systems.
0 Improve grantee publicly owned treatment works (POTW) performance,
addressing operations and maintenance (O&M) and pretreatment.
0 Ensure targeting of funds to:
(a) water quality priority needs, and
(b) most cost effective and appropriate project design.
0 Improve State management of delegated activities, assuring:
(a) an adequate number of State staff, and
(b) trained State staff.
0 Improve EPA oversight of delegated State, Corps and Region activities,
including 205(g) grants and Corps interagency agreement (IAG) by:
(a) enforcing delegation agreements,
(b) reviewing State staff levels and capability, and
(c) improving project information.
The Administrator, in his December 27, 1984 letter, assured the President
that priority program issues identified would be reviewed during FY 1984 and
corrective actions would be implemented, subject to resource availability.
At the beginning of the ICR effort, OWPO managers were confronted with the
challenge of planning the review so that it could be performed within available
resources. The managers reexamined the five summary issues and identified
seven (7) specific subject areas within them which had the greatest vulnerability
to fraud, financial loss, or mismanagement and the greatest potential for
safeguarding Federal, State, and local government funds.
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The seven subject areas selected for review were:
° Cost-Effectiveness and POTW Facility Sizing
° State Project Priority Systems
0 Change Orders and Claims Management
0 Design Specifications and Bidding
0 Local Grantee Financial Management Capability
0 Facility Operations and Maintenance
0 Value Engineering Analysis
The first four subjects were scheduled for reviews of one-year duration
because it was hoped all significant questions could be examined and
recommendations for actions to address management deficiencies made within
the year. The final three subjects were scheduled for two-year studies
because the EPA policies and requirements for these were recently issued and
implementation was insufficiently advanced for assessment. It is also more
important to examine EPA provisions for these subjects at the local/grantee
level and more feasible to do this in FY 1985.
CONDUCT OF REVIEW
The OWPO Director designated the Office of Program Management and
Evaluation (OPME) as the lead office within OWPO for planning and
coordinating the full review. This office was assigned responsibility for
assisting management involvement, planning review procedures, scheduling
the outputs, coordinating the individual team reports, and consolidating
and providing for review of this report. EPA and OMB guidelines were
used, and the GAO standards were consulted. Throughout the process, the
office worked closely with the Office of Administration's Internal Control
Review Task Force and, as appropriate with the Grants Administration Division
(GAD) and the Office of the Inspector General (OIG) concerning project
design specifications and bidding, where related reviews are also underway.
Because of the highly delegated status of the program, Regional office
management performance was principally assessed through measuring the
extent of State management implementation of EPA requirements in the
study areas. A combination of factors influenced this review approach.
Grant application review, implementation of Federal requirements and
project management during the construction and post-construction stages
are very heavily delegated to States (and to the Corps of Engineers).
Program personnel have been reduced by forty percent since FY 1980,
principally in the Regions. The 1981 Clean Water Act Amendments have
introduced a number of significant changes. Regional personnel work with
their State counterparts to effect national requirements within individual
State programs, and they provide technical assistance to State reviewers.
The revised regulation and guidance governing Sec. 205(g) delegation program
management very significantly streamlined EPA management of the program.
The regulations "encourage full State delegation, and the broadening of
EPA and State responsibilities related to overview, evaluation, and
planning under delegation." The changes reflect "a broad overview policy,
which emphasizes achievement of environmental and program results, rather
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1-4
than routine management review." The weight of these new factors on program
management requires the integrity and effectiveness of the Regional
performance to be measured through State management accomplishments and
implemention of the national requirements.
Regional managers were briefed April 3 on the rationale for selection of
review subjects and procedures, and HQ/RO agreement was reached. Seven HQ/RO
review teams were established, with 10 representatives from HQ and 22 represen-
tatives from the Regions participating. All the Regions participated in one
or more reviews.
OWPO and Regional team members met in Washington, D.C. for a detailed
planning and study development in mid-April. (See Exhibit II for a complete
schedule of review activities.) HQ staff briefed HQ and Regional team
members on the concepts and objectives of the FMFIA, Circular A-123 and
the Agency's ICR process. The majority of the time was devoted to individual
team sessions to allow the members to organize themselves, discuss issues,
list management techniques for review, and develop studyspecific questionnaires
and a team approach to involving and interviewing the States and selecting
test projects. The teams were given a set of generic forms and questionnaires
to aid this process.
Because it was necessary to limit the number of States interviewed,
each team chose a representative §araple that would help assure the validity
and applicability of review findings and team recommendations to the
national program. Criteria used for choice of States were generally
based on relative State size (e.g. , the largest and smallest State in
each Region) and team members' knowledge of conditions affecting program
management in individual States. Six to eight States were chosen for
each study, and a total of 27 States participated in the review. (Each
ICR team report provides attachments that list team members, State personnel
interviewed, and the questionnaires used.)
In inviting States to participate, Regional management emphasized that
the purpose of the review was to determine the effectiveness of EPA management
approaches in meeting statutory and program objectives to identify needed
changes in EPA policies, guidance or regulations. The teams emphasized that
the purpose was not to duplicate State performance evaluations under
delegation as defined in annual Sec. 205(g) delegation workplans, operating
guidance and EPA management systems such as the Administrator's Strategic
Planning and Management System (SPMS) or Office of Water Operating Guidance
and Accountability System (OWAS/OWOGAS) or to "second guess" program or
project management decisions made previously. In order to cover the two
summary issues conncerning program delegation, State management of delegated
activities and EPA oversight of States, the ICR review teams drew upon
pertinent Section 205(g) delegation program findings from reviews that had
been conducted recently. If the data were not available, the ICR reviewers
incorporated the delegation concerns within the scope of their studies, as
appropriate. Also, the reviewers on some teams sampled project files to see
how grantees were implementing established guidance and procedures in their
subject areas. The reviewers also looked for State-specific guidance,
procedures, and management innovations that might be useful to other
States and EPA Regions.
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1-5
RO team members with some HQ assistance reviewed delegated State
implementation of policies, guidance and procedures and selected grantee
project files during May and June. These reviews were coordinated with
on-going mid-year reviews scheduled under the Agency Accountability
Systems, as appropriate. During this time, to prevent duplication of
effort, the OWPO review managers arranged several meetings with Grants
Administration Division (GAD) managers of the ICR review of the procurement
process and with the OIG and GAD managers involved in on-going reviews
on the integrity of the bidding process under EPA grants. Also to help
coordination, GAO studies underway in corresponding areas (e.g., VE analysis)
were identified and information shared.
The teams met again June 28-29, compared and discussed questionnaire data
and findings, and drafted team reports. Teams discussed their reports with
HQ program managers at the June 28-29 meeting. Following this meeting, HQ
team leaders briefed the Office and Division Directors on conclusions and
recommendations, and decisions were made on the supportability of the
conclusions and recommendations for the final report. Management decisions
were also reached on the Office's priorities and plans for implementation
of report recommendations. Following these discussions, the team reports
were consolidated and closely reviewed by HQ and RO program managers and the
Assistant Administrator for Water prior to transmittal to the Assistant
Administrator for Administration.
In addition to the findings and recommendations outlined in the management
summary, the teams reported that the review was helpful in achieving a deeper
understanding of the study areas and operations of the Regions and delegated
States. Although no evidence of major fraud, waste or mismanagement was
found, the team members unanimously supported conducting ICR reviews
annually because of continuing high program vulnerability due to the extent
of program delegation and the levels of public funds involved. They
recommended integrating ICR issues and tracking follow-up actions in the
OWAS system and the Sec. 205(g) State delegation reviews. OWPO is moving
to accomplish this during planning of the FY 1986 OWAS priorities in
early FY 1985.
FY 1985 REVIEW
Construction grant program managers recognize the continued highly
vulnerable nature of the program and EPA responsibilities to assure
adequate management controls exist to prevent and detect fraud, waste
and mismanagement. They have moved to institutionalize the ICR reviews
into the annual management tracking process. An ICR of the integrity of
Federal requirements and recommended procedures will be conducted annually.
In FY 1985 the review will be conducted at the local grantee management
level. The study will particularly focus on the grantees' implementation of
the Federal requirements and the grantees' management support needs.
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The review will be organized to focus closely on two areas which
are being extended into a second year of study:
0 Local Financial Management Capability
0 Grant Facility Operation and Maintenance
And, we are adding two new studies:
0 Grantee Construction Management
0 Grantee Land Acquisition for POTW Projects
We plan to include the delegated States in the grantee reviews, when
possible. We are proposing only one study directed to the State level:
0 POTW Grant Funding Needs Survey Data Base
Details of the FY 1985 1CR review plans are provided in Exhibit IV
in the Executive Summary.
The other five ICR reviews in this report are being discontinued
because they have fulfilled their purpose and have provided program
managers sufficient valuable insights and action recommendations for
implementation within FY 1985.
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II
STATE PRIORITY SYSTEMS
A. TEAM MEMBERSHIP
The ICR team was composed of four Regional office members and one
headquarters member. Generally, the experience level of the team is
considerable. For the most part, each member has extensive professional
experience, including six or more years of experience in construction
grants. More comprehensive information concerning the review team is
attached.
B. EVENT CYCLE
The purpose of the priority system/list management process is to
assure that EPA construction grants are awarded to high priority water
quality or public health projects. The objective is to assure that
grant awards to these projects are made in conformance with the 1981
Construction Grant Amendments of the Clean Water Act and appropriate
regulations and guidance. Effective priority list management is important
to the program because it is the initial step in determining the priority
of grantees to receive Federal funds through the construction grants
program. Furthermore, effective priority list management is necessary
to assure the maximum return on the Federal investment and discourage
the funding of projects that achieve only minimal pollution abatement.
The review was conducted in the context of the States having program
management responsibility and EPA Regions and HQ having oversight
responsibilities.
C. CONTROL TECHNIQUES
The basis for control is embodied in law, regulation, and guidance,
as well as in ongoing management and oversight processes such as priority
system and list approval, monitoring and tracking, and performance
evaluation. The following published controls and implementation
procedures are involved -in priority system/list management:
Published Controls
o Section 216 of the 1981 Amendments to the Clean Water Act (P.L.
97-117), published February, 1982 [Priority Determination].
o Interim Final Construction Grants Regulation, published in the
Federal Register, May 12, 1982, (40CFR 35.2015) [State Priority
System and Project Priority List].
o Office of Water Administrator's memo dated July 20, 1982 [Approval
of State Priority Systems].
o OWPO FY 1984 priority list development information memorandum dated
March 31, 1983.
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o Final Construction Grants regulation, published in the Federal
Register, February 17, 1984, (preamble and 40CFR35.2015) (State
system and project priority list).
o OWPO FY 1985 priority list development guidance dated
February 24, 1984.
o Any supplementary guidance that may have been published by the
Regional Administrator to clarify or otherwise assist the States in
meeting the requirements of the Clean Water Act.
Implementation Procedures
The process begins with the States developing and submitting their
proposed project priority systems to the EPA Regional Offices for review
and approval. If the States make frequent modifications to their systems,
this review and approval process tends to be an annual activity.
Generally, systems undergo substantial changes only when the law changes.
The requirements of the 1981 Amendments to the Clean Water Act are an
example of significant change.
To expedite the priority list development process, EPA generally
issues priority list guidance appropriate for a given fiscal year. EPA
Regional Offices typically supplement this guidance to account for
regional differences. The project priority list is developed by the
State consistent with the approved priority system. It is submitted
annually to the EPA Regional Office for review and acceptance prior to
the beginning of the Federal fiscal year.
Regulation requires the priority list to include a fundable portion,
consisting of those projects anticipated to be funded from the current
allotment; and a planning portion, consisting of projects anticipated to
be funded from future authorized allotments. Projects which are neither
in conforraance with the priority system criteria nor required to meet the
enforceable requirements of the Act must be withdrawn from the list.
After acceptance by the EPA Regional Administrator, the list is entered
into GIGS for ongoing program management. Projects are awarded from the
fundable portion of the list, except where appropriate "by-pass" procedures
are employed as provided for in the approved priority system. Priority
system and list management is funded under Sec. 106 of the Act. EPA
monitors priority list management through State work plans, periodic
performance evaluation, and through other related performance areas such
as a State's progress toward meeting grant award obligation commitments.
Many EPA Headquarters offices rely on priority list information for
oversight purposes. Their success or failure to extract information from
the Grants Information and Control System (GICS) is an ongoing indication
of the States performance, not only in supplying accurate data, but in
properly managing their priority lists as well. If Headquarters offices
cannot extract accurate information, it is virtually impossible to phow
national program status at a particular point in time.
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D. REGION/STATE SELECTION
States selected for review by the Regional workgroup members are as
follows:
REGION STATES SELECTED
III Maryland, Pennsylvania
IV Florida, Tennessee
V Illinois, Minnesota
IX California, Nevada
The key criterion for selecting the States was, generally, size, with
sampling limited to one large and one small State per participating
Region. Other contributing factors included travel requirements, the
Workload of the State at review time, dovetailing this review with other
evaluations in a given State, and noteworthy priority system/list
circumstances in a particular State. The team's judgment was that the
States selected would be representative of the national picture.
E. REVIEW PROCEDURES
The reviews were conducted in the four Regional Offices and in the
eight selected States during May 1984. The Regions and four of the States
(one in each of the four Regions) were reviewed by a team, which consisted
of a headquarter' s member and one or more members from the respective
Regional Office. The four other States were reviewed only by the
respective Regional Office team member.
A list of questions focusing on five areas of interest was developed
by the team prior to the Region and State visits. These five areas
(issues 1 through 5 as shown on the questionnaire [Exhibit I]) cover a
complete cycle of priority system/list management: 1) features of the
approved priority system, 2) priority list development in accordance with
the system, 3) choice of projects for funding in accordance with the
accepted priority lists, 4) priority system/list management coordination
with other water quality and public health initiatives, and 5) results
achieved in terms of projects funded versus actual water quality
improvement.
From the beginning, the team decided to present a "generic findings"
report. This approach keeps the focus on the evaluation of control
techniques and how they are working. The stated purpose of the review was
not to evaluate, grade, or rank a given State's performance.
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F. TEAM FINDINGS AND RECOMMENDATIONS
The Federal Managers Financial Integrity Act of 1982 requires each
Executive Agency to establish a system of internal accounting and
administrative controls. In this context, the team found that:
State Ranking Formulas
o The eight State systems reviewed appeared to emphasize water
quality and public health as required by law, regulation and
guidance and to direct grant funds to high priority water quality
and public health projects. Specific factors which evaluate
projects for water quality and public health importance were
generally found to be prominent in each State's priority system.
o The States varied in their approach to creating and modifying their
priority systems; each State system is different in one way or another.
The States' view is strong that the law, from inception, gives the
States primary responsibility for project priority systems and lists.
o A number of the States are not clear on what the universe of
projects for priority determination is. This uncertainty
suggests that some portion of the universe of projects is not run
through the priority ranking process, but is subjectively
determined not to have priority list position.
o Documentation to substantiate values for various factors used in
the priority system ranking formula is weak and not readily
available. For example, direct and indirect water quality and
public health factors are present and assigned proportionally high
weightings in the ranking formula, but the basis for the values
assigned to these factors is often not evident.
o System ranking formulas are sometimes so complex that a cursory review
cannot readily demonstrate how various factors impact the result.
Water quality and public health criteria often are indirect surrogates,
causing some doubt as to their influence in the ranking formula.
o The review revealed some interesting approaches to arriving at
the fundable portion of the priority list. This ranged from
pre-screening on the basis of readiness-to-proceed to a multi-year
fundable portion. It also revealed how some States build in
flexibility to handle unexpected public health problems without
by-passing a project on the fundable portion of the priority list.
o All States have procedures to develop lists in accordance their
systems. However, individual States caused ICR reviewers some
concern in that not all data to support project priority were
accurately verified. The control technique is in place, but
subsidiary data to substantiate values for the ranking formula
calculation were deficient or not available.
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Recommendation
Task group should conduct further, comprehensive analysis of the
workings of State priority system ranking formulas to insure the
mandatory water quality and public health emphasis and to recommend
modifications where formulas are overly complex and not readily
understandable.
Guidance
o States found Agency guidance during the past few years to be late
and weak in "how to" details.
o The team agrees that, generally, Agency guidance has been too late.
To meet some States' needs, priority system guidance would have to be
issued approximately a year in advance of the intended implementation
date because of the State's legislative process. Large States
with well developed programs do not desire extensive Agency guidance.
Small States, with less developed programs and limited resources
want detailed guidance to help them improve their existing systems.
o There are indications that both Regional and Headquarters
oversight of the priority system/list control process has been
too shallow. Review and approval procedures are often very
informal and at times are not applied with sufficient rigor.
Recommendation
Agency should provide priority list guidance to Regions/States no later
than the end of February preceding the fiscal year for which it applies.
Headquarters should seek additional Region/State input to make guidance~
clear and more meaningful. Because certain State legislatures must act
to effect priority system revisions, EPA must allow for a substantial
lead time when issuing priority system revision guidance.
Oversight
One of the States reviewed uses a multi-year fundable portion
approach to priority list management. This is clearly in
conflict with the current construction grant regulation, which
calls for a fundable portion based on the current year allotment.
Recommendation
Establish task group to develop procedures for review, approval, and
acceptance of State priority systems and lists. Use this as a
training vehicle for participants. This would permit cross
fertilization and expanded understanding of multiple approaches to
system/list management among Regions and States.
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Priority List Management
o Each State's system contains by-pass procedures that allow
funding projects from the I/A, rural and other set-aside
allocations. The procedures permit the by-passing of projects
where grantee inaction makes funding impractical. Generally,
these situations do not negatively impact the overall water
quality and public health objectives because by-pass funding
follows the established priority. At times, however, States will
initiate large scale by-pass procedures to avoid the imminent
loss of funds to re-allotment even though high water quality and
public health benefits may not be achieved. A project's readiness
to proceed may carry excessive weight in priority funding
determinations.
o All reviewed States phase or segment projects to prevent a few
projects from taking all the State's allotment. Segmenting
allows funding of other, smaller (less costly) projects throughout
the State. In States with very large urban areas, segmenting is
absolutely essential to stability in the grant program.
o All reviewed States have public hearings annually to discuss
priority system/list matters. The frequency varies from
bi-monthly to once a year. In the case of the State with
bi-monthly meetings, the agenda includes adjustments to lists,
by-passing projects, and other list management aspects for
discussion in public forum.
Recommendations
o Regional EPA priority list reviewer must require State to provide
complete data documentation at the time it is submitted for review
and acceptance.
o Have a task group study further these various approaches to priority
system/ list management. It is the review team's perception that
there are several effective approaches to successful results in this
area. It would be helpful if information concerning these systems
could be shared by those States still trying to improve the
effectiveness of their systems.
Information Systems Management
The review confirmed that we continue to have difficulty getting the
officially accepted State priority lists into the Grants Information
and Control System (GIGS) to reflect what the States took to public
hearing and what was accepted by the Regional EPA. Often this is
attributed to key punch problems, errors, omissions, and other general
administrative problems. Whatever the reasons, the problem remains
and corrective action is indicated.
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II-7
Recommendation
Require State to provide Region with hard copy of officially
accepted priority list identical to that which is put into GIGS at
the beginning of the fiscal year. Regions should follow up to
insure correlation between hard copy and what goes into GIGS. A
hard copy should be provided to Headquarters as well.
Grants Management
Ongoing monitoring reveals that grant awards vary somewhat from
priority lists in a number of States. Some of the differences can be
explained in terms of GICS administration; that is, keypunch and
coding errors. Additional effort is needed to reduce this variance.
Recommendation
Have work group study the reasons for grant awards not tracking
completely with priority lists and make recommendations for
substantially reducing or eliminating the problem.
Other Findings and Recommendations
Regional EPA should investigate States that have set unusually
high reserves for grant increases. This practice may be impacting
the funding of additional water quality/public health improvement
projects. Practices in States reviewed range from zero allowance for
grant increases to tens of millions of dollars annually. Regional
EPA should determine what reserve is reasonable for a given State
operation and provide appropriate State-sjecific guidance.
Encourage continued coordination among grants, Needs Survey, permits
and enforcement. States with good coordination of actions appear to
be placing greater emphasis on the highest priority projects. For
example, each program operation should recognize priority overlaps,
so that actions ean be taken in harmony to achieve results.
If monitoring for results is to be successful, much more effort at
coordination among water quality/public health focused initiatives
must be fostered, including provision for a much expanded funding
base for these activities. (Refer to Section 305(b) State Water
Quality Reports and ASIWPCA report "America's Clean Water 1972-1982 )
These reports may not be comprehensive enough to gain widespread
acceptance as representative of the state of the Nation's waters.
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G. RESPONSE TO REGIONAL COMMENTS
Two Regions pointed out the substantial resources required to fulfill
the review team's recommendation concerning the States' providing documentation
to substantiate values used in the priority system ranking formula. The
intent of the team's recommendation is precisely that of the two Regions.
The intent of the recommendation is to increase Regional oversight and to
have assurance that the States do, in fact, have subject documentation,
should questions arise during the priority list acceptance process. It
goes without saying, that oversight must be selective. It is incumbent
upon the Regions, of course, to determine the extent of documentation
required to achieve confidence in the State numerical rankings.
One Region commented: "Do not agree priority system management has
been shallow. Feel State has primary responsibility as indicated in the
Act. EPA role has been appropriate." The workgroup's recommendation to
tighten oversight of the priority system and list is consistent with its
findings that oversight has been shallow in several key areas of priority
system and list management. The Region which made the comment was not
involved in the ICR review.
One Region made the statement that the Needs Survey, "...needs to be
revamped from the top to bottom." The review did not scrutinize the Needs
Survey process particularly. It was looked at only to the extent that it
be considered as the "universe" from which priority projects should be
drawn. This Region's recommendation to revamp the Needs Survey is not
considered by the team to be an integral part of this ICR review and should
be considered under other auspices.
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WORKGROUP MEMBERSHIP
Roy Whatley: Region IV; 31 years of Federal Serrvice, 18
years with EPA and predecessor agencies, 6 years in
construction grants; registered Professional Engineer in
the State of Georgia. Current position: Grants
Management Team Leader for North Carolina and Kentucky.
Charles Orzehoskie; Region V; 20 years of engineering
related employment, 14 years of Federal service, 13 1/2
years service with EPA, 13 1/2 years in construction
grants; registered Professional Engineer in the State of
Illinois. Current position: Chief of Facility Planning
Unit.
Richard M. Fetzer: Region III; 9 years with EPA, 9 years
in construction grants; B.S. degree in Earth Science,
Master of Public Administration. Current position: Water
Quality Management Coordinator for Pennsylvania, West
Virginia and B.C.
Jim Shuster; Headquarters; 25 years business management
experience, 6 years in construction grants, most recent 1
1/2 years principal focus has been priority system/list
management. Current position: Senior Staff Operation
Research Analyst with the Priority and Needs Assessment
Branch.
The following Region IX personnel were also involved in
the Priority System/List Internal Control Review
Albert Brody: Environmental Protection Specialist,
Program Support Branch, Water Management Division; 7 1/2
years in EPA construction grants.
Nancy Edmisten: Environmental Engineer, California
Branch, Water Management Division; B.S. and M.S. in
Microbiology, M.S in Civil Engineering; 4 years in private
consulting firm, 1 year with the Corps of Engineers, 4
months with EPA.
Jeff Willett; Environmental Engineer, Program Support
Branch, Water Management Division; B.S. in Civil
Engineering; 2 1/2 years with U.S. Forest Service, 6
months with EPA.
Steve Fuller: Environmental Engineer, Arizona, Hawaii and
Nevada Branch, Water Management Division; M.S. in Engineering;
M.P.A. in Environmental Management; 10 years experience in
EPA construction grants.
