UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                            WASHINGTON. D.C. 20460
                                                                  .^      OF
                                                               THE INSPECTOR GENERAL
 MEMORANDUM

 SUBJECT:   Supplemental  Report  of Audit  ofCRegion 4's
           Superfund Indirect Cost Rate  Under CERCLA
,           for the Fiscal  Year  Ended  September  30,  1983)
           Audit  Report  No.  P5EH8-11-0034 - 80633

 FROM:      Kenneth D.  Hockman  7/^vov.tk  .>rH<><|. topr.
           Divisional  Inspector General  for Audit
           Internal  Audit  Division (A-109)

 TO:        David  P.  Ryan
           Comptroller
           Office of the Comptroller  (PM-225)


 Attached are  two copies of  a supplemental report of audit of Region 4's
 Superfund  Indirect  Cost Rate for the Fiscal Year Ended September 30,
 1983.  We  have no objection to the further release of this report at your
 discretion.

 SCOPE AND  OBJECTIVES

 The firm of Tichenor  and  Eiche, Certified Public Accountants (CPA) previously
 performed  an  audit  of the Superfund  Indirect Cost Rates for the Fiscal Years
 ended September  30,  1984  and 1983.  We  transmitted the CPA's report to you
 on March 18,  1987 (Audit  Report No. P5E16-11-0020-70901).  Due to questioned
 and set-aside Personnel Compensation and  Benefits costs (PC&B), the CPA did
 not express an opinion on Region 4's Superfund Indirect Cost Rate for fiscal
 1983.  Subsequently,  Region 4  personnel reviewed PC&B costs for fiscal  1983
 and adjusted  the previously reported amounts.  The CPA audited the adjusted
 PC4B costs for fiscal 1983  in  accordance  with generally accepted auditing
 standards  and the Standards for Audit of  Governmental Organizations. Programs.
 Activities, and  Functions,  issued by the  U.S. General Accounting Office.

 RESULTS OF AUDIT

 The CPA accepted  Region 4's Superfund Indirect cost rate of S59 for each
 regional program hour charged  to hazardous waste sites in fiscal 1983.
 Additional  details  are contained in  the attached CPA's report.

-------
ACTION REQUIRED
None.  In accordance with EPA Directive 2750, you are the designated Action
Official  for this report.  Since the report contains no recommendations,
a formal  written response is not required.  We have closed out this audit
in the Audit Tracking and Control System.
Should your staff have any questions, please have them contact
Roland W. Cyr on 382-4930.
Attachment
cc:   Tichenor and Eiche, CPAs

-------
                               DISTRIBUTION


                                                                   Copies

A.  Office of the Inspector General                                  5

    Director, Audit Operations Staff (3)
    Chief, Program Analysis Unit (1)
    Divisional Inspector General  for Audit
      Southern Division (1)

B.  Headquarters Offices

    Comptroller (PM-225)                                             2
    Director, Financial Management Division (PM-226)                12
    Chief, Superfund Accounting Branch (PM-226)                      1
    Agency Follow-up Official  (PM-225)                               1
      Attn:  Resource Systems Management Division
    Associate Enforcement Counsel for Hazardous Waste                1
       Enforcement (LE-134S)

C.  Region

    Regional  Administrator, Region 4                                 2
    Audit Follow-up Coordinator                                      1

-------
m.
   \
   I    UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                    WASHINGTON. O.C. 20460


                        MAY I 0 1989

MEMORANDUM                                        THE INSPECTOR GENERAL

SUBJECT:  Audit of Superfund Interagency Agreements
          with the Corps of Engineers - Jibboom Junkyard
          Site
          Audit Report M5BFL9-11-0037-9100276
                              I I    IA  AJ *-4 I)     \
                             ^^•y    v4\  FT   A^/V flrJVT\f^&mM
FROM:     Kenneth D. Hockman /)9^vi«0v JJ   no c*/*n^
          Divisional Inspector  General for Audit
          Internal Audit Division (A-109)

TO:       Harvey G. Pippen
          Director, Grants Administration  Division  (PM-216F)


On July 1, 1988, my office sent a copy of  the attached Army Audit
Agency report for information purposes to  the Director, Office  of
Administration and the Director, Office of Emergency and  Remedial
Response.  The report referred  to apparent deficiencies in
project design which may have resulted in  construction costs
increasing from $2 million to $4 million.  At that time,  I
indicated that EPA's Office of  Inspector General would review
whether EPA contractor(s) contributed to the design  deficiencies.