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11-10
Attachment
STATE STAFF INTERVIEWEES
PRIORITY SYSTEM/LIST ICR
MARYLAND:
Charlotte Holland, Chief, Division of
Grants, Programming and Liaison, Maryland
Department of Health and Mental Hygiene.
PENNSYLVANIA: John Dougherty, Chief, Planning and Evaluation
Section, Division of Municipal Facilities and
Grants, Bureau of Water Quality, Pennsylvania
Department of Environmental Resources,
Tom Kahler, Chief, Project Evaluation
Bureau of Water Quality, Pennsylvania
of Environmental Resources.
Unit,
Depa rtment
FLORIDA:
Jerry Hertin, Environmental Supervisor, Program
Management Section, Bureau of Wastewater
Management and Grants, State of Florida.
TENNESSEE:
Greg Majure, Chief, Administrative Section,
Division of Construction Grants and Loans, State
of Tennessee.
ILLINOIS:
Ron Drainer, Manager of Grants Administration
Section, Illinois Environmental Protection
Agency.
Mike Bowers, Staff Specialist, Grants
Administration Section, Illinois Environmental
Protection Agency.
MINNESOTA:
CALIFORNIA:
Duane Anderson, Grants Section Program
Administrator, Minnesota Pollution Control
Agency.
Eric Torgeson, Acting Chief, Management
Evaluation Section, State Water Resources
Control Board.
Sharie Carlson, Staff Specialist, Management
Evaluation Section, State Water Resources
Control Board.
NEVADA:
Jim Williams, Chief, Construction Grants,
Division of Environmental Protection.
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II-ll Attachment
PRIORITY SYSTEM/LIST
ICR ISSUES/QUESTIONS
ISSUE 1
Are water quality/public health (WQ/PH) weighting factors, ranking
formulas, by-pass procedures, and public participation mechanisms in State
priority systems getting the appropriate high priority WQ/PH projects to
the top of the priority list?
Questions: How is priority system established and modified?
Are WQ/PH factors incorporated into a ranking formula in such
a manner that their impact is readily identifiable?
How are water and public health factors assigned weights
vis-a-vis other factors that are weighted as well?
What are these factors? Which are WQ/PH? How do they fit
into the formula?
How dominant overall are they?
What are the reasons for by-passing? What are the procedures?
How do by-pass procedures impact the process?
What is the procedure for phase/segmenting?
How does phase/segmenting impact the process?
What are the procedures for public participation?
How does public participation impact the process?
Has the Agency provided sufficient guidance on how to
accomplish the WQ/PH focus? Is the guidance timely?
What is the level/detail of the review process for approval of
a revision to a State's priority system?
ISSUE 2
Are the resulting lists being developed in accordance with the
approved priority systems?
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11-12
Questions: How does the list development process incorporate assurance
that the resulting lists are a direct reflection of the
requirements of the system?
Does the system include procedures that result in the list
being developed in a timely manner?
What form does the priority list take?
What is the universe of projects that are to be considered for
the list?
ISSUE 3
Are projects being awarded in accordance with these lists?
Questions: To what extent are projects awarded that do not appear on the
priority list or only appear just prior to award?
To what extent are projects awarded that do not appear on the
fundable portion of the priority list at the beginning of the
fiscal year.
What is the nature of such projects?
What action is taken on by-passed projects to get/keep them
moving?
How well does the fundable portion of the project priority list
correlate with obligation projections? What are the reasons
for differences, if any?
ISSUE 4
Are water quality areas being identified in coordination with other
WQ/HI initiatives?
Questions: What exactly are these other initiatives?
What are the similarities with those of priority system/list
management?
What are the benefits of effective coordination?
What systems/mechanisms exist to insure that priority water
quality areas are identified?
How does a State's priority system address a situation where a
municipality is in noncompliance with the NPDES Permit but the
project has insignificant water quality or public health
benefits?
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11-13
ISSUE 5
Are the projects that are being funded actually cleaning up the water?
Questions: What monitoring and tracking mechanisms are in place or are
being put in place to demonstrate that projects being funded
are actually cleaning up the water?
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III.
COST-EFFECTIVENESS AND FACILITY SIZING
A. THE REVIEW TEAM
The internal control review team consisted of nine members, five
from the Office of Water Program Operations, four from Regions III, IV,
VI and VIII. The combined experience of team members is more than 81
years in the construction grants program and almost an equal amount of
time in other professional engineering work. Their education and
experience well qualified the team to examine and assess the wastewater
engineering issues within the scope of the review. (A list of the review
team members with their experience is attached.)
B. BACKGROUND/EVENT CYCLE
Under Sections 204 and 218 of the Clean Water Act (CWA) the
construction grants program is required to ensure that wastewater
treatment projects receiving EPA funds are cost-effective and properly
sized. The objective of this review is to determine if adequate management
management procedures are in place and working effectively to meet this
requirement.
The most cost-effective wastewater system is that combination of
components which has the most economical overall life cycle costs and
meets the goals of the CWA. Selection of the cost-effective alternative
also takes into consideration non-monetary factors such as environmental
concerns, project implementation, operability and aesthetics. A properly
sized wastewater facility is based on sound demographic projections,
reasonable flow estimations, staging considerations and good design practices.
The concept of "appropriate technology" refers to a recognition
that certain types of wastewater technologies are generally more suited
to certain community situations, Low capital cost, low operation and
maintenance cost technologies for small communities include onsite and
cluster systems, facultative ponds, overland flow land application,
trickling fiters and alternative sewers. EPA began stressing alternatives
to conventional gravity sewers and complicated centralized treatment
plants for small communities in 1976 in recognition that some low -
cost alternatives were inadequately considered in the cost-effectiveness
analysis.
The focus of this review is on projects for communities with
populations of 15,000 or less. Addressing small community wastewater
facilities needs is a major management concern. The majority of the
3,000 active planning projects are for smaller communities, and the
difficulties these communities face in the construction grants program
are widely recognized.
Cost-effectiveness and sizing reviews are important in controlling
Federal construction grant fund expenditures. These activities, properly
conducted, also help to protect the Federal interest in water pollution
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III-2
control by determining the type and size of wastewater facilities most
appropriate for the community's situation, in terms of the water quality
or public health problem being addressed and the capability of the
community to finance and manage a wastewater system. This is especially
crucial to a small community, for which an investment in a wastewater
project is often the largest capital undertaking it has experienced.
Consequently, should the analysis of cost-effectiveness and facility
sizing not be conducted properly, there is a potential not only for a
waste of Federal funds but for the imposition of a severe financial
hardship on the community. Additionally, an adequate solution to the
pollution problem may not be achieved initially and further expenses
may be incurred in meeting permit limits or correcting the public health
problem.
C. CONTROL TECHNIQUES
The following are the basic control techniques:
1. Headquarters Control Techniques
o Cost-effectiveness/Appropriate Technology
- The Clean Water Act Amendments of 1978 and 1981, Public
Law 95-217 and 97-117; Set requirements, policy and
incentives for facility planning, cost-effectiveness and
innovative/alternative technology.
- Construction Grants Regulation, (September 27, 1978 and
Feburary 17, 1984), principally 40 CFR 35.2030 Facilities
Planning; Section 35.2032 Innovative and Alternative
Technologies and Section 35.2034 Privately Owned Individual
Systems (Subpart I Designations): These regulations
require consideration of innovative, alternative and,
for small communities, appropriate low cost technologies;
list the required contents of a facilities plan; and
outline requirements for I/A technology and privately
owned individual systems.
- National Environmental Policy Act of 1969; Requires
Federal agencies to carefully consider all environmental
effects of proposed actions and alternatives and make
analyses available for public scrutiny.
- Council on Environmental Quality Regulations of
November 29, 1969 and EPA regulations, 40 CFR Part 6,
Implementation of Procedures of NEPA; Establishes EPA
policy and procedures for the identification and analysis
of the environmental impacts of EPA-related activities
and the preparation and processing of environmental
impact statements.
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III-3
- Program Requirements Memoranda (PRM's) and Policy
Memoranda; Several addressed this subject area
including a December 20, 1976 memorandum from Russell
Train to Regional Administrators entitled "Encouraging
Less Costly Wastewater Facilities for Small Communities,"
and PRM's 77-8, 78-9, 79-3, 79-7, and 79-8.
- Construction Grants 1982 (CG-82 Guidance); Part 1 contains
guidance for facilities planning and cost-effectiveness
analysis. Section 7.2.1. contains specific guidance on
selecting appropriate technologies for small communities.
- Financial and Management Capability Policy; In addition
to requiring a demonstration of financial capability, it
requires States to develop a procedure for identifying
problem projects on the basis of high cost, inappropriate
technology or potential financial impact. An ICR is
being conducted separately on implementation of this
Policy.
- Advance Treatment (AT) Policy; Requires EPA Headquarters
review of projects with an incremental cost due to advanced
treatment of over $3 million to determine whether they
will result in significant water quality improvements.
- Office of Water Operating Guidance and Accountability
System (OWOGAS); Contains the qualitative question for
use in the FY 1984 mid-year review of the Regions, "How
are the delegated States ensuring the selection of
appropriate and cost-effective technologies in small
communities?"
- Technology Transfer: OWPO and ORD disseminate technical
information to program staff and consulting engineers
on less costly treatment methods and general information
to small communities on how to identify and rectify
potential cost problems with wastewater treatment systems.
Distribution is primarily through Regional and State
offices and mass mailings to interested organizations.
o Sizing of Facilities
- 1981 Amendments: After October 1, 1984, grants are limited
to the amount of treatment capacity to serve needs existing
on the date of grant approval, but not in excess of
existing needs on October 1, 1990. Any incremental costs
for reserve capacity would not be grant eligible.
- Construction Grants Regulations (February 17, 1984);
Principally, Section 35,2030 Facilities Planning (flow
reduction, relationship between capacity and need,
upgrading existing facilities, infiltration/inflow);
Section 35.2116 Collection System; Section 35.2110
Infiltration/ Inflow; and Section 35.2123 Reserve Capacity.
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in-4
- Construction Grants 1982 Guidance; Especially Chapter 5 -
Existing and Future Conditions; Chapter 6 - Development
and Screening of Alternatives (Parts 6.0, 6.2 and 6.9)
and Chapter 7, Part 7.1 - Additional Capacity.
- Infiltration/Inflow Program Guidance: PRM 78-10, and
other I/I guidance and technical manuals.
2. EPA Regional Control Techniques
Following is a summary of the techniques used in the four Regional
offices relative to the issue area reviewed:
- Delegation Agreements: Delineate the responsibilities of
EPA and the State for managing the construction grants
program. Documents vary widely in organization and
format from Region to Region. In most of the Regions
reviewed, agreements are fairly standardized for all
States and define the functions which are delegated.
The procedures for carrying out the functions are either
standardized and included in the agreement or are covered
in separate documents for each State. In one Region,
procedures unique to a State are incorporated in its
delegation agreement, resulting in significantly different
agreements for each State. Delegation agreements
constitute by far the most influential source of control
of the States.
- Overview of Delegation; Each delegation agreement
specifies how annual review of the State's program will
be conducted. Most Regions conduct their reviews with
staff other than those assigned to work with the State
under delegation. A review of a specified number of
approved facility plans, usually ten percent, is normally
conducted as part of overview in the delegation agreement.
- Annual Workplans: These documents negotiated between the
Region and the States contain both the planned
achievements for the fiscal year and the overview methods
by which progress will be assessed.
- Environmental Review; A non-delegable review function,
this is usually performed by a group in the Regional
Office other than the project engineering staff. The
Region determines, by reviewing State's environmental
information or by making its own environmental assessment,
whether a project receives a "Finding of No Significant
Impact" or requires an Environmental Impact Statement.
- AT Review; Regional offices are responsible for reviewing
advanced treatment projects with an incremental AT cost of
less than $3 million. Four of the eight States reviewed
are delegated the AT review function.
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III-5
- Regional Policies and Guidance; Some Regions, lacking
directives from Headquarters, develop their own policies
or guidance in response to programmatic issues. Policies
are usually transmitted by memorandum to the States.
Guidance is transmitted by memo, newletter or staff
meetings.
- Technology Transfer; Some Regions have technical
information dissemination programs directed at State
staff and consulting engineering which may include
training seminars, meetings, brochures and newsletters.
3. State Control Techniques
State control techniques are governed largely by the extent of
delegation of relevant functions. All States reviewed are delegated
facilities plan review; however, in one Region cost-effectiveness
analysis is a shared function with the States. Most other functions
related to cost-effectiveness/sizing, such as environmental information
document preparation and infiltration/inflow analysis are delegated to
the States reviewed. Advanced treatment review is delegated in four
States.
Control technniques used by the States include:
- Wasteload Allocation: This measure sets permits limits
for proposed facilities, which can affect the type of
technology selected.
- Design Reviews: In some States, such as Montana and
Wyoming, design review can involve an in-depth review
of technology selection.
- State Guidance, Codes, Regulation and Policy: Can pertain
to planning aspects such as sizing but usually apply to
facility design (design criteria and standards). Some
States reviewed did not have their own guidance specific
to facilities plan review and related reviews but used
EPA guidance.
- Pre-planning Conference; Meeting with the potential
grantee and engineer to review requirements, guidance and
procedures.
- Mid-course Review; Meeting or teleconference with
potential grantee and/or engineer to review status of
planning; check whether requirements are being met; and
comment on preliminary alternative selection.
- Checklists: Lists of requirements for various components
of the planning phase of a project.
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III-6
- Information Dissemination: Newletters, mailings, etc., to
current and potential grantees and their consulting
engineers notifying them of program changes, new guidance
and publications.
With the exception of the wasteload allocation process, none of
these control techniques are specifically required by EPA regulation.
D. THE STATE SELECTION AND REVIEW PROCESS
Four Regional offices participated in the review. Two Headquarters
representatives and a Regional representative participated in each
State review. One day was spent at each Regional Office reviewing
management procedures and one day at each State Office reviewing
management procedures and a random sample of facilities plans and files.
The States were selected by the ICR team primarily on the basis of
having been delegated the facility planning review and approval function
for a long period of time and having a sufficient number "of projects to
review. (A list of the Regional and State personnel included in the
review is attached.) Eight States, two States in each of the four
Regions, were evaluated in detail — Maryland, Pennyslvania, Georgia,
North Carolina, Oklahoma, Texas, Montana and Wyoming.
The management procedures and techniques bearing on
cost-effectiveness determination, facility sizing, and technology
selection were examined in each Regional office by interviewing key
staff and reviewing pertinent documents. The management techniques in
the eight States were similarly investigated. Facility plans and
project files for a total of 47 projects (five to nine projects in each
State) were reviewed to test the application of the various control
techniques. (Sample questionnaires used in the reviews are attached.)
E. EFFECTIVENESS OF CONTROL TECHNIQUES
Generally, the facilities plans reviewed exhibited proper cost-
effectiveness analysis and sizing. In some cases, however, there were
significant analytical mistakes which affected the results. Most of
the projects were governed by the September 28, 1978 regulations.
Program Requirements Memoranda 77-8, 78-9, 79-3, and 79-8, which
were in effect at the time most of the facilities plans were approved,
emphasized technologies suited for small communities. While the
methodology used was mostly accurate, there were instances of improper
or inadequate consideration of technologies which may have affected the
outcome of some of the analyses. Examples are a lack of consideration
of small diameter gravity sewers, onsite systems and cluster systems;
improper cost-effectiveness analysis of pressure and vacuum sewers; and
unreasonable estimates of costs and useful lives for alternative sewers
and onsite systems.
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III-7
1. Effectiveness of Headquarters Control Techniques
- Clean Water Act; Basically it provides a good framework
for ensuring cost-effective and properly sized facilities
appropriate for small communities. The elimination of
grant eligibility for reserve capacity, although not yet
in effect, should prove to be a strong deterrent to
oversizing of facilities. The eligibility restriction
on collectors will have its biggest effect on small
communities and may be a strong incentive for use of
alternative conveyance systems which remain eligible
for grant funding for a small community (as defined in
the regulations). Reduction of the Federal share may
increase the attractiveness of I/A technologies. However,
the allowance system is seen as a disadvantage for most
rural communities, where a different and often more
difficult set of problems exist. These problems require
more sophisticated and more costly planning techniques
than are usually necessary for a larger community. In
these cases the amount of the allowance may be a smaller
percentage of the planning costs incurred. Conversely,
the allowance system rewards high capital cost projects
by giving a greater amount for design of expensive
projects. Also, the elimination of Step 1 and 2 grants
reduces the likelihood that communities and States would
be willing to go back and redesign a lower cost
alternative because it would be at their expense.
- Construction Grant Regulations; Many Regional and State
staff interviewed felt that the February 17, 1984
regulations, particularly the absence of the Appendix A -
Cost-effectivenes Analysis Guidelines of the Subpart E
Regulations, severely gutted the controls over cost-
effectiveness and sizing. Only one Region interviewed
had a system for reviewing whether appropriate low cost
technologies were considered in the facilities plan
for small communities as called for in the regulations.
The system consists of a simple required checklist.
One Region cited a problem with the 85% removal
requirement potentially causing a community with dilute
wastewater to implement advanced treatment processes to
meet secondary standards.
- NEPA Law and Regulations: Because NEPA compliance is not
delegable, this function in some Regions provides the only
hands-on EPA contact most projects receive. For States
delegated the function of preparing the environmental
summary information, EPA Regions rely on the information
provided by the State for their review. Although the
purpose of the environmental assessments is to provide
EPA with information for environmental decisions
regarding cost-effectiveness and sizing, this may be the
only detailed information regarding cost-effectiveness
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III-8
and sizing that is available to EPA Regional personnel
before applications are submitted for funding. As such,
it provides some opportunity for EPA Regional office
personnel to give a broad appraisal to cost-effectiveness
and sizing considerations applicable to specific projects
that would not be available under delegation without
NEPA.
CG-82; The guidance document was highly thought of by
the Region and States as a control technique because it
is a compendium of all regulations and guidance impacting
the program and is written in easily-understood terms.
GC-82 was not in effect when most of the sample projects
were approved. The document is now somewhat out of
date, which may limit the document's current effectiveness
in the cost-effectiveness and sizing areas. Most States
and Regions feel that there is a lack of guidance on
implementing the reserve capacity provision of the 1981
Amendments.
Financial and Management Capability Policy: This was not
in effect when most projects reviewed were approved, so no
results-oriented test was conducted. States do not
appear to be making much progress in developing a
screening system for detecting problem projects.
EPA's recently developed screening system for potential
problem projects was applied to the sample projects as
an adjunct to the review. The indicators with
suggested high cost criteria are a follows:
Indicator Suggested Criteria
Capital Cost of Sewers §4000 per household
Capital Cost of Treatment $3 per gallon per day
of capacity
Total Project Capital Cost $6000 per household
Allowance for Future Flow 50% of initial flow
Annual Operations and $100 per household
Maintenance Cost
Annual Household Cost 1.5% of median household
income
The suggested criteria are based on national data and are
intended to point to a potential problem and the need for
more intensive review. (Each State should select its
own criteria to meet local conditions.)
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III-9
Of the 47 project reviewed, 13 exceeded two or more of the
indicators. The criteria for total project capital cost
was exceeded in 12 cases. Annual household cost as a
percentage of median income was exceeded 5 times but
this cost determination could not be made in 14 cases
because no income data was given. Of the 9 projects
with data on sewer costs, 6 exceeded the capital cost of
sewers indicator. The allowance for future flow was
more than 50 percent of the initial flow in 11 projects.
The O&M cost indicator was exceeded 6 times. Had the
sample projects undergone early screening, as outlined
above, more intensive review would have been conducted
on a significant number of these projects. This review
may have included a reevaluation of the need for and
size of the project, a reassessment of technologies and
an investigation of additional funding or financing
methods. The more intensive review would not necessarily
indicate a need for a major project change.
Advanced Treatment (AT) Policy: Small community AT projects
usually don't receive a Headquarters' review because of
the $3 million incremental cost criterion. Four of the
States reviewed were delegated the AT review function.
Nine projects reviewed" were AT projects, the costs of
which were within reasonable limits. Some States were
urging grantees to use certain lower cost technologies,
such as oxidation ditches and land treatment, if AT
permit limits were called for. These States reported
success in a number of cases.
OWOGAS: It is significant to note that key personnel
in several of the States and some Regional staff had
never heard of the appropriate technology section of
OWOGAS, or in some cases, of OWOGAS itself. It appears
that most Regions are getting little input from the
States in responding to the mid-year review of the
qualitative questions dealing with appropriate technology.
Based on this observation, it is possible that OWOGAS is
not very effective.
Technology Transfer: A good program of technology
transfer is available and, to the extent it is used, is
effective in promoting understanding of low cost
appropriate technologies. The concept of small community
wastewater planning and technology selection needs to be
more comprehensively transferred to the States and
consulting engineers.
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111-10
2. Effectiveness of Regional Control Techniques
- Delegation Agreements: In some cases, it was difficult to
ascertain the effectiveness of delegation agreements.
Annual reviews of the States by the Region should result
in conclusions on delegated State performance. In some
cases, either the State review was not performed, was
performed sporadically, or if a review resulted in
meaningful recommendations, no follow-up was conducted.
An annual review is one of the few control tools available
to EPA, yet it was not employed effectively in all cases.
- Annual Workplans; Comprehensive use of annual workplans
ws not evident in the Regions.
- Environmental Review; Its effectiveness seems to be
governed by the latitude given the environmental review
group in setting the scope of the review, the
credibility given to the review, and particularly the
accuracy and completeness of the environmental assessment
provided by the State. Most Regions effectively apply
this technique as a broad appraisal of technology selection
and sizing. (See also NEPA law and regulations.)
- Regional Policies and Guidance: Some guidance developed by
the Regions prior to delegation has made its way into
delegation agreements. Region-developed guidance on some
aspects of the 1981 Amendments such as reserve capacity
has not been tested. In general, most Regional guidance
is effective.
- Technology Transfer; The Region that has the most active
technology transfer programs claimed beneficial results.
This seemed to be borne out by a cursory comparison of
technology selection in the various Regions reviewed.
3. Effectiveness of State Control Techniques
- Facility Plan Review: Most States and Regions reviewed
facilities plans using checklists designed to ensure all
statutory and regulatory requirements are met. None used
evaluative forms directed at utilizing judgment regarding
technology selection, sizing and the overall soundness of
a project. Three States relied heavily on individual
reviewer judgement rather than specific guidance in the
facilities plan review process. All States cited problems
in reviewing projects under constantly changing
regulatory scenarios. The difficulties of determining
the validity of planning assumptions and thoroughly
evaluating technology selection were cited by the States.
In one State, facility plans are routinely reviewed by
O&M inspection and permit compliance staffs. In many
States, very little facility planning is currently being
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done because of the backlog of approved plans. The absence
of a Step 1 grant makes it more difficult to track
facility planning.
- Wasteload Allocation: In some cases, stringent permit
limits had a detrimental effect on technology selection
by necessitating advanced treatment processes or not
allowing seasonal discharge.
- Design Reviews; The two States emphasizing in-depth
design reviews see them as a positive tool in assuring
appropriate technology because they resulted in significant
beneficial technology changes in several cases. Because
of the new reserve capacity clause, a need for better plans
and specifications review was noted.
- State Regulations, Codes, Policies and Guidance: These
techniques are used positively in some cases by
facilitating small community wastewater planning, e.g.
generic facilities plans, review for simplicity of
facility operation, strict evaluation of failing septic
situations, etc. On the other hand, restrictive codes
and policies can have a disastrous effect by limiting
technology selection. The most frequent case of this
was non-consideration of small diameter gravity sewers,
either because of a minimum pipe size criteria or
reluctance to use septic tanks in conjunction with a
sewer system. Inadequate consideration of onsite systems
was also common.
- Pre-planning Conferences and Mid-course Reviews; These
techniques are valuable if one of their objectives is
to guide the grantee and his engineer toward a valid
consideration of technology and sizing issues. They are
mostly used to ensure compliance with the law and
regulations. These measures are resource intensive and
are used by about one-half of the States reviewed.
- Checklists: (See Facilities Plan Review)
- Information Dissemination; Most States do a good job
in providing guidance and procedural and technical
information to grantees and engineers.
F. TEAM FINDINGS AND RECOMMENDATIONS
The ICR team concludes that the majority of small community projects
reviewed through the construction grants program in the eight States
surveyed, are sound, cost-effective, suitably sized projects with
technologies appropriate for the grantee's situation. Extrapolating
from the sample, the team believes this also applies nationally. Some
problems are recognized, however, and they are summarized, as follows:
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Program Restrictions and Training Needs
o There appears to be a general misunderstanding of the term
"appropriate technology" by the Regions and States. The concept
of "appropriate technology" needs to be demonstrated in training
sessions for State and EPA project reviewers and consulting
engineers, using case studies.
o Recommendation; We suggest that training sessions be held in
the office of each State desiring one.
o Insufficient or inaccurate consideration is frequently given to
alternative technologies that are well suited to small community
situations, in particular small diameter gravity sewers and
onsite systems. (In the 14 projects involving collector sewers,
none considered small diameter gravity sewers; pressure or
vacuum sewers were not considered in 5 cases; consideration of
onsite systems was lacking in 5 instances; 12 plans did not
consider cluster systems.) Reasons for this can be categorized
as follows:
I.) State codes which restrict sewers to a minimum size larger
than commonly used for alternative sewers;
2.) Reluctance by approving agencies to consider onsite
systems as an integral part of a public wastewater system,
or
3.) A lack of knowledge of, or a bias against, alternative
systems on the part of consulting engineers and project
reviewers.
o Recommendation; EPA hold high level discussions with States
which restrict the use of alternative systems to ensure that
the States' policies are based on sound engineering judgement.
EPA continue its training program on alternative technologies
for State and Regional review staff and A/E's as part of a
workshop series on appropriate technology.
Updating Old Facilities Plans
A systemmatic method for early updating of older facility plans is
not universally applied. There were four cases observed where facility
plans were approved three or more years prior to construction. Those
projects may be affected by changes in cost estimates, changes in the
state-of-the-art, planning area changes, etc.
Recommendation; Although manpower intensive, the team recommends that
EPA require a review of all small community projects scheduled for Step
2 + 3 or Step 3 funding if the facility plan is over two years old.
Resource requirements can be reduced by using a screening procedure based on
type of technology proposed, extent of sewering or cost indicators to
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pinpoint those in most need of updating. The team recommends an early
financial capability type review. If necessary, projects should be
referred for further facilities planning or design work, which is
eligible for EPA funding in many cases. (See memorandums from OWPO
Director to Regional Water Management Division Directors dated
February 23, 1982 and May 17, 1982.)
Delegation Performance Reviews and Management Reviews
o In several States, annual reviews by the Region of facilities
planning and related delegated functions had never been
performed, or had been performed incompletely; annual workplans
are used only to a limited extent by the Regions.
o Recommendation: In those States where facility planning is active,
the Region must devote resources to an annual review of facility
planning and related functions by using annual workplans.
Accomplishment of this task should be reviewed by Headquarters
each year.
o A general lack of knowledge by some key State and Regional
personnel of OWOGAS was apparent.
o Recommendation; Regional offices should convey in an effective
manner to their staff and to the States the operating level
priority activities which OWOGAS outlines. OWQGAS activities
should be included in State - EPA agreements. Further, OWOGAS
should be revised to better address the appropriate technology
issue.
Project Tracking and Feedback
A general observation can be made that there is not an
adequate feedback process at either the Region or State level by which
a project is tracked from inception through the operational phase and
whereby significant changes, problems, or other valuable information is
catalogued and analyzed with other input to determine if changes in the
planning process are necessary, e.g., a particular technology is unsuited
to a small community situation.
Recommendation: At the least, the facilities plan and design should
be reviewed by Staff staff level responsible for O&M inspections and
permit compliance, i.e., those knowledgable about operating facilities.
This activity may be resource intensive.
Resource Needs
There is insufficient contact by Regional people with
State staff and with projects (i.e., site visits, trouble-shooting) and
inadequate staff resources in speciality areas such as I/A technology,
small flows and financial capability.
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III-1A
Recommendation; More resources in terms of staff-power (especially
senior technical personnel) and travel funds should be allocated to the
Regional program.
State Facilities Plan Reviews
The State facilities plan review process allows some
potential problem projects to be approved.
Recommendations:
(1) Rigorously enforce the provisions of 40 CFR 35.2030
with project reviews based on a sound knowledge of wastewater technologies
and engineering economics.
(2) Change regulations to require a value engineering analysis
for projects in communities of less than 10,000 population, the cost of
which is to be made grant eligible under a separate allowance.
Findings and Recommendations for Future Internal Control Review
Several shortcomings of this internal control review of cost-
effectiveness/facility sizing were noted:
1.) The scope of the issue area is too large for the resources and
time allotted.
2.) Because of the wide variation in techniques, attitudes and
geography among the Regions and States it is difficult to
generalize many of the findings of the review as being
indicative of the construction grant program on a national scale.
3.) It is difficult to assess the effectiveness of some current
control measures because few projects have been approved under
them.
4.) The volatile nature of any "bad" project makes this subject area
sensitive to individual Region-specific, State-specific or even
grantee-specific control measures.
5.) The scope of the control measures is limited, for the most part,
to the facilities planning stage. There are additional control
measures applied in later stages of a project, such as value
engineering and financial capability analysis, which may have a
bearing on the cost-effectiveness and size of the constructed
facilities.
Recommendations; Because the scope of the activity reviewed is so
large, only an overview evaluation was made. The review team recommends
that an internal control review of specific subjects in this activity
area be conducted next year. Recommended subjects for review are
facility sizing and design criteria and an assessment of the impact of
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111-15
the 1981 amendments, especially the allowance system and reserve capacity
limitations on the quality of facility planning in States where a
significant amount of facility planning is still being conducted. The
review team also recommends that different Regions be reviewed next year.
G. RESPONSE TO REGIONAL COMMENTS
One Region disagreed with requiring a grant-eligible value
engineering analysis prior to design for projects in communities of
less than 10,000 population since EPA pays the States, under
Sec. 205(g), to review facilities plans. We, accordingly, changed the
recommendation to delete the words "prior to design". Two other Regions
commented regarding the need for a regulation change and funding mechanism
for the recommendation of VE analyses, the grant eligibility of updating
older facility plans, and an incorrectly worded reference to the degree
of Region/State knowledge of the "appropriate technology" provisions
in the OWOGAS system. These comments have been addressed through appropriate
revisions to the report.
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Attachment
111-16
The Review Team
The internal control review team consisted of eight members:
Connie Bosma - Headquarters
Education: B.C. Civil Engineering, M.S. Civil Engineering
Professional Experience: P.E. (Virginia), 7 years experience with a
water and sewer utility and with a consulting firm, 4 years of service
in the construction grants program. Presently is Chief, Construction
Planning and Review Section
Keith Dearth - Headquarters
Education: B.S., Civil Engineering, Master of Civil Engineering (MCE)
Professional Experience: P.E. (South Carolina, Oklahoma, Nevada),
19 years experience in architecture/engineering, construction and
public works facility engineering, 9 years of service with EPA in
the areas of facilities planning, financial analysis and small flows
technology. Presently is Chief of the Assistance and Review Branch.
John E. Flowers - Headquarters
Education: B.S. Civil Engineering, M.S. Environmental Engineering
Professional Experience: P.E. (Virginia), 10 years as project
manager of wastewater projects for water and sewer utility; 4 years
as environmental engineer in construction grants program involved
mainly with small community wastewater issues.
Bob Freeman - Region IV, Atlanta
Education: B.S. Chemical Engineering, M.S. Civil/Sanitary Engineering
Professional Experience: P.E. (Georgia, Mississippi), 11 years in
the construction grants program involved with facilities planning,
plans and specifications approval, and construction activities in
the Florida, Georgia, and Mississippi Sections Presently in Office
of Applied Technology which provides technical support to the
grants division and State agencies.
Ancil A. Jones - Region VI, Dallas
Education: B.S. Civil Engineering, M.S. Environmental Engineering
Professional Experience: P.E. (Oklahoma, Louisiana, and Texas),
17 years experience in Federal water pollution control programs
covering all water related activities. Currently Regional Staff
Engineer in the Construction Grants Branch.
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111-17
Dave McAdams - Region III, Philadelphia
Education: B.S. Civil Engineering, M.S. Environmental Engineering
Professional Experience: P.E. (Pennsylvania), 7 years experience in
the construction grants program reviewing facilities plans and
preparing environmental documents as Staff Engineer.
Lee Pasarew - Headquarters
Education: B.S. Civil Engineering, M. of Eng. (Civil), M.S. Planning
Professional Experience: Eleven years of wastewater planning
experience with a county government and a consulting firm, 4 years
of EPA service as an Environmental Engineer in financial capability
analysis, facilities planning, and small systems technology.
Marie Perez - Headquarters
Education: B.S. Civil Engineering
Professional Experience: P.E. (Virginia), 4 years design and
construction experience with consulting firms, 8 years as Environmental
Engineer on a wide variety of water-related activities with EPA.
Stanley M. Smith - Region VIII, Denver
Education: B.S. Civil Engineering, M.S. Sanitary Engineering
Professional Experience: P.E. (Kansas), 14 years as District Engineer
and Chief of Water Pollution Control Program for State health department,
19 years in Federal water pollution control programs with experience
in most water-related activities, currently an Environmental Engineer
in Water Division.
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Attachment
Agencies and Individuals Involved
Region Office
Region III
(Philadelphia)
ICR Team
Representatives
Connie Bosnia
John Flowers
Dave McAdams
Region IV
(Atlanta)
Connie Bosma
Bob Freeman
Lee Pasarew
Region VI
(Dallas)
John Flowers
Ancil Jones
Marie Perez
Region VIII
(Denver)
Keith Dearth
Marie Perez
Stan Smith
State Office Visited
Maryland Department of Health
Mental Hygiene, Office of
Environmental Programs
and
Pennsylvania Department of
Environmental Resources
Bureau of Water Quality Management
Division of Municipal Facilities
and Grants
Georgia Department of Natural
Resources, Environmental
Protection Division
North Carolina Department of
Natural Resources and
Comnunity Development
Division of Environmental Management
Oklahoma Department of Health
Environmental Health Services
Wastewater Construction Grants
Services
Texas Department of Water Resources
Construction Grants and Water. Quality
PI anning Division
Montana Water Quality Bureau
Environmental Services Division
Wyoming Department of Environmental
Quality, Water Quality Division
Principal
State Contact
John Mil nor, Chief
Division of Grants Project
Management
John Dougherty, Chief
Planning and Evaluation Section
Gadenzio Paquibitan, Jr., P.E.,
Program Manager, Municipal Grants
Program
AlanWahab, Supervisor
Local Planning Management Unit
H.J. Threng, Director
Construction Grants Engineering
Division
Don Nelson, Chief
Project Engineering Section
Joe Steiner, Chief
Construction Grants Section
Mike Hackett, Engineering Control
Supervisor
111-18
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111-19 Attachment
Questionnaire
Regional /State Management
Control Objective: Projects for Small Communities Have Low Cost,
Easily Operated and Maintained Technologies
Region:
1. What control techniques are in use by Region and each State? (Use
attached Tables)
A. Del egati on Agreements
B. State EPA Agreements
C. Annual Workplans
D. Overview Procedures
1.) Description of Procedures
2.) Summary of Results in each State
E. Other (e.g., States' procedures for reviewing documentation of need
for the project, cost estimates and AT projects; procedures for
assuring existing facilities are used to the optimum degree.)
2. Region's and State's opinion of effectiveness of each control technique
used by States, Regions and Headquarters.
3. What additional control techniques are being planned by Regions and States?
4. How and when does the State convey its procedures, requirements and
guidance to the grantee?
5. What additional control techniques does the Region and State recommend?
6. What problems/obstacles do the Region and States have in achieving the
control objective?
7. What positive/innovative actions are being taken to achieve the control
objective?
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111-20
Questionnaire
Regional/State Management
Control Objective: Wastewater Facilities are Properly Sized
Region:
1. What control techniques are in use by Region and each State? (Use
attached Tables.)
A. Delegation Agreements
B. State EPA Agreements
C. Annual Workplans
D. Overview Procedures
1.) Description of Procedures
2.) Summary of Results in each State
E. Other (e.g., States' procedures for reviewing population and flow
projections, reviewing consistency of treatment capacities with
loadings and flows, and implementing the reserve capacity provision
in the 1981 amendments.)
2. Region's and State's opinion of effectiveness of each control technique
used by States, Regions and Headquarters.
3. What additional control techniques are being planned by Regions and States?
4. How and when does the State convey its procedures, requirements and
gui dance to the grantee?
5. What additional control techniques does the Region and State recommend?
6. What problems/obstacles do the Region and States have in achieving the
control objective?
7. What positive/innovative actions are being taken to achieve the control
objective?
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111-21
Questionnaire
Cost-Effectiveness/Sizing
Random Sample
Regi on:
State: Date of Delegation for Facility
Project: Plan Approval
Grant Number: Date Facility Plan was
Size of Community: Approved
Status of Project:
Part I C/E Analysis
Existing Faci 1 ity (Description and Size):
Problem/Need:
What alternatives were evaluated in terms of cost?
What consideration was given to the following alternatives (include
reasons for rejecting any alternative);
- Use of all or part of existing facilities, upgrade O&M:
- Onsite or cluster systems:
- Alternative sewers:
- Trickling filters:
- Lagoons:
- Oxidation ditches:
- Land treatment:
- Alternative methods of sludge disposal/util ization:
- Other innovative/ alter native technology:
What alternative was selected?
Why was this alternative selected?
Has the alternative changed since the facility plan was approved? If so,
has the FNSI been amended and costs reevaluated?
What level of O&M effort is needed? Was the community's O&M capability
consi dered?
Cost of proposed facility: Total capital $ __
Total eligible cost $
Grant amount $
Local share $
0,M&R $
Household cost $ /yr.
Year of estimate
or ENR index
What consideration was given to financial capability?
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111-22
What other control techniques were applied to this project?
If operating, is the f acil ity meeting its permit limits?
Part II Sizing
Current Population:
Sewered
Unsewered
Design Population:
Sewered
Unsewered
Initial number of households to be served:
Design Population According to BEA Projections
If design population is different than BEA projections, why?
Projected Annual Growth Rate
Historic Annual Growth Rate Over Last Ten Years
What was the basis for selecting the design population?
Residential flow: Existing
Design
Basis for determination:
Commerci al/institutional flow: Existing
Design
Basis for determination:
Industrial flow: Existing
Design
Basis for determination:
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IV
LOCAL FINANCIAL CAPABILITY
A. STUDY TEAM
The ICR review team was composed of three Regional office members and
three Headquarters members. Individually and collectively, the team
members were well qualified and brought considerable experience to the
study. Their professional experience is in the fields of environmental
and sanitary engineering, financial planning, and construction grants and
and other public works programs. (See attached information concerning the
review team.)
B. INTRODUCTION/BACKGROUND
Objective. The objective of the review was: 1.) To determine if
adequate management procedures are in place to ensure that grant
applicants have demonstrated the necessary financial capability to
construct, operate and maintain the treatment works and 2.) to evaluate
the effectiveness of these management procedures.
Importance. The success of construction grants projects depends to a
large extent on whether the projects are financially sound. Ensuring that
grant applicants have the necessary financial capability will facilitate
cleaning up the nation's waters and meeting the goals of the Clean Water
Act.
Consequences. If the objectives are not met, communities may build
wastewater treatment systems that they cannot afford. This may result in
abandonment or substandard operation of wastewater facilities,
non-compliance with the Clean Water Act, a waste of Federal, State and
local funds, and an adverse impact on water quality.
C. PRESCRIBED CONTROL TECHNIQUES
The major management control techniques are summarized below. [More
detailed descriptions are presented in Attachment A.]?
o Program Requirements Memorandum (PRM) 76-3 "Presentation
of Local Government Costs of Wastewater Treatment Works in
Facility Plans" (8/16/76): Required that cost, financing method
and typical user cost information be included in all facility
plans.
o Administrator memo to Regional Administrators "Encouraging Less
Costly Wastewater Facilities for Small Communities" (12/30/76);
Recognized and discussed high cost projects and low cost
alternatives and requested special consideration for high cost
projects. It also established a way to identify high cost
projects.
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IV-2
o PRM 79-8 "Small Wastewater Systems." (5/9/79): Further clarified
definition of small alternative systems, refined guidelines for
what constituted a high cost project and elaborated on what
actions to take for expensive projects.
o CG-82" Guidance; States that six questions should be answered in
order to demonstrate financial capability and redefines method
for identifying high cost projects. It also presents several
suggested indicators for identifying potential problems.
o Clean Water Act; Requires grantee to certify that it has
financial capability before receiving grant assistance.
o Construction Grants (CG) Regulations (40 CFR 35 Subpart I)
(2/17/84); Elaborates on CWA requirement with respect to
financial capability demonstration, certification, and
intermunicipal service agreements (ISA). Previous regulations
also required that communities demonstrate their financial
capability before receiving grant assistance.
o Financial and Management Capability Policy (2/17/84): Presents
specific questions for demonstrating financial capability,
requires certification, intermunicipal service agreements, and
outlines EPA, State and grantee roles and responsibilities.
Also requires States to develop a screening system to identify
possible high cost projects for more detailed review of financial
impacts and cost-effectiveness.
o Delegation Agreements; Describe EPA and State responsibilities
for managing the construction grants program including
Implementation of the Policy.
o Office of Water Operating Guidance and Accountability System
(OWOGAS FY 1984); Establishes Agency priority objectives (e.g.,
implementing the Financial Capability Policy) and provides a
framework for evaluating Regional performance in meeting these
objectives.
D. DATA SOURCE SELECTION AND REVIEW PROCEDURES
Regions III, IV, and VII were selected as the participating Regions
based on their willingness to participate. This is a two-year study
because the Financial Capability Policy was recently issued (2/17/84), and
an adequate random sample of financial capability demonstrations was not
available for review in the first year.
In the first year of the study management procedures at each
participating Region were reviewed by one person from EPA Headquarters
during a one day visit. A questionnaire (See Attachment) was developed
for this purpose by a study team composed of Regional and Headquarters
representatives. As part of the Regional reviews information was gathered
on all 17 States within the three participating Regions. No States,
however, were actually visited.
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IV-3
In FY '85 this ICR will be completed by updating information on the
questionnaire pertaining to Regional and State management procedures and
reviewing a random sample of demonstrations at the offices of participa-
ting States. Two States from each participating Region will be selected
to participate in the second, in-depth part of this study, based on
their interest in participating and the availability of a representative
sample of approved financial capability demonstrations.
E. TEAM FINDINGS
These findings are based on interviews and review of documents at Region-
al Offices. They have not been confirmed by State visits, and thus will be
further verified in the second year of study.
Delegation Agreements/Workplans
The EPA/State delegation agreements had not served as an effective control
technique because only three months had passed since publication of the Policy
and most delegation agreements had not been updated. All three Regions indic-
ated that their State/EPA delegation agreements would be updated by FY 1985.
Of the 17 States in the three Regions studied only one State had
included all of the requirements of the February 17, 1984 Financial
Capability Policy in its delegation agreement. Thirteen had general
requirements regarding analysis and demonstration of financial capability
without specific reference to the Policy. The remaining three States
either were not delegated or had no financial capability requirement in
their agreements. The major element missing from the delegation agreements
in all but the one State was the requirement for the State to develop a
screening system to identify those projects in need of further review.
Two of the States had specific language in some detail in their FY '84
workplan regarding activities they would take to fulfill their responsibilities
under the Policy. One Region, prior to February 1984, required State workplans
to reflect implementation of the Policy when it was finally published. Eight
States had general language which basically mirrored the delegation agreement,
while four States had no financial capability elements in the workplans.
The workplans, which typically reflected the general requirement in the
delegation agreement, could not yet function as a control technique. The
one workplan that did include financial capability required the grantee
to demonstrate capability, but there were few specific provisions on how
this was to be reviewed by the State and what train of events should be
triggered if a project were deemed to be high cost.
Regional Overview
None of the Regions had in place specific procedures or checklists
for reviewing the State's financial capability activities. Two of the
Regions plan to overview a 10% sample of their State's financial capability
reviews but had not yet developed a plan to do this within the requirements
of the delegation agreements. The third Region has a proposed procedure (still
unsigned) which lists the responsibilities of the Region, grantees and States
and which includes an implementation section that deals with reasons for
disapproving a grant based on financial capability.
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IV-4
The precise method for overviewing State financial capability
activities had not been established in two of the Regions, in large part,
because the Regions have not developed a clear understanding of how they
expect the State to actually implement the Policy. Potentially a strong
and effective control technique, Regional overview is not yet being used
by the Regions.
Early Identification of High Cost Projects (Screening)
The requirement for States to develop a formal screening system to
identify those projects in need of further review of their financial
capability demonstration had not been met by most of the States. The
States do not yet have a specific screening system which is designed to
look at all projects in a systemmatic way. Only one Region distributed
the "Indicators of Possible High Cost Projects" computer list and only
one State was reported to be using it. These computer lists use the
Needs Survey and the U.S. Census to screen all projects nationally to
identify those with potential problems. These lists were sent to the
Regions in 1982 and 1983. The other States tend to use single indicators
such as user cost, user cost as a percentage of median income, total
project cost or type of technology to identify potential high cost
projects. The Policy requires that a combination of indicators be used.
Most States were relying on their project officers to notice high cost
projects during the normal course of their facility planning and Step 3
review process.
Preparation of screening systems is reported to be underway in some
States. Despite this activity, screening for high cost projects has not
yet been developed to a point were it constitutes an effective control
technique.
Transmittal of Policy and Guidance
Clear communication to the States and grantees of the requirements of
the Policy is an essential prerequisite to the development and
implementation of effective control techniques. All three Regions
transmitted the Policy to the States by mail, together with the related
guidance materials produced by Headquarters. Two of the Regions followed
up the transmittal with discussions at subsequent scheduled meetings,
audits and telephone calls. One Region felt no follow up was necessary.
One Region distributed no computer reports and only a small number of
Guidebooks. In general, however, most of the Headquarters materials were
distributed to the States. Only one Region had produced or distributed
any additional guidance material.
The States communicate with grant applicants with varying
effectiveness. Some of the States met directly with the grantee/engineer
and presented the Policy requirement as part of a pre-application
conference or other general discussions. A few States included (or
intend to include) the Policy and associated guidance in the grant
application kit. One State had not notified its grantees about the
Policy although the Policy was effective February 17, 1984. In the case
of four other States, the Region did not know if the Policy was being
communicated to the grantees.
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IV-5
Problem Project Resolution
Most of the existing and yet to be implemented control techniques
will be ineffective if the States (and Regions) are not prepared to deal
with those projects identified as high cost. One of the Regions was
unaware of any procedures its States used to resolve problem projects.
Many of the States in the two remaining Regions dealt with problem
projects on an informal one-on-one basis, usually by talking to the
engineer and community officials. In three States efforts were made to
ensure that the users were aware of the projected high costs as a method
of resolving the problem. One Region felt that if a project is high cost
and the community is informed but still wants to proceed, the grant must
be awarded, even though the Region has doubts about the community's
financial capability. One State indicated that its projects already use
the most appropriate technology, and thus they try to resolve high cost
problem projects through increased funding and obtaining local acceptance.