The Engineering and Science Unit  (Unit) within the Office of
Inspector General has completed its review.  The Unit found no
errors on the part of the architect/engineering (A/E) firm that
developed the feasibility study for EPA.   The following paragraph
contains the Unit's conclusion:

     There was no remedial investigation conducted for the
     site, and at the direction of  EPA Region 9 the  A/E
     utilized existing data for the site to prepare  a final
     feasibility study.  The A/E for the final feasibility
     study had no responsibility in determining the  scope
     and characteristics of contaminants at the site.
     Therefore, the A/E cannot  be held responsible for the
     construction cost increases due to the additional
     contamination and buried structures discovered  during
     the remedial action at the site.

-------
While the issue of contractor liability no longer concerns us,
we believe EPA will need to take action if the Agency seeks to
recover costs from a Potentially Responsible Party (PRP).  Page
16 of the Army Audit Agency report states that a significant
amount of site work was performed without modifying the construc-
tion contract.  This included the excavation and transportation
of approximately 5,700 tons of material, additional air monitor-
ing and perimeter sampling, and extended security and contractor
supervision.  The Corps' contract close-out process has been
completed.

On May 2, 1989, Emil Knutti of the Office of Waste Programs
Enforcement indicated that EPA had not identified a PRP.  Mr.
Knutti added, however, that if a PRP is identified, EPA's
recovery case would be strengthened if the Corps and its
construction contractor ratified the contract to reflect vari-
ations in estimated quantities.  In responding to the audit
report, the Corps indicated that it would ratify the contract if
requested by EPA (see attachment B).  Accordingly, we are making
the following recommendation.

RECOMMENDATION

If EPA plans to recover costs from a Potentially Responsible
Party for work at the Jibboom Junkyard site, we recommend that
the Director, Grants Administration Division request the Corps of
Engineers to ratify the Corps construction contract to cover all
variations in estimated quantities.

ACTION REQUIRED

In accordance with EPA Directive 2750, the action official is
required to provide this office with a copy of the proposed
determination on the findings within 90 days of the audit report
date.  For corrective actions planned but not completed,
reference to specific milestone dates will assist this office in
closing this report.

Should your staff have any questions concerning this report,
please have them call John Walsh on 475-6753.


Attachment

-------
                                                  APPENDIX


                      DISTRIBUTION OF REPORT


Director, Office of Emergency and Remedial Response (OS-200)

Director, Office of Program Management (OS-240)

Associate General Counsel, Solid Waste and Emergency
  Response Division (LE-132S)

Director, Financial Management Division (PM-226)

Comptroller (PM-225)

Director, Procurement and Contracts Management
  Division (PM-214)

Chief, Grants Information and Analysis Branch (PM-216F)

Regional Administrator, Region 9

Divisional Inspector General for Audit, Western Division

Regional Counsel, Region 9

Agency Followup Official (PM-208)

Audit Followup Coordinator (PM-208)
  Attn:  Program Operations Support Staff

Agency Followup Official (PM-225)
  Attn:  Director, Resource Management Division
                                                                         \
                                                                        o
                                                                        V
                                                                         \
                                                                        o
                                                                        o
                                                                         I

-------
                                      •-.•^W,!'*-
                                         •".«=*

-t ..:
                                                                              •-vl53»S

-------
                DEPARTMENT OF THE ARMY
               OFFICE OF THE AUDITOR GENERAL
                    3101 PANK CCNTEM OftlVC
                 ALEXANDRIA. VINOINIA 223O2-I906

                      15 April 1988
Commander, U. S. Army Engineer District, Omaha
Commander, U. S. Army Engineer District, Sacramento
     This is our report on the Audit of Superfund
Construction for the Jibboom Junkyard site at Sacramento,
California.  The audit was made from June 1987 through
January 1988 at your commands and was part of a
multilocation Audit of Superfund Construction.

     Procurement practices used for the design and
construction projects at the Jibboom Junkyard site were in
accordance with prescribed procedures for contracts and
contract modifications; however, contract modifications
were not issued for variations in estimated quantities
listed in the construction contract.  Surveillance of the
design and construction contractors was adequate; but,
apparent design omissions identified during construction
were not properly assessed for potential architect-engineer
liability as required by regulatory guidance.  Except for
obligations, accounting transactions were generally
recorded promptly and accurately.  The U. S. Army Corps of
Engineers' direct and indirect costs for the Superfund
project were consistent with established procedures for the
design project but not for some costs of the construction
project.  Actions to implement the Army's Internal Control
Program as it relates to Superfund construction were
adequate.  The results of audit are summarised in Part I
and the details are in Part II of this report.  Copies of
the report are being furnished to the activities listed in
the Annex.
                            The Auditor Gener