None of the States appeared to have a set routine for resolving
problem projects. Issues such as who should be notified about a problem
project, what type of actions would be set in motion and what resources
would be available to work on the problem were not yet addressed at the
State level.
Implementation of Demonstration and Certification Requirement
Two of the specific requirements of the Policy are that all grant
applicants must demonstrate their financial capability by submitting 1.)
the answers to five questions and 2.) a signed certification of their
financial capability. The preliminary findings indicated that the Regions
were not aware of whether grant applicants in their States were answering
the questions or submitting the certification. Part 2 of the study will
focus more closely on this issue.
Obstacles to Effective Management Controls
Although the Policy requires the demonstration of financial capability
prior to award of the grant, any serious problems detected at this stage
are very difficult to correct. Once facility planning and design are
completed and the project is on the fundable portion of the priority list
any intervention which substantially delays and/or revises the project
will likely run into considerable opposition from the community and
possibly the State.
The reasons that States and communities are reluctant to revise the
facility plans and completed designs for high cost projects include:
o Concern that replanning or redesign will delay a project long
enough to cause it to be bypassed on the priority list. This
could lead to a delay in construction, a reduction in the Federal
contribution (as eligibilities and grant amounts are reduced) or
no funding at all.
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IV-6
o Concern that grant money not spent due to delayed projects will
be subjected to reallotment.
o Concern over the additional cost of redesign or replanning.
The screening element requirement was included in the policy to
address this problem by encouraging States to look at their projects as
early as possible. The construction grant regulations also require
financial capability to be considered in the facility plan. However,
most communities have completed their facility plans, and many have
completed design and are just awaiting their turn for a Step 3 grant. As
a consequence, although screening will be effective in identifying problem
projects, remedies will be hard to implement for many projects.
Regional and State Capability to Evaluate Financial Capability
For many State and Regional staffs involved in the review and approval
of grant applications, the broad area of financial capability is perceived
to be beyond the scope of their education and experience. Many have
voiced concern about their ability to judge, based on a grant applicant's
demonstration, whether a community can or cannot afford to build and
operate a wastewater treatment plant. As a result they are hesitant to
implement the Policy aggressively.
There are two issues involved here. First, there is the real issue of
training, experience and understanding in the field of municipal finance
and related areas. This is mainly a staffing skills problem and can be
dealt with quite effectively through training, guidance, use of outside
resources (e.g., consultants) and acquisition of staff with the
appropriate expertise. Recommendations regarding this are included below.
The second issue is the perception on the part of Regional and State
staff as to the purpose of the Policy. Many consider the Policy as just
one additional gate the grant applicant must pass through on the way to
an award and think that it is up to the financial capability demonstration
reviewer to either open or close the gate, depending on whether or not the
community has the financial capability. This view of the Policy
places the reviewer in confrontation with the applicant. Many with this
perspective feel that they will be forced to make unpopular financial
capability judgments regarding award of a grant without benefit of
experience or written criteria against which to measure the project.
One Region has asked for official criteria or an indicator to
strengthen their position when they recommend against a grant award.
HQ response to this request has been:
o The previous HQ indicator was misused as a "go/no go" decision
tool with no allowance for local conditions.
o A nationally developed number may not be relevant at the
community level, and these types of indicators are best set at
the State or local level to reflect local conditions.
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IV-7
o The area is too complex to be reduced to one or two single
snapshot indicators. Financial capability must be judged on a
wide variety of factors and their trends.
o The primary reason that the Agency issued the Policy is not to
turn down projects. Instead, it is to identify, as early as
possible, projects with financial capability problems so the
problems can be resolved and to ensure that local officials know
the real cost and financial impacts of their projects. Thus, an
award will be made for a project that the community can afford
to operate in compliance and that does not waste federal funds.
A related issue raised by one of the three Regions was whether the
States (or Regions when appropriate) can really determine if a community
has sufficient financial capability or if the State can only verify the
community's certification of financial capability (i.e., answered the
Policy questions). The Region felt that States could never be in a
position to accurately determine what a grant applicant could or could
not afford. That was solely the community's responsibility according to
this reasoning, and States can only insure that the questions are answered
and certification submitted. Forcing a grant applicant to fully
understand the financial impacts of the project is clearly an essential
ingredient in promoting sound projects, but it is ultimately not a
substitute for the requirement of Section 204(b)(l)(B) of the 1981
Amendments, which essentially says that no grant should be approved
unless the Administrator has first determined if the applicant has the
financial capability.
Effectiveness of Control Techniques
At present the effectiveness of specific, formal control techniques
cannot be evaluated because in most cases the appropriate management
procedures had not been put in place. This was in large part due to the
reluctance of the Regions and States to develop a comprehensive financial
capability management system until the Policy was published. In most of
the States the specific requirements of the February 17, 1984 Financial
Capability Policy were not yet reflected in the delegation agreements,
workplans, and review procedures. Thus, the current regulations, CG-82
guidance, and the Policy itself, including the demonstration/certification
requirements, have not served to implement the financial capability
provision of the Clean Water Act. It must be noted, however, that
financial capability activity has occurred in the Regions (and to a
lesser degree in the States) based on informal procedures. It is
extremely difficult to evaluate management techniques and their
effectiveness if no specific documentation is kept.
F. TEAM RECOMMENDATIONS
o Regions and delegated States should revise all existing delegation
agreements and FY '85 workplans to include the specific requirements
of the February 17, 1984 Financial Capability Policy. This should
include revisions to the facility plan review and the Step 3 and
Step 2+3 grant approval functions.
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IV-8
The Regions should establish specific procedures to overview the
States in meeting the requirements of the policy including:
- development of a screening system
- review of financial capability demonstrations
- resolution of problem projects
The Regions, working with the States, should also develop a
procedure to assist States, when requested, in the resolution of
problem projects.
The Regions and delegated States should ensure that the demon-
stration and certification is completed for all grant applicants.
Headquarters should proceed with the proposed plan for Part 2 of
this ICR study by updating the Regional and State management
procedures questionnaire and by reviewing a sample of financial
capability demonstrations from the participating States. The ICR
study team should investigate, in Part 2 of the financial capability
study, if these recommendations are being followed.
Headquarters should develop and offer training programs to improve
the ability of State and Regional staff to review and evaluate
financial capability demonstrations and to assist grantees when
appropriate. Additional State Financial Capability training
sessions aimed at grant applicants should also be conducted.
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IV-9
RESPONSE TO REGIONAL COMMENTS
Only one Region provided significant comments as follows:
o "There appears to be an inconsistency between a statement in the
ICR report that is critical of the States for dealing with problem
projects on an informal basis (instead of developing a set routine for
handling problem projects) and a statement that the value of a
nationally developed indicator may not be relevant at the community
level (and would be best set at the State level).
o "There is a critical statement in the ICR report about those who
voiced concern over their level of financial capability expertise
but then it is stated that the subject is too complex to be reduced
to using only one or two financial indicators. Region IV suggests
that effort be made to provide more detail on how the financial
capability demonstrations must be reviewed (certification vs.
affirmative determination of financial capability)."
ICR Team Response: Recommending that States develop a procedure to
resolve problem projects does not conflict with recommending that States
develop their own indicators to identify potential problem projects.
Both recommendations reflect the States responsibility for complying with
the policy in two different areas: Identifying problem projects and
resolving problem projects.
The ICR report acknowledges that the financial capability area can
be somewhat complex and that additional training is desirable. Regardless
of its complexity, Regions and States are expected to develop the necessary
expertise to adequately review a financial capability demonstration to
determine if the applicant has the necessary capability to successfully
complete the project (not just to make sure that the applicant has supplied
answers to the questions and signed the certification). To assist Regions
and States in this effort, EPA Headquarters will be conducting five
training seminars in FY '85.
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IV-10
Attachment
Keith Dearth - Chief, Assistance and Review Branch, EPA HQ. Eight
and one-half years of service with EPA in the areas of facility
planning, financial analysis, and small flows technology. Eight
years previous experience in the financial field and 19 years in
architecture, engineering, construction and public works (facility
engineering).
Connie Bosma - Supervisory Environmental Engineer, Chief,
Construction Planning and Review Section, EPA HQ. Four years of
service with EPA and seven years combined experience with a water
and sewer utility and a consulting firm.
Lee Pasarew - Environmental Engineer, EPA HQ. Four years of EPA
service in the areas of financial capability analysis, facility
planning, and small system technology. Previous experience with a
county government and a consulting firm.
Tom Maher - Region III - Public Utilities Specialist with eight
years in user charge analysis and municipal finance. Four years as
project officer in Federal disaster activities. Private sector
experience includes construction, economic and financial feasibility
consulting and port management.
John Hagan - Region IV, Supervisory Sanitary Engineer, Chief, South
Area Grants Management Section, 24 years service in the
environmental field.
Wes Bartley - Region VII, Environmental Engineer, Missouri-Kansas
Section. Ten years EPA experience, eight years in construction
grants. Regional contact for user charge and financial capability.
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IV-11
ATTACHMENT
Prescribed Control Techniques
(PRM) 76-3 - 8/16/76 - "Presentation of Local Government Costs of Wastewater
Treatment Works in Facility Plans"
PRM required all facility plans after 1/2/77 to include the following cost
information:
1. Estimated total capital cost showing breakdown between eligible and
ineligible costs and Federal, State and local shares.
2. Expected method of local financing and estimated annual debt service.
3. Estimated annual operation and mai ntenance costs and allocation of
costs between industrial and other users.
4. Estimated monthly charge to typical customer, including connection
charges.
Administrator Memo to Regional Administrators 12/30/76 - "Encouraging Less
Costly Wastewater Facilities for Small Communities"
o Recognized problem of high costs in small communities.
o Outlined factors inhibiting use of low cost approaches. Discussed
efforts to encourage greater use of appropriate technology.
o Requested special consideration of facility plans where cost
estimates indicated that:
Debt retirement exceeds 1% of median family income.
Debt retirement plus user charge exceeds 2% of median family
income.
PRM 79-8 - 5/9/79 - "Small Wastewater Systems"
o Clarified definition of small alternative wastewater systems.
o Included revised guidelines for determination of financial impact of
project. Costs were deemed excessive if average annual household
cost as a percentage of median household income (MHI) was:
1.5% when MHI under $6,000
— 2.0% when MHI between $6,000 - $10,000
2.5% when MHI over $10,000
o Projects determined expensive were to receive further review
including determination of:
the comprehensiveness, accuracy and reasonableness of cost
estimates and cost-effective analysis
the soundness of local share financing
whether the grant applicant has investigated supplemental funding
revaluation of alternatives, including rescoping the project
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IV-12
o Provided for improved coordination with Farmers Home Administration
including FmHA evaluation of community financial capability and
proposed financing.
CG-82
o States that six questions should be answered in order to demonstrate
financial capability.
o redefines high cost project as:
- 1.0% when MHI is under $10,000
- 1.5% when MHI is between $10,000 and $17,000
- 1.75% when MHI exceeds $17,000
o List fifteen suggested indicators for identifying possible problem
projects.
Clean Water Act
204(b)(l)(B): requires grantee to certify that it has adequate legal,
institutional, managerial and financial capability to construct, operate
and maintain treatment works.
Construction Grants (CG) Regulation - final (February 17, 1984)
Requires applicants to:
o demonstrate legal, institutional, managerial, and financial
capability to build, operate and maintain wastewater treatment works.
o answer five questions in order to demonstrate financial capability.
o provide written certification that they have analyzed the costs and
financial impact of the facilities and have the necessary capability.
o execute intermunicipal service agreement if more than one
jurisdiction will use the facilities.
o demonstrate that the selected alternative is implementable from a
financial viewpoint in the facility plan.
o develop a user charge system that produces enough revenues for proper
operation and maintenance. It must also include a financial
management system that accounts for revenues and expenditures.
Mnancial and Management Capability Policy - 2/17/84
o Requires applicants for Step 3 or 2 + 3 construction grants to
demonstrate their financial and management capability by:
providing answers to five questions:
1. What is proposed in the facilities plan?
2. What roles and responsibilities will local governments have?
3. How much will the facilities cost at today's prices?
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IV-13
4. How will construction, operation and maintenance of the
facilities be financed?
5. What are the annual costs per household?
certifying their financial capability
executing an intermunicipal service agreement indicating
allocation of costs and responsibilities if two or more entities
are served by the project
o Outlines EPA and State roles and responsibilities for implementing
the policy. Major delegated State role is to develop a screening
procedure to identify communities which may need greater attention
because of high project cost or potential financial impact. Requires
EPA Regional Offices to overview State guidance and procedures and
conduct a random sample of financial capability demonstrations.
o Includes example financial capability worksheets and suggested
grantee financial capability certification letter.
Delegation Agreements - Delegation Agreements are signed written agreements
between EPA regional offices and delegated States. The agreements usually
cover broad responsibilities and are usually supplemented by subagreements
that cover specific functional areas. The subagreements usually outline EPA
and State responsibilities for carrying out the function including the method
for EPA overview of the State.
Office of Water Operating Guidance and Accountability System (OWOGAS) - FY '84
- OWOGAS is a document that outlines priority Agency objectives and provides a
framework for evaluating Regional performance in meeting these objectives.
One of the areas evaluated under OWOGAS is financial capability, specifically:
o compliance with Financial Capability Policy
o Regional efforts to ensure projects are operating on a
self-sustaining basis.
o Regional overview of State certifications
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IV-14
Attachment
Questionnaire
Financial Capability
Region: Source of*
Information
1. What is contained in each State's delegation agreement and
annual workpl an regarding compliance with the Financial
Capability Policy?
2. Describe each State's procedures and criteria for early
identification of projects which are potentially high cost.
Are there specific criteria used? What actions will be
taken for those projects identified?
3. What procedures do the States use to review financial capability
demonstrations? Is there a written checklist? Who reviews the
demonstrations? Who routinely is sent a copy of the demonstration
and the State review?
4. How do the States inform their grantees of the statutory, regulatory
and policy requirements regarding the Financial Capability Policy?
5. What are each State's procedures for resolving problem projects?
6. What are the Region procedures for resolving problem projects?
7. How does the Region overview (or plan to overview) the States
financial capability activities?
8. If overview has been conducted, summarize the results.
9. What additional management procedures (or control techniques)
does the Region use to ensure the financial capability of grantees?
10. Hew does the Region inform the States of the regulatory, statutory
and policy requirements regarding the Financial Capability Policy?
11. Does the Region feel the States management procedures (control
techniques) and guidance used to implement the Financial Capability
Policy are adequate?
*Please note the source of all information used to answer these
questions. Include name and title of persons interviewed or the
date, title and page number of documents used.
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IV-15
12. Does the Region feel that the Headquarters management procedures and
guidance are adequate?
13. What actions will the Region take (or plan to take) if it
determined that a State(s) is deficient in implementing the policy?
14. What circumstances or procedures or other control techniques (see
suggested list below) inhibit grantees, States and/or the Region
from implementing the policy? (Management Attitude; organizational
structure; personnel delegation and conmunication of authority and
responsibility; policies and procedures; budget and reporting; OWOGAS;
AMAS, organizational check and balances, ADP considerations, others.)
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IV-16
Attachment
Financial Capability ICR Evaluation Criteria
An effective management system in order to ensure that grant applicants
have the necessary financial capability to build and operate the treatment
work should include, at a minimum, the following control techniques.
1. Incorporation into State delegation agreements and annual workplans of all
Federal legislation, regulations and policies regarding financial
capability.
2. Written guidance to grant applicants for answering the policy's five
questions. This should include the Financial Capability Guidebook or
approved alternative.
3. Specific written procedures for screening projects. Screening system
should have a combination of indicators.
4. Written list of actions to take for a project identified by the screening
as a potential high cost project including:
- notification of grantee and Regions
- procedures for further review
- mechanism for tracking project as it goes through grants process
- methods used to address potential problems
5. Specific written procedures for reviewing demonstrations including:
- written checklist
- identification of members of State staff who will conduct reviews
- training of reviewers
- quality control of reviews (i.e., review of reviews)
- procedures for recording reviews
- designation of one specific person at each State with financial
capability responsibilities
6. Specific written procedures for resolving problem projects identified as a
result of the intensive reviews following screening or_ demonstration
review including.
- notification of grantee, A/E and Region
- methods used to resolve problem
- coordination with Region
- mechanisms for providing assistance to grant applicant to resolve
problem
- designation of a specific person with responsibility for project
- policy on dealing with priority list issues associated with redesign.
7. Specific written and mutually agreed upon procedures for Regional overview
of State activities including.
- Screening all financial capability reviews during period (e.g. one
year) prior to delegation
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IV-17
- overview of function (e.g., 10%) of all State financial capability
actions after delegations
- placement of financial elements in the mid-year 205(g) and CME
reviews.
8. Written specific procedures by Regions to resolve problem projects
Including.
- coordination with States
- regional review of State and grantee financial capability
demonstrations and review
- criteria for using independent inquiry
- procedures for providing assistance to State/grantee to resolve
problem
- designation of a specific person with responsibility for financial
capability
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VALUE ENGINEERING ANALYSIS
A. TEAM MEMBERSHIP
The ICR-VE team was composed or four engineers employed in EPA's
constuction grants program — one in the Office of Water Program Operations
(OWPO) and three in Regions IV, VI and VIII. All four team members were
registered professional engineers with individual professional experience
ranging from 10 to 20 years in the program and with VE. These members were:
Brian Chesson, P.E. (RO IV); Ancil Jones, P.E. (RO VI); Hubert Duckett,
P.E. (RO VII); and Walter DeReiux, P.E. (Washington, B.C.).
During 1984 Regional ICR-VE team members visited 6 States, which had
been delegated responsibility for reviewing VE studies and implementing
VE related project requirements. The team examined 17 complete VE studies
as follows:
Region State VE Studies
IV North Carolina 2
Kentucky 1
VI Texas 5
Oklahoma 4
VII Iowa 2
Missouri 3
B. STUDY OBJECTIVE
The objective is to determine if the VE requirement results in
achieving the maximum feasible cost savings (capital and operation,
maintenance and replacement (O.M&R)) in all wastewater treatment projects
with building costs greater than $10 million (or lesser cost projects
when required or requested), while maintaining facility function and
performance.
The Regional ICR team members focused on Regional and State VE
management practices in assuring compliance with statutory and regulatory
VE requirements. Regional team members visited delegated State agencies
to analyze and evaluate States' management practices.
C. CONTROL TECHNIQUES
Clean Water Act Section 218(c), as amended by Public Law 97-117 on
December 29, 1981, describes the statutory requirement for VE. The term
"value engineering" review is defined in the law as a specialized
cost control technique which uses a systematic and creative approach to
identify and to focus on unnecessarily high cost in a project in order to
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V-2
arrive at a cost savings without sacrificing the reliability or efficiency
of the project. The law requires VE on all treatment works (i.e. treatment
plants, pumping stations and sewers, etc.) with a total estimated project
value in excess of $10 million. Prior to the 1981 Amendments, sewer
projects (i.e. collectors and intercepters) were not required to be VE
reviewed, although other projects (i.e. pumping stations, treatment
plants, etc.) were required to be VE reviewed.
The construction grants regulation (40 CFR 35.2114) further clarifies
the law by stating that if the project has not received Step 2 grant
assistance and the total estimated cost of building the treatment works is
more than $10 million the applicant shall conduct value engineering. The
regulations also state that VE recommendations shall be implemented to
the maximum extent feasible.
Guidance to the grantees contained in Construction Grant 1982
("CG-82") on VE was updated based on VE program experience, and updated
guidance is contained in "CG-85". Currently, this grantee guidance
describes the VE concept, VE team composition and qualifications, VE
study scope of work and VE proposal cost/scheduling.
D. REVIEW PROCEDURES
Team members identified highly productive VE studies and less
productive VE studies and described the management of these VE studies.
Major issues that the team addressed in their delegated State visits
were:
0 Are VE studies being conducted on all wastewater treatment
projects with estimated building costs greater than $10 million?
0 Are VE studies encouraged and promoted for projects with
estimated building costs less than $10 million?
0 Based on ICR interviews, are the procedures followed by Regional
Offices and States appropriate to determine that VE studies
are thorough?
0 Are VE studies, and State reviews and approvals scheduled and
performed to meet the project schedules?
0 Are VE studies properly identifying and separating capital
cost savings and O.M&R cost savings and then combining them
to show total life cycle cost savings?
0 Are VE study recommendations being adopted to the maximum
feasible extent?
0 Is it cost-effective to lower the VE ceiling of $10 million
to $5 million or lower?
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V-3
0 Should all types of projects (including sewers) have a VE
study when project costs are below $10 million?
0 When VE studies are conducted by "in-house" personnel (i.e.,
VE study performed by other personnel in the same design firm)
do they result in similar savings compared to VE studies conducted
by "out-house" personnel?
E. TEAM FINDINGS AND OBSERVATIONS
General
Some of the overall observations of the team based on their
review of 17 projects and existing statistical data were:
0 Historically, VE studies on projects with estimated building
costs in excess of $10 million resulted in 5.4% capital cost
savings nationally.
0 Historically, every $1 invested in VE studies results in a
$15 capital cost savings (i.e. 15:1 rate-of-return).
0 The percentage of capital and O&M cost-savings from VE studies
on projects in excess of $10 million would be similar for
VE studies on projects of less than $10 million based on actual
VE review data from projects of less than $10 million.
0 State and Regional personnel that have responsibility for
VE program oversight have their time diverted to other
activities assigned by State and Regional program managers.
0 The potential cost savings (capital and 0,M&R) for projects
below $10 million may benefit small communities that have a
financial capability problem.
0 Lowering the normal EPA grant share from the current 75
percent to 55 percent and eliminating funding of reserved
capacity (effective October 1, 1984) will result in placing
a larger portion of the total project costs on local
communities, especially where States do not pay the incremental
cost increase. Therefore, the significance of VE savings
to communities greatly increases after October 1, 1984.
0 Life-cycle 0,M&R cost saving resulting from VE studies are
especially significant to communities in light of the fact
that communities pay 100 percent of the 0,M&R costs.
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V-4
Savings accured through VE studies allow more projects to
be funded on each State Priority List. This would be
especially true if the project ceiling for the VE require-
ment were lowered below $10 million since there are currenlty
more projects of less than $10 million than over that amount.
The percentage of VE savings to original project cost of
treatment plants and pumping stations is duplicated by similar
VE savings achieved from redesigning sewer projects of equal
costs.
VE studies performed by "out-house" personnel (i.e., VE Team
members from firms other than the project design firm) result
in greater cost savings than studies performed by "in-house"
personnel (i.e., VE Team members from same design firm).
The average rate-of return of assigning a full-time
professional to oversee VE studies in a delegated State
is 90:1. In other words, a $40,000 annual salary invested
in VE reviewing would result in at least $3,600,000
savings from all projects with VE reviews in the State.
Only 20 percent of all VE study cost saving recommendations are
actually being implemented. Proper VE program oversight at
Regional and State levels could increase the savings ratio by 50
percent (i.e., increase by 30 percent the recommended cost savings)
Because of the small percentage of VE study recommendations that
have been implemented, the Team felt that the corresponding
national statistics of 5 percent capital cost savings and 1
percent O.M&R cost savings should be considered only minimum
national goals. VE saving targets should be set at least 50
percent above those values. The VE Team generally agreed that,
through more positive Regional and State program management, the
actual VE study cost savings could be increased 50 percent
nationally. This could raise the national VE study capital cost
savings from 5 percent to 7.5 percent and increase 0, M&R
life-cycle cost savings from 1 percent to 1.5 percent. In other
words, with a national constuction grant program outlay of $2.4
billion* this improved VE program management would result in an
additional $58 millions in capital savings.
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V-5
Specific
Some specific observations of the team were:
0 The ICR-VE Team found in the Regions and States included in
the study that VE studies were being conducted on all
wastewater treatment projects with estimated building costs
of greater than $10 million, as required by statute.
However, Team members stated that required VE studies were not
being effectively managed and voluntary VE studies were not being
encourage or promoted by the Region and States. This is caused by
the use of Regional and State VE personnel who do not have suffi-
cient time to promote or encourage VE activity.
0 Procedures followed by Regional Offices and States to
determine if VE studies are thorough appear to be adequate.
However, the attention Regional and State personnel devote
to VE to effectively implement the procedures need to be
increased.
0 All Team members observed that VE studies, reviews and
approvals were scheduled and expedited, when necessary,
to meet the individual project schedules.
0 A resounding "no" was recorded from Team members to the
questions of whether VE study recommendations were being
adopted to the maximum feasible extent and whether adequate
justification for rejecting VE study recommendations was
provided in project files.
F. TEAM RECOMMENDATIONS
A consensus of opinion was reached among the VE team members in
arriving at the following recommendations to address the specific and
general observations:
Regional and State Management Training
Headquarters should instruct and provide information to Regional
and State constuction grants managers on the effectiveness and
benefits derived from a more vigorous VE program management and
oversight.
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V-6
VE Primary Responsibility
EPA Regional and State managers should assign VE duties to
program personnel as their primary responsibility.
Lower VE Floor to $1,000,000
Based on historical data, the project floor of $10 million can
be lowered to $500,000 before the cost of a VE study will equal
the capital cost savings. Therefore, VE is recommended as a
cost-effective measure for all projects of $1 million, or more.
VE Allowance
This recommendation is made because most of the project cost
savings (capital cost savings) resulting from VE are accrued to
the State and Federal Government, not the local community. These
VE savings are in turn used to fund more projects. (See allowance
percentages for project designing provided in Appendix B of the
February 17, 1984 Construction Grant Regulations (40 CFR Part 35)
and preamble discussion.) Team members recommended an additional
project allowance to offset the cost of VE studies. Currently,
the community only pays 25 percent of the eligible project costs
(after October 1, 1984, this share rises to 45 percent) and
usually the State pays a portion (currently averages 10-15
percent) of the local share of eligible project costs. Note that
O.M&R costs are fully paid by the community, and O.M&R cost
savings resulting from VE are a 100 percent, dollar-for-dollar
savings to the community. However, since a national average of
only 1 percent of the project's life-cycle O.M&R costs are saved
due to VE as opposed to 5 percent of capital cost savings
local managers have less incentive to schedule VE studies or
adopt most of the VE study recommendations. Developing a precise
VE allowance is very difficult since it probably is based on a
sliding scale, and the team felt it was beyond the scope of
this review.
National 5 Percent Capital and 1 Percent 0,M&R Savings
Historically, VE has resulted in 5 percent capital and 1 percent
life-cycle, 0,M&R cost savings. The team recommends that
Headquarters should consider adopting a national goal greater
than the current 5 percent capital and 1 percent O.M&R cost savings
being achieved from VE analyses. This would provide further
incentive to Regional and State reviewers to encourage communities
to accept a higher percentage of VE study recommendations.
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V-7
Assist State VE Coordinators and Assistants
If a State has been delegated VE responsibility, management
should designate a State VE coordinator with an assistant. Both
coordinator and assistant should possess proper VE training. Both
should have VE assigned as their primary responsibility. Any
changes in assigned VE personnel would obligate the State to
notify the Regional Office of the State VE substitue and his or
her qualifications. Regions and States should modify State
delegation agreements to reflect this recommendation.
Regional VE Budget
Headquarters and Regional budget managers should include a budget
element specifically dedicated to VE program activities to allow
adequate oversight of delegated States and to manage VE in
non-delegated States. This would elevate the importance of the
activity in management deliberations on program budget requests.
GICS-VE Data Elements
Need to initiate Grant Information Control System (GIGS) data
elements to track each project's conformance with VE program
national goals. Suggest GIGS data elements indicating targeted
and actual dates for VE study reviews (at 25 percent and 75
percent design levels) and a GIGS data element indicating
recommended and actual capital and O.M&R life-cycle cost savings.
Also, it is recommended that the data element indicating
recommended and actual cost savings have a time element that lets
State officials know when funds are made available and the amount
of funds that are made available through VE savings so that these
saving can be used to fund additional projects in that State.
Also, these data elements are necessary to alert Regional and
State managers as to the acceptance of recommendations and actual
cost savings before the design is complete.
The team recommends that grantee management practices used on
the VE studies discussed in this report be reviewed during FY 1985.
This grantee level review is especially important to determine the
grantee's documented justification for accepting and rejecting VE
study recommendations.
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V-8
G. RESPONSE TO REGIONAL COMMENTS
One Region disagreed with the recommendation of adopting a national
annual goal of greater than 5 percent capital cost and 1 percent 0,M&R
cost savings for VE analyses. The team cannot accept this comment. The
intent of this recommendation is to provide further incentive to Regional
and State VE personnel to encourage communities to accept a higher
percentage of VE study recommendations. The Region did not propose an
alternative incentive; an incentive should be provided; and the recommended
incentive is appropriate.
Another Region stated three concerns with team recommendations. It
disagreed with the recommendation to increase the number of projects subject
to the VE analysis requirement by reducing the project cost floor for
required VE analyses from $10 million to $1 million. The Region suggested a
$5 million project cost floor. The team cannot agree in view of statistical
data developed by the VE team members which show that VE analyses are
cost-effective below the $1 million level.
The Region also disagreed with the recommendation that one employee
be assigned per State as a full-time VE coordinator. The Regional
rationale was that States with small populations have very few VE projects.
The VE team cannot agree because lowering the floor for required VE
analyses to projects costing $1 million would increase the number of
projects to be VE analyzed, thereby significantly increasing each State's
VE review workload.
The Region further disagreed with the recommendation that proposed a
new GICS-VE data element. It reasoned that less populated States have
fewer VE projects. The team's underlying purpose was to alert Regional
and State managers to the low level of VE study recommendations being
accepted, and to encourage the provision of sufficient State VE personnel
to address this problem. The proposed data element and reporting require-
ment will help to do this.
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V-9
Attachment
Value Engineering
Objective:
Scope:
Issues:
o
To achieve the maximum feasible cost savings (capital and
O,M&R) in all wastewater treatment projects with bui3.ding
costs greater than $10 million (or lesser cost projects when
required or requested) while maintaining facility function,
performance, and reliability.
Analyze completed VE studies in two selected States in each of
three selected Regions. Focus on one highly productive study
and one lesser productive study in each of these States and
describe the management of these studies by the Region,
States,, grantees, and designers.
Are VE studies being conducted on all wastewater treatment
projects with estimated building costs greater than
$10 million?
Are VE studies being encouraged and promoted for other
wastewater treatment projects with estimated building costs
less than. $10 million?
Are procedures followed by Regional Offices and States
appropriate to determine that VE studies are thorough?
Are VE studies, reviews and approvals scheduled and expedited
to meet the project schedules?
Are VE studies properly identifying and separating capital
costs savings and 0,M&R costs savings and then combining them
to show total life cycle costs savings?
Are VE study recommendations being adopted to the maximum
feasible extent?
Approach:
Select and evaluate those VE studies that (1) achieved capital
cost savings of more than 5 percent and O,M&R cost savings of
more than 1 percent and (2) achieved less than 5 percent and
1 percent capital and 0,M&R savings respectively.
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V-10
Determine if results of VE studies were acceptable,
comprehensive, feasible and if life-cycle costs savings were
significant.
Identify and evaluate the management practices used by the
Regions, States, grantees, and designers on these VE studies.
Determine whether the national average of 5 percent capital
and 1 percent O,M&R cost savings are an accurate index to
identify "highly" productive and "lesser" productive VE
studies.
Identify those management practices used by the Regions,
States, grantees, and designers that achieve maximum feasible
cost savings.
Evaluate the effectiveness of delegation arrangements between
Regional Offices and States.
Evaluate effectiveness of coordination between States,
grantees and designers.
Determine, based on the above analyses, if additional effort
and resources are needed in the following areas, a) Regional
or State level management tracking procedures, b) technical
guidance, c) task force effort, d) Regional, State, grantee
and designer training seminars, e) changes to regulations, or
f) changes in VE scope, etc.
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V-ll
VALUE ENGINEERING PROGRAM
Questionnaire
Attachment
State:
Grantee:
Questionnaire completed by:
Title:
Phone:
Region/Office/Branch:
Purpose (ICR Cbjective) : To achieve the maximum feasible cost savings (capital
and 0,M&R) in all wastewater treatment projects with building costs greater than
$10 million (or lesser cost projects when required or requested) while
maintaining facility function, performance and reliability.
Date(s) Interview Conducted:
Date VE Delegated:
State VE Coordinator:
Date, VE Trained:
Assistant Coordinator:
Full Delegation:
Title:
_ 40HR.
Title:
Phone:
Other:
Date VE Trained:
Person(s) Contacted at State:
Name:
Name:
Name:
Title:
Title :
Title :
Phone :
Phone :
Phone :
Person(s) Contacted at Grantee:
Name: Title:
Name: Title:
Name: Title:
Phone:
Phone:
Phone:
VE Project Description:
Capital O,M&R Life Cycle
Proposed
Accepted
VE Cost
Sty & Imp
LCC
Save
Percent
Save
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V-12
1. Are VE studies being conducted on all wastewater treatment
projects with building costs greater than $10 million?
Yes No
a. What procedures have been adopted to ensure
that all projects requiring VE studies have
been identified?
b. What controls are used to ensure that identified
VE studies are conducted?
2. Are VE studies being encouraged and promoted for those
wastewater treatment projects with estimated building
costs less than $10 million.
Yes No
a. What activities are used to encourage and/or
promote VE studies?
3. Are procedures established by Regional Offices and States to
determine if the VE studies are thorough.
Yes No
a. What are these procedures?
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V-13
b. Do these procedures cover: Yes No
Proposal
Qualifications of the VE Team
Pre-^workshop Maetings . . . .
Workshops
Oral presentations
Preliminary reports
Final reports
Implementation
4. Are VE studies, reviews and approvals scheduled and expedited
to be compatable with the project schedules?
Yes No
a. What actions are taken to make sure the VE
activities (i.e., studies, reviews and approvals)
are appropriate for the project requirements?
b. What procedures are used to ensure that these
activities meet the VE study schedule?
5. Are VE studies identifying maximum capital and 0, M&R
costs savings and are they properly evaluating
those life cycle costs?
Yes No
a. What procedures are used to ensure that
capital and 0,M&R cost savings are
separately identified and combined into
total life cycle cost savings?
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V-14
6. Are VE study reccrarenations being adopted to the maxiinum
feasible extent?
Yes No
a. What documentation is available to show that
acceptances of the recommendations were
appropriate?
b. Has complete information been submitted to
support rejection of any recommendation?
c. Has every effort been made to adopt a cost effective
portion of a recommendation even though other
portions of the recomrendation have been rejected?
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V-15
Attachment
affirmative steps are to be carried
out. The six (6) affirmative steps
are to be included in the bidding
documents (Section 16.9).
11.3
DESIGN REVIEW A review of your
bidding documents
includiig the construction drawings
and specifications is performed
prior to the award of Step 3 grant
assistance or before initiating
procurement action for building on
Step 2+3 projects. A review of
the construction drawings and
specifications is made by your
reviewing agency. Your design should
be consistent with your approved
facilities plan, thus avoiding
any delay in approval. Also, a
biddability and constructability
review is conducted by the Corps of
Engineers or delegated State to
ascertain that the proposed construc-
tion drawings and specifications
provide adequate information so that
a contractor can bid and construct the
facility without additional details
or directions. The review by the
reviewing agency is for administrative
purposes only and is a reasonable
determination that the effluent
limitations or water quality standards
described in the facilities plan will
be achieved, that the results of the
infiltration/inflow analysis have been
considered, that the recommendations
of the value engineering review
have been included. The design 'review
does not relieve you or your A/E of
responsibility for the project design.
Structural, electrical and mechanical
details of design will typically not
be reviewed in detail. Obvious
irregularities will be noted and
reported to you. Compliance with the
design and administrative considera-
tions discussed in this section will
be confirmed by your reviewing agency.
CHAPTER 12
CONCURRENT ACTIVITIES DURING DESIGN
12.0
CONCURRENT During project
ACTIVITIES design, it will be
necessary to under-
take other activities which are either
directly or indirectly related to the
project design or are a part of the
grant application process. While
some of these activities could be
undertaken after design, it is
recommended that they be performed
concurrently with design in order to
save time, reduce costs and continue
moving the project toward grant
award.
12.1
VALUE
ENGINEERING
Value Engineering
(VE) is an intensive
review uti1i zi ng
a specialized cost control technique
which identifies unnecessary high cost-
in a project. VE obtains the best
project at the least costx without
sacrificing quality or reliability^ by
using:
o Multidisciplinary team of
design professionals guided by
a VE coordinator to:
o Evaluate cost and function
relationships;
o Concentrate on high cost
areas;
o Generate creative alternatives;
o Provide recommendations to you
and the project designer.
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V-16
A VE review is required for a
construction project with a total
estimated building cost in excess of
$10 million. VE is also recommended
for projects costing less than $10
million because they also contain the
potential for substantial savings. VE
serves as a mechanism to enhance
the design of wastewater treatment
facilities by providing the project
designer with an opportunity to
utilize the knowledge and experience
of other individuals to optimize the
project design.
12.1.I'-
VE TEAM AND
QUALIFICATIONS
The VE team
coordinator is an
important VE
participant who should have demon-
strated technical and managerial
capability. The team coordinator acts
as a liaison between the VE team, the
project's design team and you. The
team coordinator should be a qualified
individual with VE experience on
wastewater construction projects.
Other VE team members should be
experienced professionals with VE
training*, -if possible, -and- previous
VE experience on wastewater construc-
tion projects. The specific team
makeup and size should be appropriate
for the nature, size, and complexity
of the project.
Because it is essential that the VE
review be independent and objective,
it should not be conducted by the
design firm. You should consider
using a separate subagreement with the
VE review firm to perform the VE
review instead of a subcontract under
the original architect/engineer (A/E)
subagreement.
components and systems of the project.
Depending on the size and complexity
of the project, the VE effort may
vary from one team and one review
session to multiple teams and multiple
reviews. For example, a large project
should involve at least two separate
reviews: one review at approximately
the 20-30 percent design stage to
evaluate the plant layout, structural
design, hydraulic capacity, etc.; and
a second review at approximately the
65-75 percent design stage when
electrical and mechanical systems are
being designed.
The VE study will generally result in
two reports. The first VE report
should include such items as:
o Scope of the VE study;
o Basic VE
including the
such as:
methodology employed,
results of each phase,
12.1.2
SCOPE OF
WORK The VE study should
consider all
Information Phase - collection
of all facts, background and
data that are pertinent to the
design, including an energy
and a cost model;
Speculative/Creative Phase -
creation of an extensive list
of alternative ways to perform
the essential functions found
during information gathering,
concentrating on areas with
highest potential savings;
Evaluation/Analytical Phase -
evaluation of the feasibility
of alternatives generated
during the creative phase;
Development/Recommendation
Phase - a more complete
evaluation of the most
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V-17
feasible alternatives
and identification of VE
recommendations;
o Summary of VE recommendations;
o Estimated cost savings for each
VE recommendation.
The VE report is presented both orally
and in writing to you and the project
designer. Since the purpose of
VE is to obtain the best project
at the least cost without sacrificing
quality or reliability, it is
important that the VE recommendations
are evaluated from a noncritical and
constructive position.
The final VE report should include
items such as:
o Accepted VE recommendations;
o Cost and schedule for imple-
menting the accepted recommendations;
o Rejected recommendations and
reasons for the rejection;
o Net savings (both capital and
0&M) over the planning period for the
accepted VE recommendations.
In reviewing the final report you and
your reviewing agency should ensure
that there is sufficient justification
for each rejected VE recommendation.
12.1.3
PROPOSAL COST
AND TIMING
Since VE is a
process that
involves senior
professionals, the selection of
experienced and well qualified VE
team members and team coordinator
is essential for best results.
Likewise, it is vital that you and
your design A/E, when soliciting or
advertising for VE proposals, clearly
specify the scope of the VE study,
including the number of studies
required and other essential
factors to assure that all proposals
will be submitted on the same basis.
Proposals should clearly identify the
number of studies and teams; the
names and experience backgrounds for
the team coordinator and study team'
members, plus a description of the VE
study procedures, with a schedule for
completing the study.
Experience shows that two VE studies
will generally achieve optimum VE
benefits. If the second study cannot
be accomplished, one study should
be scheduled around the 20-30 percent
design stage for best results.
A prestudy meeting with you, your
design A/E, VE team coordinator and
reviewing agency will help refine the
scope, schedules and procedures and
improve working relationships to
maximize study benefits. If managed
properly, VE will not delay the
project.
12.2
USER CHARGE
SYSTEM
The user charge
represents the
amount of money you
will charge each customer each year in
order to pay for the operation,
maintenance, and replacement (OM&R)
of the wastewater collection and
treatment system. A sound user charge
system is an essential step in
ensuring your ability to pay for OM&R.
Generally, the charges are based
on the amount of water (measured by
water meters) used by homeowners
and small commercial establishments.
Industries and large commercial users,
in general, also pay by water use but,
in addition, a surcharge may be added
because the strength of their waste
or the rate of discharge causes
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VI
SPECIFYING AND BIDDING
A. TEAM MEMBERSHIP
The ICR team which conducted this review consisted of one
environmental engineer from each of three Regions (II, V, and X) and a
construction program manager from Headquarters. Individuals of the group
were selected for:
o Their construction grants program experience with EPA;
o Their knowledge of construction and construction practices; and
o Their qualifications to provide expert testimony.
A list of team members and professional summary is shown on Attachment 1.
B. CONTROL OBJECTIVES
The objectives of EPA requirements and procedures are to:
o Ensure quality bidding documents by assuring that:
- Plans, specifications, and estimates are reviewed and approved
according to Section 203(a) of the Act;
- Specifications for bids do not restrict competition in
accordance with Section 204(a)(6) of the Act; and
- Bidding documents comply with Parts 30, 33, and 35 of the Code
of Federal Regulations and EPA policies.
o Ensure quality procurement by assuring that procurement procedures
are reviewed and comply with minimum Federal and EPA standards as
contained in 40 CFR Parts 30, 33, and 35 and EPA policies.
C. CONTROL TECHNIQUES
For each objective, the team identified the control techniques that
program management had developed to efficiently and effectively accomplish
the objective and protect the projects and grant funds from waste, loss,
unauthorized use or mis-appropriation.
In the "specifying" event cycle, where the control objective is to
ensure quality bidding documents, the following control techniques are
prescribed and used:
o Bidding document reviews by States and Corps of Engineers (COE).
o Biddability and constructability (B and C) reviews by COE and
States.
o Review by Headquarters and Regions of States and COE activities.
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VI-2
In the "bidding" event cycle, where the control objective is to
ensure quality procurement, the following control techniques are
prescribed and used:
o Self-certification reviews by grantees.
o "Approval to award" reviews by the States and COE.
o Oversight reviews by the States, COE and Regions on procurement
activities of grantees.
o Oversight functions by Headquarters and Regions relating to
activities of the States and the COE.
These control techniques were tested for effectiveness and efficiency.
Review findings provide a high degree of assurance that the internal
control objectives are being achieved.
D. REVIEW PROCEDURES
The team selected two States from each Region involved (e.g., one
large State and one smaller State), which had been delegated partial to
full project review and management responsibilities. The degree of
delegation was an important criterion for State selection.
A listing of the States selected, with comments on the relative size
of each State and the degree of delegation, is shown in Attachment 2.
Attachment 3 lists the agencies and individuals involved.
Project Selection Criteria
In each State, projects were selected using the following criteria:
o Projects where grantees have recently awarded construction
contracts (within six months, if possible).
o Projects under construction for both large and small contract
amounts (e.g., more than $10 million and less than $5 million, if
possible).
o Projects where the grantee is self-certified, if possible.
The work group developed a detailed questionnaire for each control
objective to be used as a basis for interviewing each State. The
questionnaires were annotated for each question to show the responsible
entities, such as EPA Headquarters, EPA Region, COE, State or
grantee/engineer. The questionnaires for specifying and bidding are
are included in Attachments 4 and 5.
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VI-3
ICR Procedures
The ICR was conducted in each Region in essentially the same manner:
o Regions sent introductory letters to invite State participation.
o Questionnaires were discussed with each State prior to the EPA
visit.
o Regions conducted interviews at the State offices.
o Regions analyzed results of interviews.
o Regions prepared highlights of findings.
E. TEAM FINDINGS AND RECOMMENDATIONS
Major Conclusions
The ICR for specifying and bidding was conducted in three
Regions (II, V and X) and six States (New York, New Jersey, Minnesota,
Ohio, Oregon and Washington). Results clearly show that EPA is now
achieving quality performance in this area. Although variability exists,
the States and COE are essentially doing a very good job. Only a few
instances of minor deficiencies were found. However, the ICR team has
identified areas in which the potential for fraud and misuse of Federal
funds exist. In an effort to reduce this potential, the team developed
recommendations for the five program activities and management concerns.
Biddability and Constructability Reviews
The effectiveness of B and C reviews conducted by the COE received
a very mixed reaction from the States interviewed. The reaction varied
from "very beneficial" to "of little benefit." In all cases, it was very
difficult to measure the dollar savings from such reviews.
Where the B and C reviews were found to be beneficial, credit was
given to the quality of COE personnel assigned to perform the review.
Where the reviews were less beneficial, repetitious and less significant
comments prevailed. Some States felt that the electrical and mechanical
portion of the B and C review was very beneficial to improving design
integrity, since their own review was not adequate in this area.
In summarizing the reaction from the States interviewed, two States
were convinced that the B and C reviews were very beneficial, two States
believed the reviews were moderately beneficial and the other two States
had determined that the reviews were not beneficial.
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VI-4
In view of States' response, the team found:
o The value of B and C reviews varies from being "very beneficial"
to being "of little benefit".
o Performance of B and C reviews varies from "conducted on
all projects" to "conducted on selected projects."
o The B and C level of effort did not vary as a function of the
project size and complexity (i.e., large, complex projects
warrant much more reviewer attention than small, standard
projects). B and C reviewers' time could potentially be more
effectively used.
o Feedback to the COE by the State regarding the implementation
of their B and C comments was generally lacking.
Recommendations:
o Headquarters and COE should jointly consider ways to optionize
COE participation in plans and specifications reviews activities.
o If a B and C review is conducted, it should include a
"plan-in-hand" site inspection.
o Headquarters should compile and develop and Regions should
distribute lists of reoccurring deficiencies in B and C reviews
to all States and grantees.
Bidding Documents and Procurement Process
Generally, delegation agreements provide for the use of checklists
in reviewing plans and specifications and the procurement process. These
checklists are effectively employed in the review process. As an example,
the checklists include a reexamination to assure that the non-restrictive
specification requirements.have not been violated (In the limited
sample of the ICR, no such violations were found.) The checklists further
ensure that EPA and State requirements are met and that the potential for
fraud, waste and mismanagement is minimized. However, checklists need to
be improved and guidance needs to be expanded or revised so that bidding
documents and procurement will address the following concerns.
1. Checklists
o Checklists serve to document the file and to provide a record of
review.
o Checklists should be expanded to ensure that they include
current important items. Not all checklists in use have been
updated to reflect current regulations. This deficiency has been
recognized in some States and the updating of checklists is in
progress.
o Follow-up by the States of checklist deficiencies should be
improved.