-------
              AUDIT OF SUPERFUND CONSTRUCTION
                   JIBBOOH JUNKYARD SITE
                   SACRAMENTO,  CALIFORNIA
                          CONTENTS


                                                      Page

Letter of Transmittal

PART I    -    SUMMARY

               Preface 	    1

               Objectives and Scope 	    2

               Background 	    3

               Observations and Conclusions 	    3

               Command Reaction 	    8

               Responsibilities and Resources 	    8

PART II   -    FINDINGS, RECOMMENDATIONS, AND
               A - Project Design 	    9

               B - Contract Modifications and
                   Obligations 	   15

               C - In-House Costs 	   20

               ACTIVITIES FURNISHED COPIES OF
                   AUDIT REPORT	   23

-------
                  U. S. ARMY AUDIT AGENCY
              ALEXANDRIA, VIRGINIA 22302-1596

              AUDIT OF SUPERFUND CONSTRUCTION
                   JIBBOOM JUNKYARD SITE
                   SACRAMENTO,  CALIFORNIA

MM 88-601                                     15 APRIL 1988
                           PART I

                          SUMMARY

PREFACE

     The     Comprehensive      Environmental     Response,
Compensation, and Liability Act of 1980 (Public Law 96-510)
mandated  the  establishment  of  the  Hazardous  Substance
Response   Trust  Fund,   which   is   commonly  known   as
"Superfund."  The     Superfund,     managed     by     the
U. S. Environmental  Protection Agency, was  established to
respond to  emergency hazardous conditions and  to  fund the
cleanup  efforts required  to  remove  or  control  hazardous
waste  substances  in  instances  when the  responsible  party
cannot be  identified or will  not perform the  cleanup and
the  State  will not assume  responsibility.   In  February
1982,   the  Environmental   Protection   Agency  and   the
U. S. Army Corps of  Engineers  reached  an  agreement for the
Corps to provide technical  assistance,  contract for design
and construction work,  and perform contract administration
functions  when  the  Federal  Government  assumes  cleanup
responsibility  for   hazardous  waste   sites.   The  actual
cleanup is  accomplished by  contracting with private firms.
Contract costs are paid by the Corps and then reimbursed by
the Environmental Protection Agency.

     The public law establishing the Superfund requires the
Inspector General,  Environmental Protection Agency to audit
Superfund  as  appropriate  and requires  Federal  agencies to
cooperate   with  the  Inspector   General's   efforts.  The
Inspector  General  requested  audit  assistance  from  The
Auditor  General  of  the   Army  in  evaluating  the  Corps'
management  of  Superfund cleanup efforts.  Representatives
of  the  The  Auditor General  and  the   Inspector  General
decided that an audit during 1987 of the Corps' involvement
with Superfund would evaluate the effectiveness of account-
ing, procurement, and contract administration  for selected
Superfund  projects  and  would  evaluate the appropriateness
of  Corps'   in-house  costs   charged  to  the projects.   This
report gives our audit results for the design and construc-
tion projects for the Jibboom Junkyard Superfund site.

-------
OBJECTIVES AND SCOPE

     By agreement with the Environmental Protection Agency,
the  mission  of  the  Corps  includes  providing  technical
assistance for the cleanup of  the  Jibboom Junkyard hazard-
ous  waste site,  contracting  for  design and  construction
work  at  the  hazardous  waste  site,  and  performing  the
associated   contract   administration  functions.  Specific
audit  objectives  for our  review of  the Jibboom  Junkyard
cleanup effort were to determine whether:

   - Contracts and contract  modifications were  awarded in
     accordance with prescribed procedures  and if  procure-
     ment practices ensured that services were received at
     fair and reasonable prices.

   - Surveillance of  contractor performance was adequate to
     ensure contract  requirements were met and whether pay-
     ments made to contractors were proper.

   - Accounting  transactions   (obligations,  disbursements,
     receivables, and collections) were  promptly and accu-
     rately recorded in the accounting  records,  and if any
     rejected transactions were corrected and  reentered in
     a timely manner.

   - Direct and indirect cost  charges were  consistent with
     established Corps of Engineers procedures.

   - Actions taken to implement the Army's Internal Control
     Program, as it relates to Superfund construction, were
     adequate.