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VI-5
2. Minority and Women's Business Enterprise (MBE/WBE)
o The MBE/WBE certification process needs improved oversight
and visibility.
o A suggested MBE/WBE bidding document insert distributed
by one Region needs to be rescinded because:
- It does not clearly define what a bidder must do
to be responsive; and
It is an ambiguous specification which violates
the fundamental principles of competitive bidding.
o Unacceptable MBE/WBE inserts will promote bid protests
and increased construction costs.
(Note that soon after this review, the defective insert was withdrawn
by the Region.)
3. Non-Collusion Certification
o Non-collusion certificates are only required by,some States.
o OIG has developed a recommended form of certification.
o Use of a non-collusion certificate would reduce the potential
for collusion.
4. Code of Conduct
o EPA regulations, 40 CFR 33.270, require grantees to maintain
a code of conduct which governs their performance in the award
and administration of subagreements.
o The code of conduct requirement is not addressed in EPA guidance
and is not uniformly followed.
Recommendations;
o Checklists used by States and COE need to be revised and updated.
o Headquarters should develop and issue national guidance to
uniformly address;
- MBE/WBE inserts for bidding documents; and
- Use of non-collusion certification.
o The code of conduct regulatory requirement should be included
as an item reviewed in all CMEs.
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VI-6
Prevention of Fraud, Collusion and Bid Rigging
If suspicion of fraud, collusion or bid rigging arises, the EPA,
State or grantee course of action is clearly defined. However, the
process for identifying the suspect is not well established.
o Neither the Regions nor the States interviewed have a
process in place to identify fraud, collusion and bid rigging.
However, they are submitting the required information
to the OIG.
o The responsibility of identifying suspects rests with the
grantee, State, EPA, and the OIG.
o Unlike the OIG, Regions, States and grantees do not have a
"trained eye" for detection.
o The level of responsiility for all parties involved needs
to be more fully defined. Some States are expressing a reluctance
to assume the OIG role.
Recommendations:
o OIG and the Department of Justice must assist EPA, the State and
the grantee to develop a consciousness and awareness of incidents
of fraud, collusion and bid rigging.
o The development of the process applying to grantees, States and
EPA to detect suspects of fraud, collusion and bid rigging must
be expediously continued.
o Clear lines of responsibility must be identified by Headquarters.
For example, grantees should be required to maintain in their
files at least the 12 items of bidding records recommended by
the Department of Justice and shown in Attachment 6.
Delegation Reviews and Internal Control
Delegation agreements, of themselves, do not assure that the
bidding documents and procurement process are free from omissions or
features that may increase the potential for fraud and misuse of Federal
funds. State management and implementation of EPA program requirements
under delegation and the Regional review of State performance, together
with assistance from the COE, mutually activate the agreements and other
program provisions that are designed to prevent fraud and misuse of
Federal funds.
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VI-7
o Those States and COE Districts which are responsible for
the review and approval of bidding documents and procurement
have a procedure in place to assure timely reviews and awards.
o States and the COE are implementing delegation agreements,
including the completion of necessary checklists and taking
appropriate action.
o All Regions have not recently performed overviews in this
area because the States have established good performance records
in the past.
o Where Regions have recently performed overviews, they continue to
find good State performance.
o New York State has established its own internal control program.
When this program identifies deficiencies, training sessions are
held and standard procedures are developed by the State.
Recommendations;
o Headquarters and Regions should encourage States to establish
internal control programs.
Grantee Self-Certification of Procurement System
The May 12, 1982 regulations include provisions which allow the
grantees to self-certify that their procurement systems meet Federal
requirements.
o Some State bidding laws do not allow self-certification by
grantees.
o Many States do not encourage self-certification because they
view the process as a blind approval without a State or EPA
concurrent review of the procurement action.
o Only one project was found to have been approved under
the self-certification process. It is too early to evaluate the
impact of the process on that project.
Recommendations;
o An ICR evaluation of the self-certification process should
be performed after more projects are being conducted under a
self-certification procedure.
o For those projects where a grantee has established a
self~certification program, more thorough B and C reviews and
design reviews should be performed^
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VI-8
Resource Needs
No additional resources are required to implement the recommendations
of the ICR on specifying and bidding. All recommendations can be completed
by the existing personnel assigned to perform the management and oversight
of those cycles.
ICR Review Process; Team Recommendations
As a result of having completed this ICR effort, the team has
several recommendations to improve and assist the institutionalization
of the ICR process and aid the application of ICR recommended actions.
o Headquarters should develop a mechanism to analyze the impact
of new regulations on highly vulnerable program areas identified
through the ICR process and distribute advice on appropriate
procedures to the Regions and States concurrently with the new
regulations.
o Headquarters should develop a system for incorporating the
ICR process and recommendations into OWOGAS and the State
oversight reviews.
Concentrating on areas where deficiencies have been
found; and
Including control techniques in the oversight guidance.
o Subsequent ICRs should involve the States to a greater extent,
provide for COE participation, and expand to the grantee level.
This can be implemented parTially by modifying the CME process to
incorporate ICR concerns. A substantial saving of travel funds
would be realized. In addition, EPA should encourage States and
grantees to establish their own internal control and oversight
programs, where feasible.
o The specifying and bidding ICR should be extended into FY 1985
to include self-certification and debarment. These two areas are
recognized as potentially vulnerable areas, but sufficient project
specific documentation is not yet available for a complete ICR
evaluation.
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Attachment 1
VI-9
MEMBERS AND PROFESSIONAL SUMMARIES OF ICR TEAM
David P. Welch
Position: Area Program Manager - Municipal Construction Division
EPA - Headquarters - Washington, DC
Professional Experience:
7 years - Construction Grants Program, EPA, Headquarters
7 years - Municipal Enforcement Program, EPA Region V
23 years - Wastewater Treatment Design, Consulting Engineers, Chicago, 1L
Registered Professional Engineer - Illinois and Tennessee
Education:
BS - Civil Engineer, Yale University, Connecticut, 1947
Stewart Alexander
Position: Section Chief - Caribbean Construction Grants
EPA - Region II - New York, New York
Professional Experience:
4 years - Chief, New Jersey Const. Grants Section, EPA
5 years - Project Engineer, Caribbean Const. Grants Section, EPA
Registered Professional Engineer - New York
Education:
MS - Environmental Engineering, New York Polytechnic Inst., 1979
BCE - Environmental Engineering, City College of New York, 1972
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VI-10
Neil M. Denbo
Position: Environmental Protection Specialist - Water Division
EPA - Region V - Chicago, Illinois
Professional Experience:
12 years - Construction Grants Program, EPA
16 years - Other professional Federal service
Registered Professional Engineer - North Carolina
Education:
BS - Civil Engineering, University of Illinois, 1951
Norman Sievertson
Position: Environmental Engineer - Construction Grants
EPA - Region X - Seattle, WA
Professional Experience:
16 years - Construction Grants Program, EPA
7 years - Design and Const. Management, Dept. of Interior
4 years - Structural Design Engineer, Corps of Engineers
Registered Professional Engineer - Oregon
Education:
BS - Civil Engineering, Oregon State, 1959
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Attachment 2
VI-11
States Selected for ICR
Region States Comments
II New York Very large State, delegated
New Jersey Medium size State, fully delegated
V Ohio Large State, partially delegated
Minnesota Smaller State, fully delegated
X Oregon Medium size State, COE performs
Step 3
Washington Large State, fully delegated
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Agencies and Individuals Involved
Attachment 3
Region
Region II
New York
ICR Teair.
Representatives
Stewart Alexander
State Office Visited
New York State
Dept. of Environmental
Conservation
New Jersey State
Dept. of Environmental
Protection
Principal State Contract
Robert Haropston, Director
Div. of Construction
Management
Larry Rutland, Chief
Quality Assurance
George Goldy, Chief
Bureau of Construction
Management
Region V
Chicago
Neil Denbo
Ohio EPA
Minnesota Pollution
Control Agency
Spain James, Project Eng.
Gordon Wegart, Chief
Technical Review Section
Region X
Seattle
Norman Sievertson
David Welch
Washington State
Dept. of Ecology
Chris Hanes, Chief
Facilities Planning and
Design Section
Cathy Le Prowse
COE-EPA Section
Oregon State
Dept. of Environmental
James Van Domelon, Chief
Plan & Specification
Review Section
Bill Renfroe
COE-EPA Section
VI-12
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Attachment 4
VI-13
INTERNAL CONTROL REVIEW
Questionnaire for Specifying
Control Objective: ENSURE QUALITY BIDDING DOCUMENT
Responsible Entities:
H = EPA Headquarters
R = EPA Region
C = Corps of Engineers (COE)
S = State
G = Grantee/Engineer
Entity Questions
H,R,S,C,G Are reviews and oversights timely?
H,R,S Do delegation agreeements adequately address
administrative and managing responsibilities?
R,S,C,G Is there a formalized bidding document (i.e., plan and
specification) review criteria or checklist?
H,R,S,C What policies and guidance have been developed to assist
in bidding document developments?
R,S,C Is a checklist used in the review of bidding documents?
R,S,C If so, does the checklist reflect EPA requirements,
policies, and guidances including recent changes to
Part 30, 33, and 35 of 40 CFR?
R,S,C Is the design consistent with the Facility Plan that has
been updated with the environmental assessment review?
S Does the State use a checklist or criteria to
review the design for conformance to State
construction standards?
R,S,C,G Does the B and C review ensure that tenets to non
restrictive specifications have not been violated?
R,S,C Is there a checklist to assist in performing quality
B and C reviews?
R,S,C,G What type of internal managing and controlling system is
used in performing and implementing B and C reviews?
R,S,C,G Have any B and C reviews resulted in significant cost
savings or changes to the bidding documents?
R,S,C,G Have changes and addendums to previously reviewed
contract documents been adequately reviewed?
R,S,C,G Have construction work and delivery scheduling reviews
been adequately addressed?
R,S,C,G Does the eligibility review ensure a thorough
eligibility/ ineligibility evaluation? (i.e., Section
35.2123 reserve capacity, Sec 35.2120, Section 35.2125,
Sec 35.2127, Part 35-Appendix A, Sec 33.275)
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Attachment 5
VI-14
INTERNAL CONTROL REVIEW
Questionnaire for Bidding
Control Objective: ENSURE QUALITY PROCUREMENT
Responsible Entities:
H = EPA Headquarters
R = EPA Region
C = Corps of Engineers (COE)
S = State
G = Grantee/Engineer
Entity Questions
H,R,C,S Are reviews and oversights timely?
H,R,C,S What policies, guidance, and standards are used?
H,R,C,S Are the State delegation agreements and the COE IAG
agreements consistent with EPA procurement standards?
H,R,C,S Do delegation agreements adequately address
administrative and managing responsibilities.
H,R,C,S Are the agreements being adequately monitored and
implemented in this respect?
C,S,G Is the contract award criteria reviewed to determine if
it is in accordance with the bidding documents?
(i.e., Sec 33.235, Sec 33.285, Sec 33.240, Sec 33.250,
Sec 33.420, Sec 33.430)
R,C,S,G Is there a process in place for addressing possible
instances of fraud, collusion, bid rigging, etc?
(i.e., Sec 33.220, Sec 35,2105)
S,G Is the procurement record keeping and contract
administration being adequately reviewed for its
documentation, especially when the grantee is self
certified? (i.e., small purchase, non competive,
competitive)
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Attachment 6
VI-15
INTERNAL CONTROL REVIEW
LISTING OF DOCUMENTS REQUIRED FOR SUCCESSFUL PROSECUTIONS
OF POSSIBLE SHERMAN ACT VIOLATIONS
1. Affidavits or Certification of non collusive bidding signed by each
bidder;
2. Engineer's pre-bid estimate(s) of construction costs;
3. Specifications for contract bid;
4. Proposals (originals preferred) of successful and unsuccessful bidders;
5. Contracts (originals perferred) awarded successful contractors;
6. Certified bid tabulation;
7. Notice to Proceed Letter;
8. Grant award document and amendments;
9. Grantee's Outlay Requests for Reimbursement;
10. Contractor's pay estimates;
11. Grantee or consulting engineer's list of all firms who purchased bid
packages; and
12. Grantee or consulting engineer's list of persons (firms) attending bid
openings.
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VII.
CLAIMS AND CHANGE ORDERS MANAGEMENT
A. TEAM MEMBERSHIP
The ICR team was composed of one Headquarters staff member and three
Regional members, who brought ten additional Regional personnel into the
study. The team members have engineering experience and are well qualified
to study claims and change orders management. (See attached list of team
members.)
B. INTRODUCTION
The purpose of this review is to determine the effectiveness of the
various control techniques (regulations, guidance,-policy, etc.) that are
used in the construction grants program to review, process and approve
change orders and claims. The ultimate objective of these control
techniques is to assure that the work covered by the change orders and
claims is necessary and that the cost of the work is reasonable.
Management of claims and change orders in the construction grants
programs involves EPA, the State or CoE, and the grantee. Each entity has
a different role and different responsibilities, e.g:
o EPA Headquarters provides regulations, policy and guidance.
o EPA Regions oversee the States/CoE's implementation of regulations,
policy and guidance.
o The States/CoE review and approve change orders and determines the
cost allowable for grant participation.
o The grantee negotiates and approves the claims and change orders
that are necessary for the successful completion of the project at
the lowest possible overall cost.
C. BACKGROUND
A change order is a written order by the grantee to the construction
contractor authorizing an addition, deletion, .or revision in the work
and/or time of completion. The change order process generally originates
as a request for a change to the existing contract documents either by the
grantee or the construction contractor, or from the resolution of a claim.
A change order is necessary to increase or decrease the contract cost or
work, interrupt or terminate the contract, revise the completion date,
alter the design, or in general to implement any deviation from the
original contract terms and conditions.
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VII-2
A contractor claim is a request by the construction contractor for
funds to cover additional costs and/or time that has been rejected by the
grantee, typically because some action or inaction by the grantee or a
misrepresentation in the contract documents is alleged to have caused an
involuntary change in the cost or time of performing the contract. It
differs from the other methods of initiating the change order process,
since the circumstances already exist and the construction contractor has
announced the intention of pursuing an increase in the contract price or
time.
Change orders and contractor claims require special attention since
the work required is not subject to competitive bidding. Consequently,
each step in the review process becomes critical to ensure that the
additional work is necessary, reasonably priced and allowable for grant
participation.
The successful completion of the change order process depends upon the
successful execution of the responsibilities of each of the participants:
grantee, engineer, construction contractor, and the reviewing agency. The
grantee is responsible for financing and managing the project to
completion. Because of this, the grantee is responsible for determining
whether a proposed change is necessary and whether the cost of the change
is reasonable without regard to grant assistance. The engineer is the
technical advisor to the grantee. The construction contractor is
responsible for preparing and submitting the proposal for change and
supporting documentation to the grantee. Using the proposal, the grantee
negotiates the conditions of change with the construction contractor. The
grantee then prepares and presents the change order plus supporting
documentation to the reviewing agency. The reviewing agency checks the
documentation for completeness and adequacy and the allowability of costs,
so that grant participation for the change can be evaluated.
D. CONTROL TECHNIQUES
Headquarters:
Regulations—Former Part 30 (effective for grants awarded before
September 30, 1983)
30.705 Allowable Costs
30.710 Federal Cost Principles
30.725 Cost and Price Analysis
30.900 Project Changes and Grant Modifications
—Revised Part 30 (effective for grants awarded after
September 30, 1983)
30.410 How does EPA determine allowable costs?
30.700 What changes to my assistance agreement require
a formal amendment?
30.705 What changes can I make to my assistance
agreement without a formal amendment?
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VII-3
—Part 33 (effective for grants awarded after May 12, 1982 -
Revised March 28, 1983)
33.210 Recipent Responsibility
33.275 Federal Cost Principles
33.290 Cost and Price Considerations
33.1030 Model Subagreement clauses, specifically clauses:
3. Changes
4. Differing Site Conditions
5. Suspension of Work
—Part 35 - Subpart E (effective for grants awarded before
May 12, 1982)
35.935-11 Project Changes
35.936-5 Grantee Responsibility
35.938-5 Negotiation of Contract Amendments
(Change Orders)
35.940 Allowable Project Costs
Appendix C-2: Required Provisions - Construction
Contracts, (March 1, 1976 to May 12, 1982)
Specifically, Sections:
2. Changes
3. Differing Site Conditions
4. Suspension of Work
5. Termination of Default Damages for Delay
Time Extensions
—Part 35 - Subpart I (effective for grants awarded after
May 12, 1982 - Revised February 17, 1984)
Project Changes 35.2204
Appendix A - Determination of Allowable Costs
—Federal Procurement Regulations
41 CFR 1-15.2: Contracts with Commercial Organizations
41 CFR 1-15.4: Construction and Architect-Engineer Contracts
Guidance—Handbook of Procedures
Chapter VI, Section I, Subsection 1, Change Orders
Chapter VII, Section B, Allowable and Unallowable Costs
Chapter VII, Section E, Increases and Decreases
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VII-4
—Construction Grants 1982
Section 14.1 Grant Increases/Decreases
Section 14.3.1 Change Orders
Section 15.0 Allowable and Unallowable Costs
—Management of Change Orders: A Guide for Grantees
Policy—ARE Resolution Board Decisions, especially,
ARE 8: Allowability of Unsupported Grantee Claims
—Operating Procedures for "Monitoring Construction Activi-
ties" -at Projects Funded under the Environmental
Protection Agency's Construction Grants Program
Regions;
Delegation agreements
Interagency agreement with Corps of Engineers
Construction Management Evaluations (CME)
Training—Seminar for CoE and Spates on Claims Resolutions (Region I)
(February 1984)
Contractor Claims Policy (Region IX) - (April 1983; revised May 1984)
States;
State guidance and procedures
Preaward conferences
Program Management Conferences (PMC)
Grantee;
Local procurement procedures
Preconstruction conferences
(Additional Control Techniques Under Development)
Regulation—5% cap on change orders (published in the Federal Register
for comment on February 17, 1984)-(April 1985)
Guidance—Management of Claims: A Guide for Grantees (October 1984)
—Revised/updated Handbook of Procedures (October 1984)
—Construction Grants 1985 (September 1984)
Training—Claims Seminars to Assist Grantees in Claims Prevention and
Resolution (All Regions)-(FY 1985)
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VII-5
E. REGION/STATE SELECTION; STUDY SCOPE
The ICR study was divided into two major phases. The first phase con-
sisted of an evaluation of the procedures used to review claims and change
orders in Region I (Boston), Region V (Chicago), Region IX (San Francisco),
focusing on the State within each Region with the largest allotment and the
State within each Region with the smallest allotment. The Regions were
chosen to provide for the widest geographical distribution possible. The
States were chosen so that States with large programs could be compared
with States with small programs to determine if there are any discernable
differences. The States included in the review were Massachusetts, Vermont,
Ohio, Minnesota, California and Nevada. (A list of State personnnel
interviewed is attached.)
The second phase of the ICR study consisted of an in-depth review of 60
change orders (varying in cost from $250 to $500,000) and 12 claims
(varying in cost from $226,000 to $860,000).
The principal objectives of the study were to determine the answers to
the following questions:
— Are claims and change orders properly documented by the grantee?
- Are claims and change orders processed in a timely manner by the
State/CoE?
- Are the reviews of claims and change orders by the States/CoE
thorough enough to determine liability, necessity, allowability
and reasonableness of cost?
— Are change orders involving contractor claims reviewed carefully by
the State/CoE to ensure that only meritorious claims are approved
for payment?
- Is EPA providing the necessary assistance to enable grantees to
successfully negotiate change orders and to defend themselves
against non-meritorious claims?
Since the purpose of the ICR study was to sample and test the end
product, which in this case is a reviewed and approved change order
or claim, the scope of the study was restricted to the operating level
responsible for performing this function, i.e., the State or CoE.
Accordingly, the study did not include an in-depth review and evaluation of
the Regional Office oversight in this area. However, it can reasonably be
assumed that the State/CoE performance in reviewing and approving change
orders and claims is an indication of the effectiveness of the Regional
Offices' oversight role in this area.
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VI1-6
GAD Internal Control Review
The Grants Administration Division (GAD), Office of Administration, is
conducting an Internal Control Review on Financial Assistance. The GAD
study focused on a number of "Control Objectives", but only the following
objective specifically addressed the construction grants program: "All
Step 3 construction grant applications received are reviewed and analzyed
to ensure they meet statutory/regulatory requirements."
The specific control techniques applicable to the construction grants
program that GAD focused on were the administrative requirements for review
and certification of Step 3 grant applications, and assuring that all required
items were included in the grant application.
Note, this ICR study is completely independent of the GAD ICR study and
does not in any way conflict or overlap with the GAD study.
E. REVIEW PROCEDURES/STUDY APPROACH
The followings procedures describe the step by step approach that
was used to perform the internal control review of claims and change
orders:
Identify all Agency-wide requirements, (regulations, guidelines,
policy, operating procedures, etc.) concerning the review and
approval of claims and change orders.
Identify any additional Regional requirements for the three
Regions participating in the review.
Identify the review and approval procedures mandated by the
delegation agreements for the six States.
Identify any additional State requirements for the six States.
- Develop a questionnaire (See Attachment) to evaluate the State/CoE
management of the claims and change orders review and approval
process.
Conduct a review in each of the six States in sufficient
depth to determine if all of the required procedures are being
followed. (The questionnaire served as the principal basis for
this review.)
Evaluate the management approach and operating procedures
in each of the six selected States with an emphasis on determining
whether there are adequate mechanisms in place for applying the
required control techniques.
Randomly select 10 change orders that were recently reviewed and
approved (generally during the last six months) in each of the six
States.
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VII-7
- Select the most recent claims that were settled and a change
order submitted in each of the six States.
- Develop a questionnaire (See attachment.) to analyze and evaluate
the results of the State/CoE review of the individual change orders
and claims that were selected for inclusion in the study. A
questionnaire was completed for each of the change orders and
claims included in the ICR study.
- Perform an in-depth review and analyses of all the selected
claims and change orders, using the questionnaire as the foundation
for the review, and compare the results of the review against the
stated objectives.
- Describe the nature, extent and cause of any identified problems.
- Using the results of the above analysis, evaluate the procedures
used to review and approve claims and change orders in the six
States.
- Determine the need for any additional investigation, analysis,
or review.
- Evaluate the effectiveness of the regulations, guidelines,
and operating procedures governing the review and approval of
change orders.
- Evaluate the adequacy of existing personnel resources at the
State/CoE level.
- Determine the need for additional controls and procedures.
- If necessary, develop recommendations concerning needed
improvements, or changes in management procedures:
o additional regulations, technical guidance, operating
procedures, or policy issuances.
o training programs or seminars (EPA, State or consultant).
o additional resources.
- Document the results of the internal control review.
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VII-8
G. REGIONAL OFFICE ROLE
The following section describes the Regional Office role, respon-
sibilities and functions in the change orders and claims review process
for the six States included in the ICR study.
Region I - Massachusetts & Vermont
The Regional Office role in this area varies, to some degree, to fit
the particular State. Also, the RO may get involved in the review of
detailed change order determinations pursuant to the appropriate procedures
outlined in the delegation agreement.
In Massachusetts change orders/claims associated with Federally
funded projects are reviewed and certified by the Massachusetts Division
of Water Pollution Control in accordance with the existing
delegation agreement. In Massachusetts, the Regional Office proceeds, as
follows:
o Arbitrarily selected change orders are routinely overviewed
after the fact on a periodic basis, but at least once a year. The
objective, here, is not to alter a determination made by the Division
but rather to provide general recommendations, concerning the State's
review process.
o For certain change orders over $100,000 the State may request EPA's
concurrence prior to issuing preliminary approval to the grantee.
o For claims of controversial nature or of significant cost, the
Regional Office may offer advice to the State at its request.
In Vermont, the State sends a copy of the certified letter to the
Regional Office of each change order (c.o.) it approves. The original
is sent to the applicant. A log book is kept by the Regional Office to
keep track of them.
At least once or twice a year, five to ten percent of the c.o.'s
certified by the Vermont in the prior quarter are randomly selected by
the Regional Office for oversight. The Regional Office then sends a
letter to the State requesting copies of the c.o.'s and all back-up
information. Depending on the volume of back-up information, a trip to
the State Office may be necessary to conduct the review.
An overview comment memorandum on each c.o. is written and sent to
Vermont for their information. At the following quarterly meeting at
the State Office, these comments are discussed. The intent of the overview,
because it is conducted after the State has approved the c.o., is to point
out both the strong and weak points of the State review for future reference,
In the area of claims, the State of Vermont has requested assistance
from the Regional Office in regard to the eligibility of legal costs since
Vermont has not approved similar such requests in the past.
The grants administration function in the Administrative Services
Division does not have any overview or direct responsibility in the
change order/claims process.
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VII-9
Region V - Minnesota & Ohio
Region V has similar responsibilities in both Ohio and Minnesota,
that is, to overview and provide guidance and technical assistance to the
State in its management of the construction grants program. Specifically,
Region V has negotiated delegation agreements with both States which
among other things contain detailed responsibilities for the review of
change orders and claims. These delegation agreements were based upon
current national guidance and regulations. Since the negotiation, Region V
has also conducted evaluations of the State's activities and has provided
training or advice where it appears necessary. The States have
full authority to approve change orders and exercise it without the
Region's prior review. Generally, the only time Region V is involved in
the full review of a change order (to make a funding decision) is when a
grantee requests a review of a State's decision under the "Disputes"
provisions of the regulations.
The Water Division controls the State delegation agreement activity
and performs all of the evaluations of the State pursuant to the agreement.
The grants management function in the Planning and Management Division
does not have any overview or overriding responsibility in this area.
Region IX - Nevada & California
The Regional functions in these States (both delegated) follow:
- Update delegation agreements periodically to insure conformance
with current regulations and policies.
- Provide guidance and advice to States/CoE whenever requested.
- Perform delegation monitoring reviews on a periodic basis to
verify if Federal regulations, rules and policies are being
accurately and effectively executed.
- Analyze personnel needs of States/CoE on a continual basis to
insure proper resources for the review and approval of
claims/change orders.
- Review and make determinations on grantee appeals of State/CoE
allowability determinations.
- Provide specific case-by-case advice and guidance on contractor
claims to States, CoE and grantees.
Nevada reviews and determines allowability of claims/change orders. In
California claims duties will be transferred from the State to the CoE
on October 1, 1984; change order review is currently a CoE responsibility.
All of these activities are performed by the Water Management Division.
Because of delegation, Grants Administration has no role in this area.
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VII-10
H. SPECIFIC FINDINGS OF ICR TEAM
Region I
The ICR study in Massachusetts took place during the first two weeks
of June. Conferences on generic topics covering change orders and claims
were held with the Chief Engineer and a Supervisory Engineer of the
Massachusetts Division of Water Pollution Control (DWPC). In addition,
there were discussions at staff level relating to specific reviews of the
selected change orders.
Ten change orders were selected at random from a log maintained by
the State which shows submittal date and approval date as well as the
requested amount. The costs associated with the selected change orders
varied between $2,000 to $92,000 approximately.
In our discussions with State personnel, it was revealed that grantees
do not always submit complete packages with the change order. It was
evident from the project files that State reviewers had to request
additional documentation to enable them to make a determination as to
reasonableness and allowability.
For the ten selected change orders it was found that all documentation
supporting a State determination was in the project file once data had
been obtained; that applicable Federal guidance and regulations were used
in determining allowability/non-allowability; that with one exception,
checklists required by the delegation agreement had been completed and
signed by the appropriate program manager; that the State approval letter
did not always indicate the basis for an allowable/unallowable
determination (although it was included in the change order summary); that
the grantee or its agent did not always follow established Federal and
State guidelines; and that the review process took less than 30 days once
all documentation had been received.
The ICR study also included three claims which had received an
allowability determination by the State within the past year. In our
discussions with the staff of the DWPC it was revealed that the claims
documentation is not always complete and that in certain instances it
could not be ascertained if any meaningful negotiations had taken place
between contractor and grantee. The State felt that a general weakness
in the claims area was the lack of a uniform national policy on the part
of EPA relative to the allowability of defense costs. This may account
for the backlog of unresolved claims in Massachusetts. The State also felt
that the interpretation of "defective specification" was very difficult to
implement especially as it relates to impact or delay costs.
Massachusetts had developed and distributed to all architect-engineers
(A/E's) two construction grants policy memorandums pertaining to the processing
and review of change orders and a pt>licy concerning the need and the frequency
for taking soil borings. The latter should help in minimizing change orders
and claims due to differing site conditions.
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VII-11
It was concluded from the ICR study that more engineers might be
needed in Massachusetts in the change order/claims area to reduce the
backlog and speed up the review process.
The IGR visit to the State of Vermont took place on June 13 and 14,
1984, following the regional mid-year evaluation which had taken place
in March. The State had prepared a list of change orders approved within
the past six months prior to the meeting. Ten change orders were selected
at random from this list. The costs of the selected change orders varied
approximately between $1500 to $8000. Generally, the State's review and
approval process took considerable less than 30 days. In our discussion
with the State managers, we were informed that State personnel visit each
project under construction on a regular basis and thus State is thoroughly
aware of all potential problems connected with a particular project.
For all change orders reviewed, the project folder contained an
approval letter, a summary of the change orders showing
allowable/unallowable costs, a delegation agreement checklist, as well as
the back-up documentation submitted by the grantee. If some documentation
had not been inserted in the folder, the responsible State personnel were
able to give an explanation for the change order approval.
Four claims which had been resolved by negotiation and which had been
approved between December 1982 and April 1984 were also included in the ICR
study. Again, the State personnel were thoroughly familiar with the details
of each claim.
The overall impression is that Vermont is doing an excellent job in
the review of change orders and claims. It has in place an internal process
which addresses documentation submittal, reasonableness of costs and timeliness
of review.
Vermont has a project management conference (PMC) with each grantee
prior to construction. At these conferences change order procedures are
discussed with local officials. Finally, the State mandates that all EPA
funded projects include in the specifications the latest portion of the
March 28, 1983 procurement regulations. A package of documents has been
assembled and is made available to all grantees.
The procedures used by the State to distribute the March 1983, Change
Order Guidance were effective. Since receiving the Change Order Guidance
the State has not changed its review process because the internal guidance
is considered adequate. Grantees are provided with change order manage-
ment assistance by means of the above mentioned documents and by frequent
meetings with the grantee, the engineer, the contractor and other affected
parties. State evaluations of grantee change order procedures have shown
that the time spent with the grantee at conferences and through updated
documentation improves the change order package submitted.
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VII-12
A determination of liability, necessity and reasonableness of cost of
the change order poses no difficulty as Vermont's reviews are thorough and
usually completely documented. Usually the change order summary
accompanying the State approval letter provides the reason for unallowable
costs. It is suggested that this information be included in the approval
letter. As a rule, only about six change orders are in-house under review.
There is no backlog of unresolved claims.
Review of the ten change orders and four claims showed them to be
thoroughly reviewed, well documented and meritorious. Vermont had demonstrated
that it has technical and managerial ability to review change orders and
claims using available control techniques.
Region V
As a part of the Region's annual work plan development, the
evaluation of change orders and claims was included as a FY'84 work plan
item. This anticipated the evaluation of each State office and each CoE
district office within the fiscal year. Therefore, this ICR review expands
on a plan that was already developed. The evaluation for Ohio had already
been initiated at the time of the ICR and, therefore, provided a headstart
in performing the ICR. The Minnesota evaluation was not anticipated until
mid-July and in this case the ICR data-gathering preceded the evaluation.
In both cases the evaluation and the ICR were intended to complement each
other rather than duplicate or conflict.
A visit to the Minnesota Pollution Control Agency (MPCA) at its
Roseville, Minnesota office, was made on May 17 and 18, 1984 by two EPA
Region V staff. Twelve different change orders were reviewed from six
different grants. The change order requests varied from as much as
$213,000 down to $1,700. During the visit, various State personnel were
interviewed and files were searched. In general, the State was very
carefully scrutinizing the need for the change order and the reasonableness
of the change order amounts. From the logs that were kept, only a
fraction of the requested amounts are actually being approved for funding
by MPCA (i.e., $226,000 allowed out of $446,000 requested).
The CoE is not offically involved in the change order approval
process in Minnesota, but does perform interim inspections on all active
projects and generally has some knowledge of change order actions on a
project.
In Ohio, the State agency receives the change order from the grantee and
reviews the purpose to determine if it is a fundable category (i.e.; it may
be for an add-on item which the State does not want to fund). Then it is
sent to the CoE office where a complete review is accomplished. The
Region's planned evaluation took place in March, at the State office in
Columbus and the CoE offices in Huntington and Cleveland, at which time
certain change orders were reviewed. However, many of these change orders
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VII-13
were approved more than six months ago, and accordingly could not be used
in the ICR study. We, therefore, requested that the CoE, which has the
responsibility for final change order approval, send complete change order
packages to the Regional Office for review. We asked that they include
not only the documents submitted by the grantee, but also that all review
materials and project file notations be included. Ten change orders were
received in late May and early June. The executed change orders totaled
approximately $366,000 of which the CoE found approximately $164,000 to be
allowable.
In reviewing the change orders, we found that virtually all had
adequate cost justification. However, in several instances it was found
that tiie CoE had to request additional cost/pricing information. In most
cases, the required information was supplied by the grantee. Very few
change orders submitted by the grantee contained independent cost
estimates, but they were supplied for the most part upon request. The CoE had
carefully scrutinized the necessity for the work and in many cases found
portions unallowable due to "rework" or "vicarious liability". They had
extended themselves to test the reasonableness of the cost and often used
Dodge or Means reports to develop independent cost estimates.
Documentation in the file is most often found as notes written on the
change order submitted. There may also be a memorandum identifying the
justification for the change order approval. Change order approval
letters to the grantees are generally documented with the reason for any
unallowable costs, but in some cases could be improved by the citation of
either law, regulations or Agency policy.
In both States, no change orders resulting from the resolution of
claims were reviewed. In Minnesota, the only such change order approved
was two years old and not considered representative of current policies.
A number of change orders resulting from the resolution of a claim are
currently under review in Minnesota, but final decisions have not yet been
made. In Ohio a similar situation exists. Many claims are still at the
grantee level and will constitute a review workload in the future, but
there were no recent claims related change order approvals to evaluate.
Region IX
As part of the Region IX Delegation Monitoring Program, the two
areas of Change Orders and claims are regularly reviewed to assure that
the States and CoE offices are complying with appropriate 'EPA requirements.
Region IX looked upon the ICR as an opportunity to augment regular delegation
reviews with an in-depth look into these two critical areas.
Two team members from the Water Management Division visited, the
State of Nevada, Division of Environmental Protection, on June 5 and 6,
1984, and the State of California, State Water Resources Control Board,
on June 7 and 8, 1984. The purpose of these visits was to gather data
regarding the State review and evaluation of change orders and claims.
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VII-14
As noted elsewhere in this report, it was agreed that an in-depth
review of ten change orders from each State that had recently been reviewed,
and four (or as many as were available, if less) claims that had recently
been reviewed would be made. For the change order selection, projects
were chosen at random from lists of total active projects, prior to the
visit. For California, projects were chosen to get a representative
cross section of the State, and in so doing, we also got a sample of
reviews performed by different reviewers. The last completed change
order was then chosen from each of the ten selected projects for the
in-depth review. The same procedure was used for Nevada change order
selection, however, from a much smaller universe of active projects. For
claims selection, in California the four most recently reviewed claim
settlements in which an allowability determination had been made, and
no further appeals taken, were chosen. In Nevada, only one claims
settlement was before the State for review, and since the draft
allowability determination had been written (thus, the review process was
complete), it was selected for the in-depth review. Costs of change
orders ranged from $250 to $499,000, and claims from $266,000 to $860,000.
In general, the States and CoE are doing a good job of reviewing change
orders and claims. In many cases, the project officers themselves acted
as reviewers and were intimately familiar with the project and could make
enlightened judgments as to the necessity and reasonableness of each
change. In California, 80 percent of the packages were complete upon
submission, but in Nevada, only 50 percent were complete, and additional
information had to be requested. This took time and resources to
accomplish and could be the cause of claim costs, if the change required
prior approval, and the contractor was delayed during the time the
reviewing agency was attempting to get complete documemtaion from the
grantee.
From the decisions made and the notes in the file, it could be seen
that the reviewers were thorough and complete in evaluating the change
orders and claims. Where documentation was lacking, discussions with the
reviewers supplied the needed answers.
Even though there is a substantial number of unreviewed change
orders in California it does not appear to impact the program, since the
average time for review in that State is less than one month. (Same as
Nevada.)
The complete packages contained extensive cost analysis and cost
breakdowns. The reviewers usually requested a time breakdown and critical
path analysis for change orders involving time extensions, and considered
grantee mismanagement and engineer error when making allowability determi-
nations.
In the area of claims costs, both States are using the Regional
Policy on Contractor Claims of April 1983, which deals with prevention
and resolution techniques, but limits allowability guidance to post -
May 12, 1982 grants. Both States want and need guidance for earlier
claims and claim costs, as this is becoming a major issue on some large
projects. Recommendations covering this issue may be found in the
appropriate section of this report.
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VII-15
I. ICR FINDINGS AND RECOMMENDATIONS
In general, the overall management of claims and change orders by the
States, CoE and EPA was satisfactory. However, the results of the
Internal Control Review uncovered a number of areas where changes, or
improvements are needed. The most pressing need is to educate grantees
on what information to submit with a request for approval of a change
order or settlement of a contractor claim.
Note, the control techniques applicable to the change orders and claims
which were reviewed as part of the ICR generally followed the old Part 35
procurement regulations which contained more detailed requirements then
the new Part 33 procurement regulations. The ICR team does not know what
effect full implementation of the new Part 33 regulations will have on
the change order and claim management process. Accordingly, the results
of the Internal Control Review should not be used to evaluate the effec-
tiveness of the control techniques mandated by the Part 33 procurement
regulations.
The detailed findings and recommendations of the ICR team follow:
Documentation of Claims and Change Orders by Grantees
The initial documentation submitted by the grantee was insufficient
for approximately 40-50% of the change orders reviewed. The information
most frequently missing were independent cost estimates, and to a lesser
extent, proof of negotiation. In all of these situations the reviewing
agency (State or CoE) requested and received the information needed to
review and act upon the change order.
The initial documentation submitted by the grantee was insufficient
for 60-70% of the claims reviewed. The data most frequently missing
were cost and time information; an independent analysis for determining
liability; the rationale for the settlement price; and documentation of
the negotiation proceedings. In all cases, the reviewing agencies requested
the additional information. In cases where the information was not
submitted, the costs were considered to be unallowable.
The ICR team concluded that the grantees are not always supplying
adequate supporting documentation for claims and change orders. However,
the ICR also concluded that the States/CoE are doing a good job of
determining and requesting the information that is lacking.
Recommendation:
The grantees should be advised of what constitutes a complete change
order or claim package and at the same time directed to submit all of the
necessary information at one time. This advise and direction can be given
during a Program Management Conference, included in a State newsletter or
bulletin, or accomplished by any other appropriate method.
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Note, the information required for a complete change order package is
contained in the "Management of Construction Change Order — A Guide for
Grantees", pages 12 and 13. The information required for a complete
claims package will be included in the "Management of Claims: A Guide
for Grantees" which is currently under development.
Timeliness of Review by State/CoE
All change orders were reviewed in a timely manner, generally
30 days after receipt of all required documentation. Claims took
considerably longer, in some cases years.
Based on the samples studied, the 1CR team concluded that States/CoE
are managing change orders in a timely manner and preventing backlogs
from occurring. However, the ICR team also concluded that the States/CoE
are having difficulty in reviewing claims in a timely manner. This is due
to the complexity of the claims and the lack of any National guidance or
policy in this area.
Recommendation;
Finalize and issue the "Claims Management Guidance" document as soon
as possible.
Adequacy of Reviews/Approvals of Change Orders and Claims by the State/CoE
Based on an evaluation of the State/CoE procedures for reviewing
change orders and claims; interviews with State staff; and the results of
the analysis of 60 change orders and 12 claims, the ICR team concluded
that the State/CoE reviews were thorough enough to determine necessity
and reasonableness of cost. However, the basis for many of the
allowability/unallowability determinations was not uniformly documented
in the files. The ICR team thought that the basis for the allowability/
unallowability determination needs to be included in every project file
for future use in audits and grantee appeals.
The ICR team also concluded that reviewers to considered the issue
of respective liabilities of the parties in their determinations and some
State/CoE offices had procedures for documenting same. In one specific
instance, as a result of the State agency's review of liability, the
costs were declared unallowable and the grantee's engineer accepted total
responsibility for the incurred costs.
Recommendation;
Reviewing agencies should be required to follow the guidance
"Management of Construction Change Orders",p. 15, "Documenting the Project
File for Change Orders" and, in addition, to add to the project file the
basis for each allowability decision, and to the letter to the grantee
the basis (law, regulation and/or policy) supporting the decision to deny
additional funds.
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VII-17
Adequacy of EPA Control Techniques
Change Orders — Generally the EPA control techniques concerning the
management of change orders were adequate and were being followed.
However, there is no EPA requirement that the basis for the allowability/
unallowability decision be included in the file and communicated to the
grantee. The ICR team concluded that since the information is needed at
the time of final audit and in the resolution of grantee appeals, the
basis for allowability/unallowability decisions must be included in the
official project file. Furthermore, this documentation will improve the
thoroughness and precision of the review.
Claims — There is no National guidance to assist grantees and
reviewers in dealing with contractor claims. This has caused confusion
and delays on the part of the grantees in preventing and resolving
contractor claims. Additionally, the lack of guidance has hindered the
reviewing agency in assisting grantees and in making allowability
determinations on settlement and associated claims cost.
Recommendations;
Require reviewing agencies to document the basis for the allowability/
unallowability determinations and communicate the basis of unallowability
to the grantee in writing. Also, issue claims management guidance.
J. RESPONSE TO REGIONAL COMMENTS
One of the Regional comments suggested that the overview concept used
by Region I in Vermont be considered as model for use in other States.
The ICR team carefully considered this suggestion, but since the overview
process used in Vermont is only applicable to States that have recently
been delegated the authority to review and approve change orders, this
concept would not be appropriate for use as a general model. Accordingly,
the ICR team did not incorporate this suggestion into the report.
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VII-18
Attachment
INTERNAL CONTROL REVIEW STUDY TEAM
Headquarters
Larry McGee
Southern Area Program Manager
Municipal Construction Division
Office of Water Program Operations
10 yrs EPA
Region I
Anthony DePalma
Oscar Arpin
Ralph J. Caruso -
Region V
Chief, Southern New England Section 14 yrs EPA
Municipal Facilities Branch
Environmental Engineer 6 yrs EPA
SNE Section, MFB
Chief, Northern New England Section 13 yrs EPA
Municipal Facilities Branch
John Kelley
Richard Zdanowicz
James Campbell
Valdis Aistars
Dennis Dalga
Carl Norman
Tom Griffin
Region IX
Chief, Municipal Engineering Section 17 yrs CoE, EPA
Chief, MES Unit I 12 yrs EPA
Environmental Engineer, Unit I 11 yrs EPA
Environmental Engineer, Unit I 4 yrs EPA
Environmental Engineer, Unit I 5 yrs EPA
Environmental Engineer, Unit II 4 yrs EPA
Environmental Engineer, Unit II 11 yrs EPA
Robert Gervais
Kenneth Barker
Roger Yates
Special Assistant/Contractor Claims
Environmental Engineer
Water Resources Engineer
10 yrs EPA
10 mths EPA
7 mths EPA
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VII-19
Attachment
INDIVIDUALS INTERVIEWED
REGION I
Massachusetts :
Department of Environmental Quality Engineering
Division Of Water Pollution Control
Mr. Paul A. Taurasi, Chief Engineer
Mr. Robert Cunningham, Asst. Chief Engineer
Mr. Joseph Cassano, Program Manager
Construction Grants Program
Mr. H. M. Chikkalingaiah , formerly Principal
Sanitary Engineer
Construction Grants Program
Vermont; Agency of Environmental Conservation
Division of Environmental Engineering - Montpelier'
- Mr. William Brierly, Director
Public Facilities
- Mr. Edward Leonard, Chief of Engineering
- Mr. Allyn Lewis, Supervisor,
Construction Section
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VII-20
INDIVIDUALS INTERVIEWED
REGION V
While doing the ICR visits, numerous State and CoE staff were
interviewed. The following is a list of the principal individuals and
their titles:
Minnesota; Minnesota Pollution Control Agency
- Gordon Wegwert - Chief, Tech Review Section
- John Hensel - Chief, Minor Municipal/Industrial Unit
- Gene Soderbeck - Chief, Metro/Land Treatment
Ohio; Ohio Environmental Protection Agency
- Sanat Barua - Chief, East Engineering Section
- George Elmaraghy - Chief, West Engineering Section
Army Corps of Engineers:
Rick Rothbauer - Grants Management Coordinator
EPA Branch, Construction Division
Joel Rogers - Construction Management Coordinator
EPA Branch, Construction Division
Wes King - Chief, EPA Branch, Construcion Division
Carl Carter - Construction Representative, EPA Branch,
Construction Division
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VII-21
INDIVIDUALS INTERVIEWED
REGION IX
Nevada: Department of Health and Natural Resources
Division of Environmental Protection
- James Williams, Chief, Construction Grants Setction
- David Collings, Project Officer
- John Nelson, Project Officer
- John Worlund, Project Officer
California: State Water Resources Control Board
Division of Water Quality
- James Putman, Assistant Division Chief/Chief, Construction
and Grants Administration Branch
- Donald Hodge, Chief, Construction Section
- Jack Holt, Claims Coordinator
Army Corps of Engineers;
South Pacific Division;
- Tony Mei, Environmental Engineer, EPA Coordinator
Sacramento District:
- Lawrence Attaway, Unit Chief, Construction Coordinator
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VII-22
Attachment
EVALUATION QUESTMNNAIRE
INTERNAL CONTROL REVIEW
Claims/Change Orders
CONTROL OBJECTIVE:
To insure effective management of claims and change orders at the Federal,
State and local level.
EVALUATION QUESTIONS:
1. How have the current control techniques been communicated:
a. Headquarters to Regions?
b. Regions to States/CoE?
c. State/CoE to Grantees?
2. How are the current control techniques being applied by the Region:
a. Do the delegation agreements include all of the Agency requirements
concerning the review and approval of change orders and claims?
b. Have the latest revisions (e.g. February 17, 1984 regulations) been
incorporated into the State/CoE agreements?
3. How are the current control techniques being applied by the State:
a. Does the State's operating procedures include all of the requirements
contained in the delegation agreements?
b. Does the State's operating procedures include the latest EPA require-
ments (e.g. the February 17, 1984 regulations)?
4. Were the procedures used by the State/CoE to distribute the March 3, 1983
change order guidance effective?
5. Has the State/CoE changed its review process since receiving the Change Order
Guidance?
6. Are the review agencies providing grantees with change order management
assistance?
7. Have any evaluations of grantee change order procedures been performed?
a. If so, give details.