     The  audit,  performed from  June 1987 through January
1988,  was  made  in  accordance  with  generally  accepted
government  auditing  standards  and,  accordingly,  included
such tests of  internal controls  as we  considered necessary
in the  circumstances.   The audit was  an integral  part of
the  multilocation Audit of Superfund Construction, and the
results will be  included  in  an overall report to higher
management levels.  Additionally,  the results of audit will
be provided to the Inspector General, Environmental Protec-
tion- . Agency.  Audit  work  was performed at  Headquarters,
U. S: Army   Engineer   District,    Omaha;    Headquarters,
U. S;' Army  Engineer  District,  Sacramento  and  its  Valley
Resident Field Office.  The audit covered transactions that
were  representative  of operations current  at the -time of
the audit.

-------
BACKGROUND

     The Associated Metals Company operated a metal salvag-
ing business from 1951 to 1965 on a 9-acre site in downtown
Sacramento, California.   In  1965,  the State  of California
purchased the Associated  Metals  Company  property for ease-
ment and  construction of an  interstate  highway.  Construc-
tion of  the highway  and  an  adjacent frontage  road during
1967  covered  all  but  about  2.7 acres  of the  Associated
Metals  Company  property.  Based on  information that  the
site  had  been   used  for dismantling  transformers,  soil
samples were  taken  from  the site  during April  1981.  The
soil  samples  showed  extensive  contamination  from  lead,
zinc, copper,  and polychlorinated biphenyls (commonly known
as  FCBs).  The  site,  named  Jibboom  Junkyard  after  an
unofficial  nearby  landfill,  was   identified  for  Federal
cleanup by  the  Environmental Protection  Agency  because it
was near an intake  pipeline  for  the city's municipal water
supply.  The cleanup process involved  the excavation  and
offsite disposal  of  contaminated  material in  an approved
landfill facility.

     To accomplish  the cleanup,  the  Environmental  Protec-
tion Agency made available to the Corps about $5.2 million.
The  Omaha District  awarded  the design  contract  for  the
cleanup effort  in May  1985  using  an existing  indefinite-
delivery order  type contract and  awarded the construction
contract for the cleanup effort in July  1986.  The design
contract  was  administered by the  Omaha District  and  the
construction contract was administered  by the  Sacramento
District.  The  construction  contract  responsibility  was
transferred to  the Sacramento District  following contract
award  because   the   cleanup  site  was located  within  the
Sacramento District's  geographic boundary.  Cleanup of  the
Jibboom Junkyard  site was 99-percent physically completed
by May 1987.

OBSERVATIONS AMD CONCLUSIONS

     The  contract for  the Jibboom Junkyard site  cleanup
design   was  awarded   in   accordance   with   prescribed
procedures, and procurement practices ensured that services
were  received  at  fair  and  reasonable  prices.  Delivery
order  7 to  an  existing indefinite-delivery contract  was
issued  during  May  1985  in the   amount of  $46,209  for
preparation  of   final  design documents  for  the  Jibboom
Junkyard  cleanup.  There  were no modifications  issued  for
the  design effort.   Services. for  the  indefinite-delivery
contract used for the design effort were advertised in the
Commerce  Business  Daily  and 20 architect-engineer  firms
responded. Preselection and selection boards evaluated each

-------
of the firm's qualifications and ranked three firms consid-
ered for  contract award.  Prior to negotiation,  cost data
was  obtained  from the  prospective  firm  selected  and  a
government  cost   estimate  was  used  in  evaluating  the
reasonableness of the bid proposal.

     Contract  and contract  modifications  issued  for  the
construction  project at the  Jibboom  Junkyard  site  were
awarded in accordance with prescribed procedures, and  pro-
curement practices ensured  that services were  received at
fair and reasonable prices.  However, contract modifications
were not  issued  for  variations  in  estimated quantities
listed in the construction contract.  Services for the con-
struction contract were advertised in the Commerce Business
Daily and six prospective contractors responded.  A govern-
ment  cost  estimate  was used  to   evaluate bid  proposals
received  and  the  lowest  bid  proposal  submitted  by  a
responsive contractor was selected for  contract award.  A
firm-fixed price contract for  about $2  million  was awarded
during July 1986  for the construction project.   There were
20 modifications valued  at  $389,424 awarded as of 31 July
1987 and one modification  was pending.   Modifications were
negotiated in accordance with the Engineer Federal Acquisi-
tion Regulation Supplement using government cost estimates
and  cost  or  pricing data  obtained  from  the  contractor.
However,  the   construction  contract  was not   modified  to
increase the total contract price by about $1.6 million for
variations in estimated quantities  paid.  As a result, pay-
ments to the  contractor  exceeded the  value  of  the contract
and contract  documentation  did not show  the  actual amount
of  services  covered by the  contract.  Use  of  contract
modifications  for all variations  in estimated quantities
would  help  to  ensure  proper  documentation for  recording
obligations as well as to ensure that payments  to contrac-
tors are within the total contract  price.