8. Are experienced engineers reviewing the change orders?
9. Does the State utilized the CoE field knowledge in its review?
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VII-23
10. Will the review process identify change orders that are due to miananagement
or due to vicarious liability of grantee agents?
a. When such change orders are identified, are the costs of the change
orders automatically considered unallowable for grant participation?
11. Are reviews thorough enough to determine liability, necessity, and
reasonableness of cost?
12. Does the State/CoE change order approval letter clearly identify any
unallowable costs along with the basis (law, regulation and/or policy)
to support the decision?
13. What is the normal response time, particularly for change orders in
excess of $100,000?
14. Does a backlog of unreviewed change orders exist?
15. Does a backlog of unresolved claims exists?
COMMENTS:
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VII-24
INTERNAL CONTROL REVIEW - CHANGE ORDER
Project Name __ Grant No.
Contract No. Change Order No.
Contract Amount $ Change Order Amount
~~ Total $
Allowable $
Approval Dates: Contractor
Grantee
State/CoE
1. Was a complete change order package received from the grantee (i.e.
cost/price information, justification, independent cost estimate,
etc.)?
2. Was there documentation in the file that substantiated reasonableness
of cost, allowability/eligibility, necessity and liability?
3. What basis/procedures did the State/CoE use to determine reasonableness
of cost?
4. If the approved costs of the change order were due to delays, were
changes to the schedule suitablely documented by the grantee and con-
sidered by the reviewer?
5. What test were used to determine allowability relative to possible
grantee or contractor mismanagement?
a. Was this adequate?
6. Were review decisions adequately documented in the file?
7. Was the agreed upon check list/review procedures outlined in the
delegation agreement followed?
a. If not, explain.
8. Were change order review guidelines followed.
9. Did it appear, in this instance, that the grantee followed the pro-
cedures outlined in "Management of Construction Change Orders - A
Guide for Grantees?"
10. Does the State/CoE change order approval letter clearly identify
any unallowable costs along with the basis (law, regulation and/or
policy) to support-the decision?
11. Did the State use CoE field knowledge?
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VII-25
INTERNAL CONTROL REVIEW - CLAIMS
Project Name Grant No.
Contract No. Settlement Amt. $
Contract Amount $ Change Order Amount
Original Claim Amt. Total $_
Allowable $
Approval Dates: Contractor
Grantee
State/CoE
1. Was a complete change order package received from the grantee (i.e.
cost/price information, justification, independent cost estimate,
etc.)?
2. Was there documentation in the file that substantiated reasonableness
of cost and allowability/eligibility?
3. What basis/procedures did the State/CoE use to determine reasonableness
of cost?
a. Was this adequate?
4. Were the causes of the claim adequately documented?
5. If the approved costs of the change order were due to delays, were
changes to the schedule suitablely documented by the grantee and con-
sidered by the reviewer?
6. What tests were used to determine allowability relative to possible
grantee or contractor mismanagement?
a. Was this adequate?
7. How was the claim settled?
a. Why was it settled that way?
8. Was similar criteria utilized in settling a claim covering both eligible
and ineligible work?
9. Was the claim settled contingent upon Federal participation?
10. Were review decisions adequately documented in the file?
11. Was the agreed upon check list/review procedures outlined in the
delegation agreement followed?
a. If not, explain.
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VII-26
12. Were change orders/claims review guidelines followed?
13. Did it appear, in this instance, that the grantee followed State/
CoE guidance, if any, in this area?
14. Does the State/CoE change order approval letter clearly identify
any unallowable costs along with the basis (law, regulation and/or
policy) to support-the decision?
15. Did the State use CoE field knowledge?
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VIII
OPERATION AND MAINTENANCE
A. TEAM MEMBERSHIP
The ICR review team was composed of five engineers with individual
professional experience in the construction grants program which ranged
from two to twelve years and additional professisonal experience in the
field. All were well qualified to review municipal treatment facilities
operation and maintenance (O&M). (See attached list of team members with
qualifications.)
B. BACKGROUND/INTRODUCTION
Under the 1981 Amendments to the 1972 Clean Water Act (CWA, or the Act)
all publicly owned treatment works (POTWs) are required to meet a statutory
deadline of July 1, 1988, for compliance with the water quality objectives
of the Act. To accomplish this objective, EPA has established a National
Municipal Policy which requires the development of individual compliance
strategies for all noncomplying POTWs.
Previous studies of POTWs by the General Accounting Office have
identified the more prevalent causes of noncompliance as: (1) design
deficiencies, (2) equipment deficiencies, (3) industrial waste overloads,
(4) operation and maintenance deficiencies, and (5) infiltration/inflow
overloads.
To improve the operation and maintenance (O&M) of POTWs, correct O&M
deficiencies and assist POTWs achieve compliance with their NPDES permits,
the EPA has undertaken the following actions:
(1) Develop computerized diagnostic programs to assist States and
communities identify operational process, management, and
financial problems which are causing poor performance and
noncompliance.
(2) Supported construction of State training facilities for POTW
O&M personnel through Section 109(b) grants.
(3) Improved operation and maintenance training for POTW operators
through pilot programs financed by EPA under Section 104(g)(l).
(4) Required the development of plans of operation under Section 204(a)(4)
of the Act for all construction grants facilities.
(5) Required the development of Operation and Maintenance manuals for
all construction grants facilities.
(6) Required performance certification of all construction grants
facilities under Section 204(d) of the 1981 Amendments.
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VIII-2
In addition to the above actions, the Administrator has expressed a
desire to improve operation, maintenance, and long terra compliance of
POTWs. In order to explore options for achieving these goals, a task
force comprised of representatives from the construction grants, enforcement,
and training programs and a Regional Office was established under the
leadership of a special assistant to the Administrator. The task force
should be publishing their recommendations in the near future.
C. CONTROL TECHNIQUES
This review focuses on the effectiveness of the requirements established
to assure that operation and maintenance deficiencies do not cause NPDES
permit noncompliance for the POTWs funded under the 1981 Amendments of the
Act. All noncomplying POTWs constructed prior to the 1981 Amendments must
develop a Composite Correction Plan under the Agency's National Municipal
Policy Program.
Due to resource limitations, the team targeted its review on the following
EPA O&M-related management control techniques as required by the 1981 Amendments:
(1) The Plan of Operations under Section 204(a)(4), which identifies the
specific actions and completion schedule required to assure that
grant funded POTWs and associated personnel are properly prepared
for start-up and operation 'of the newly constructed facility in a
cost-effective, efficient and reliable manner.
(2) The Operation and Maintenance manuals developed under Section
204(a)(4), which provide long-term guidance for the efficient operation
and maintenance of grant funded POTWs. They identify proper staffing,
personnel training, maintenance, and operation for each facility.
(3) The one year performance certification under Section 204(d) of the
1981 Amendments, which improves the performance of grant funded POTWs
by placing greater emphasis on the grantee's accountability and
responsibility for proper operation, maintenance, management and
training during the planning, design, construction and initial
operations period. This provision requires the municipality, after
one year of operation, to either affirmatively certify that the
grant funded facility is meeting its design specification and permit
requirements or commit to corrective actions to assure the facility
will meet the requirements.
D. REGION/STATE SELECTION
The first phase of the Internal Control Review was conducted in EPA
Regions I, II, III, and IV since these Regional Offices volunteered
resources. The States of New York, West Virginia, Maryland, Maine,
Massachusetts, Mississippi and North Carolina were selected for the review
based on the following criteria:
o They had been delegated program review responsibilities and
were in various stages of O&M-program management development.
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VIII-3
o They had reviewed specific ranges of project types and sizes.
o State staff had varying levels of O&M technical expertise.
E. REVIEW PROCEDURES
The review was divided into two phases to facilitate examination of
the data at the State and grantee levels. The first phase, conducted
during FY 1984, evaluated States' review procedures for assuring quality
plans of operation, effective O&M manuals and effective implementation of
the performance procedures. The review also included an evaluation of the
need for additional investigations and technical guidance or assistance to
assure proper operation and maintenance of grant funded wastewater treatment
facilities.
The Regional ICR team members examined State management systems for
accomplishing the operation and maintenance requirements, plus the plan of
operations and O&M manuals. For projects funded under the 1981 Amendments,
the review procedures included discussions with State officials responsible
for implementing the operation and maintenance requirements, in accordance
with a uniform questionnaire developed by the review team. The reviews of
the States were conducted during May and June of 1984. In addition to their
interviews of State officials, the Regional team members reviewed a total
of 23 projects during their 1-2 day visits.
The reviewers addressed the following issues related to each of the
three EPA management control requirements:
Are plans of operation adequately addressing the development of
actions necessary to assure efficient and reliable project start-
ups and successful operations?
o Are plans of operation providing information which results in
efficient operations, maintenance, replacement and qualified
personnel?
o Are the operation and maintenance (O&M) manuals providing effective
information and guidance for proper operations and maintenance of
the facilities?
o Is the performance certification requirement improving facility
performance?
o Do the performance certifications accurately reflect the
capabilities of the facilities?
An examination of EPA's Regional O&M review procedures was not undertaken
since the participating Regional Offices had delegated their O&M review
functions to the States. These Regional Offices do not have any resources
specifically dedicated to project level O&M reviews.
o
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VIII-4
The second phase of this review, planned for FY 1985, will examine
grantee utilization of (1) the plan of operation to achieve adequate O&M
budgets and personnel staffing, (2) the O&M manuals to operate and maintain
the facility and (3) the performance period to assess the facility's capabilities
of achieving design criteria and effluent limitations. It will involve
detailed discussion with specific grantees to assess if the operation and
maintenance requirements are achieving their intended objectives.
The following criteria will be used to select grantees for the review:
o Grantee project received a construction grant under the 1981 Amendments.
o The performance certification has been completed, or the facility
is completed and operating and has the potential of completing its
performance certification in FY 1985.
F. TEAM FINDINGS AND RECOMMENDATIONS
The ICR study of State operation and maintenance management and
review procedures resulted in the following findings and recommendations:
Plan of Operations
o Plans of operation were prepared, submitted and approved in conformance
with EPA regulations and the EPA/State delegation agreement under
Section 205(g) of the Act.
o States review procedures incorporate checklists which contain EPA
guidance/delegation agreement criteria.
o States believe that plans of operation are necessary even though they
do not utilize them as a management tool.
o EPA and State guidance and procedures are adequate for the development,
review and approval of plans of operation.
Note, the impact of the lack of State monitoring of the plan of operation
will be evaluated in FY 85.
Operation and Maintenance Manuals
o Operation and Maintenance Manuals were prepared, submitted and approved
in conformance with regulations and State delegation agreements.
o State review procedures incorporate checklists which contain
EPA guidance/delegation agreement criteria.
o All States believe that the Operation and Maintenance Manual
is an essential element for successful start-up and operation
of a wastewater treatment plant.
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VIII-5
o States expressed varied viewpoints on the levels of detail and
sophistication required for Operation and Maintenance Manuals,
particularly for smaller facilities.
o Generally, States insure that the grantees have Operation and
Maintenance Manuals at the wastewater treatment plant. States refer
to O&M Manuals when providing technical assistance for a facility.
o EPA and State guidance and procedures regarding the development,
review and approval of Operation and Maintenance Manuals are adequate.
Note, grantee perception of effectiveness and usefulness of O&M manuals
will be evaluated in FY 85.
Performance Certification
o All States view the performance certification activities and startup
services as important requirements for proper plant operation.
o Generally, EPA and the States have not established procedures for
implementing performance certification activities.
o A few projects requiring performance certification contained some
general grant conditions and/or A/E agreements that include
certification activities.
o During 1985, very few treatment plants which received grants under
the 1981 Amendments will have completed construction and the one year
performance certifications in Regions I, II, III and IV.
Note because of the limited number of treatment plants that will have
completed'certification in Regions I, II, III and IV during FY 1985, a
complete assessment of the effectiveness of this requirement may not be
possible in FY 1985 in these Regions.
Recommendations:
o EPA and State guidance and procedures for performance certification
should be established as soon as possible.
o The contract documents for all facilities which received grants made
under the 1981 CWA Amendments should be reviewed to determine if they
"contain adequate provisions to accomplish performance certifications.
o Regions and States should provide O&M program managers to direct and
lisure the proper implementation of the performance certification
procedures.
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VIII-6
G. REGIONAL COMMENTS
Several Regions commented on the draft report, and their comments have
been addressed. One Region questioned the limited scope of the review. The
commenter's questions implied that the ICR review should have been broader
to accomplish the study objectives. However, the suggested approach was not
feasible in this fiscal year due to resource limitations. It could possibly
be included in future studies.
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VIII-7
Attachment
Operation and Maintenance
Team Members
Dan Coughlin, Region I, FTS 223-5684
Background: 10 years in Construction Grants Program; 5 years in
Operation and Maintenance and Permit Programs.
Patrick Harvey, Rsgion II, FTS 264-1833
Background: 2 years in Construction Grants Program, 5 years in
Conpliance Program.
Tom Henry, Rsgion III, FTS 597-9911
Background: 8 years in Construction Grants Program, 3 years O&M
Coordinator.
Art Gurley, Region IV, FTS 257-2211
Background: 10 years in Operation and Maintenance Division,
2 years in Municipal Compliance Program.
Haig Farmer, Headquarters, FTS 382-5820
Background: 12 years in Construction Grants Program.
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VIII-8 Attachment
Projects Reviewed in New York
1. Onondaga County
2. Qneida
3. Defieret
Persons Contacted in New York
1. Robert Hampton, Deputy Director Construction
2. Robert Berry
3. Thomas Long
Projects Re^ABwed in Mississippi
1. Sherman C-280523
2. Mississippi Bldg. Conn. C-280424
3. Canton C-280372
Persons Contacted in Mississippi
1. Mark Smith, Chief, Municipal Facilities Section
2. Louis Montgomery, Project Engineer (MFS)
3. Geff Pittman, Project Engineer, Project Engineer (MFS)
Projects Reviewed in North Carolina
1. Winston-Salem C-370399
2. Fayetteville C-370434
3. Greenville C-370487
Persons Contacted in North Carolina
1. John Blows, Supervisor, Grants Management Unit
2. Bobby DeWeese, Supervisor, Facility Performance Unit
3. Irish MaoPherson, Chemical Analyst
Projects Reviewed in Massachusetts
1. Milford
2. Hudson
3. Falmouth
Persons Contacted in Massachusetts
1. Brian Jeans, Assistant, Chief Engineer
Projects Reviewed in Maine
1. Aroostock - Prestite Treatment District
2. Limerick Sewerage District
Persons Contacted in Maine
1. Dennis Pevingtpn
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VIII-9
Projects Reviewedin Maryland
1. Indian Head C-240A59-03
2. Elkton C-2A036A-03
3. Fort Frederick C-2A079A-01
A. Anne Arundel C-240A69-03
5. Carroll County C-240437-02
Persons contacted in Maryland
1. Dr.Ta-Shon Yu - design
2. B. Jeng design
3. J. Parker design
A. J. Rein compliance
5. D. Howard compliance
6. E. Quance grants
7. G. Keller grants
8. J. Leaseburge grants
9. R. Schmidt grants
10. C. Johnson grants
Projects Reviewed in West Virginia
1. Maiden PSD C-5A0336-03
2. Morgantown C-540259-03
3. Kanawha Falls C-54
A. Elizabeth C-540351
5. Fairmont C-540222-03
Persons Contacted in West Virginia
1. W. Means
2. T. Goodwin
3. E. Burdette
4. M. Pyles
5. C. Hiddeman
6. P. Sangani
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VIII-10
Attachment
Operation & Maintenance
Questionnaire Log
State: Grantee:
Questionnaire completed by:_
Region/Office/Branch:_
Phone: (FTS)
Date(s) Interview conducted:
Person(s) Contacted at State:
Name:
Title:
Phone: (FTS)
Person(s) Contacted at Grantee:
Name:
Title:
Phone: (FTS)
Description of Project:
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VIII-11
PLAN OF OPERATION
(State)
1. Was a draft plan of operation submitted prior to a construction
grant approval? If not, when:
2. Was it reviewed and accepted by the State management agency when
approved relative to grant award?
3. Does the State have written criteria/procedures for the review?
(Document)
4. Does the review criteria/procedure summarily address the following:
budget
financial information system
study of financing
emergency operation program
administrative function/certification/reports
startup service/laboratory functions
O&M Manual
estimated schedule
5. Does the State monitored grantee implementation of draft plan of
operation? Describe State's actions.
6. Was the final plan of operation submitted at 50 percent payment
level? If not, when?
7. Was it reviewed and accepted by the State management Agency?
Describe deficiencies.
8. Was it approved prior to startup? When approved relative to
startup? Does the State have written criteria/procedures for
review? (Document)
9. Are the following items addressed in the final plan of operation?
Budget
Provisions for annual budget sufficient to provide for
efficient O&M, and replacement (during project's useful life)
including administration, supplies, utility charges and
ancillary equipment; and
Provision for salaries to attract, train and upgrade qualified
personnel.
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VIII-12
Financial Management System
Contains and accounts for daily revenues and expenditures for
project O&M including replacement of parts during useful life.
Includes O&M costs and expenditures incurred during the
project's useful life for materials, labor, utilities and
other items which are necessary for managing and maintaining
the project to achieve the capacity and performance for which
it was planned, designed and built.
Staffing & Training
Contains a staffing plan which identifies staffing patterns,
salary schedules, staff structure and organization and
operator certification requirements.
Provides for hiring the chief operator before building is 50
percent complete.
Discussion of potential hiring problems that may be
encountered and actions to solve the problem.
Contains a continuous training plan and schedule at least 30
days prior to start-up.
Qnergency Operations Program
Effects of emergencies on operation.
Vulnerability analysis of system.
Protection measures.
Emergency response program.
Periodic revision of program as necessary.
Administrative Function
Implementation of programs to perform appropriate monitoring
and analyses for process control, compliance with the NPDES
permit, and State requirements for submission of appropriate
operational reports.
Implementing of a maintenance management system.
Procedures for startup and continued engineering services
during one year performance period.
Schedule for O&M Manual preparations, review, update.
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VIII-15
Startup Services
Schedule for startup services.
Competent operational assistance for adjustment of the
treatment process and related equipment functions to optimize
performance, safety and reliability under actual operating
conditions.
Training and instructions to provide adequate sampling,
testing and quality assurance needed for process control and
regulatory monitoring reporting, including necessity for
laboratory certification by the regulatory agency.
Services needed to implement the maintenance management system
outlined in the O&M Manual.
Services to provide the training needed to implement a record
management system as outlined in the O&M Manual.
0. Does the State monitored grantees implementation of the final plan
of operation?
1. What is State view of plan of operation requirements and usefulness
to grantee and State; suggestions for change or improvement.
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VIII-14
OPERATION AND MAINTENANCE MANUAL
(State)
1. Was O&M Manvial submitted before the date specified in the plan of
operation?
2. Was the O&M Manual reviewed and found acceptable by the State
Management Agency? (If deficient, please specify actions)
3. Did O&M Manual approval occur before startup? (If not, specify)
4. Does the State have written criteria/procedures for this review?
(Document)
5. Are the following areas addressed in the O&M Manual?
- Information on process design assumptions such as flow, peak
flows, pump capacities, etc.
Unit process information that includes control measures and
monitoring procedures.
- Startup procedures for each operational unit and item of
equipment.
Maintenance management system including schedules and
procedures for routine adjustments preventive and corrective
maintenance. Procedures as well as a spare parts inventory.
Laboratory test procedures, schedules and equipment necessary
for control of the treatment works and the specific reports to
be sent to local, State and Federal regulatory agencies.
Safety procedures for operating equipment with particular
emphasis on potentially hazardous areas such as wet and dry
wells, chlorination facility and anaerobic digesters.
Organizational structure, job descriptions and duties,
administrative procedures for purchase order preparation
approvals and budget preparation, etc.
"Troubleshooting:, analyzing and solving problems which
frequently occur in treatment works which are related either
to unit processes or the operation of specific items of
equipment.
An operating plan for emergencies which may occur and the
procedures to be followed until normal operation can be
resumed.
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VIII-15
6. What are the State's views or opinion on O&M Manuals, its
usefullness for grantee and State. (Include suggestions for
changes and/or ijnproverrents.)
7. What actions are undertaken by the State to encourage continued use
of O&M's Manual by the grantee? Explain.
8. Does the State monitor grantee utilization of the O&M Manual?
(Specify)
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VIII-16
Project Performance Certification
(State)
1. Did the grantee provide an engineering services scope of work for
the performance period provided to the State for review?
Sutmittal date relative to initiation of the performance period.
2. Was it reviewed and accepted by the State Management Agency?
Approval date relative to initiation of performance period.
3. Does the State have written criteria/procedures for this review?
(Document)
4. Were the following items addressed in the review:
Direction of operation for the project.
Training of operating personnel.
Preparation of curricula and training materials for operating
personnel.
Grantee notification of whether project is meeting its
performance standard.
O&M Manual update to accommodate actual operating experience.
5. Does the State monitored grantee implementation of the project
performance certification activities? Describe.
6. What State follow-up actions have been taken? Describe.
7. Does the State have procedures for evaluating grantee project
performance certifications? If yes, explain.
8. What is State's view of project performance certification program?
9. What are the State's suggestions/modifications for the performance
certification program?
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VIII-17
Plan of Operation
(Grantee)
1. How much input did the grantee have in the preparation of the plan
of operation? (Include documentation from files)
2. Were the dates in the plan of operation met? If not, explain.
3. How beneficial was the plan of operation?
4. Was the chief operator hired by the 50 percent level? If not,
explain why not?
5. Was the budget developed in the plan of operation realistic for
proper facilities operations? If not, explain.
6. Was a fund established for equipment replacement? Do you consider
it adequate?
7. Is the salary structure adequate to attract qualified personnel?
Explain.
8. Is the financial management system now in place in conformance with
the plan of operation? Explain any differences.
9. Is the financial management system working? Explain.
10. Is the staffing and training in conformance with the plan of
operation? If not, explain.
11. Is your emergency operation program in conformance with the plan of
operation? If not, explain.
12. Were the procedures established in the plan of operation adequate
to accomplish the following tasks?
Laboratory/monitoring functions.
Submission of proper reports.
Operational startup.
Continued operation during one-year certification period.
Implement a maintenance management system.
13. Was'staff training, including laboratory training during startup,
described in the plan of operation implemented and successful?
Explain.
14. How effective was the plan of operation? Explain. (Indicate any
necessary changes in the system)
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VIII-18
O&M Manual
(Grantee)
1. Is the O&M Manual readily available to the operator? Explain.
2. Is the O&M Manual utilized and by whom? Describe.
3. Was the O&M Manual revised during startup and certification period
to reflect actual operating conditions?
4. Is the O&M Manual understood by plant staff? Explain
5. Is the maintenance management system developed in the Manual
followed by plant staff? If not, explain.
6. Have the emergency operating procedures developed in the manual
been reviewed by plant staff. Are they utilized? If not, explain.
7. Are the safety procedures provided by the manual followed? If not,
explain.
8. Are the laboratory procedures as provided by the manual followed?
If not, explain.
9. In general, has the O&M Manual proved useful? What changes are
recommended?
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VIII-19
Project Performance Certification
(Grantee)
1. Were there any delays in initiating the performance certification
period? If so, explain.
2. Were the following engineering services provided during the
performance certification period:
Direction of operation for the facility.
Personnel training.
Curricula and training materials.
Revision of the O&M Manual.
Grantee notification of the facility's performance.
3. Did actions initiated during the performance period enhance, the
project's performance? Explain.
4. What changes would you recommend to improve operations and
maintenance during the performance certification period? Describe.
.U.S. GOVERNMENT PRINTING OFFICE, U56-9O<./2O262
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