     Surveillance  of  the design  contractor's  performance
was adequate to  ensure that contract requirements were met
and payments  made to the contractor were  proper.  Timely
reviews were  made of  design  documents  submitted by  the
contractor.   Corps personnel  verified  that services  were
performed  before  giving  approval  for  payment  to  five
requests   for  progress  payments  received   from   the
contractor.   The   architect-engineer  contractor   for  the
Corps prepared the final design that included the statement
of  work  for  the  Superfund   construction   project.   An
architect-engineer firm under contract to the Environmental
Protection Agency  had prepared the final feasibility study
and other related documents that  established the scope of
work for the Jibboom Junkyard hazardous waste cleanup.  The
feasibility study provided a list of hazardous materials at
the site  plus an  estimate  of the amount  of material  for

-------
excavation and disposal.  The Corps design effort was based
on  the Environmental  Protection Agency  feasibility study
and other related documents.

     Surveillance of  the construction contractor's perfor-
mance  was adequate  to  ensure  that  contract  requirements
were met  and payments made to the  contractor  were proper.
But,  information on  apparent design  omissions  identified
during construction was  not properly assessed for possible
architect-engineer  liability  as  required  by  regulatory
guidance. Contract requirements were met for monitoring pay
quantity  measurements   and   quality   control,   issuing
progress  payments,   maintaining  entrance  control,   and
approving transporters.  Corps personnel verified that con-
struction services  were  properly performed before  giving
approval  for  payment  to 12 requests  for  progress payments
received  from the contractor.  The  construction contract,
initially  awarded  for  about $2 million,  grew to  about
$4 million  to  cover  work  not  identified by  the  design
effort.  Also, a work stoppage of 2 weeks occurred due to a
shortage  of  funds.  The  design  effort underestimated  the
amount of material for  excavation  and disposal  by about
100 percent and  did  not identify three types  of hazardous
materials plus  underground  concrete structures  that  were
present at the  site.   The construction design prepared by
the  Corps  was  based  on  information  furnished  by  the
Environmental  Protection Agency.  Additional  coordination
was  needed   to   ensure  that  information   on   the  apparent
design omissions would  be  furnished  to  the  Corps  design
activity  and the Environmental  Protection Agency so  that
architect-engineer liability could be assessed for possible
cost recovery and lessons  learned  could be evaluated  for
possible changes in methods on future projects.

     Except  for obligations,  accounting   transactions  for
the  design   and  construction   projects   were   generally
recorded promptly and accurately in the accounting records.
Rejected  transactions were  corrected and  reentered in  a
timely manner.

   - About $72,400 of  obligations  were  recorded for  the
     design  project  from May  1985  through November 1986,
     and  about  $4.2 million  of  obligations were recorded
     for  the  construction project from March  1986 through
     Nay  1987.   Obligations were recorded  late  for  over
     70 percent  of the cost of  the  construction contract,
     obligations  were understated  by  about   $121,000  for
     variations  in estimated  quantities,  and an obligation
     of $60,000 was recorded twice for a contract modifica-
     tion.  Sacramento  District   needed  to issue guidance
     reemphasizing the need to follow existing local proce-
     dures for recording obligations timely and  accurately.

-------
An obligation of about $46,200 for the design contract
was not  recorded promptly after  the issuance  of the
delivery  order.   However,  prior  to  our  review  the
Omaha District changed their  procedures for obligating
delivery  orders  to  indefinite-delivery contracts  so
that future obligations will  be recorded promptly with
the issuance of a delivery order for a design project.

About $52,000  of disbursements were recorded  for the
design project  from May  1985 through  November 1986,
and about  $3.5 million of 'disbursements were recorded
for the construction project  from May 1986 through May
1987.   In  total,  41 transactions  were  recorded.  Dis-
bursements  were  made  for  design  and  construction
contractor invoices, purchase orders,  travel vouchers,
and reimbursable order  invoices.   All  but  3   of  the
19 disbursement  transactions  reviewed  were  promptly
and accurately recorded within 30 days of the approval
for payment.  The three transactions not  promptly and
accurately  recorded  were  small  dollar  amounts  not
having material impact.

About  $72,400  of  receivables were  recorded for  the
design project  from May  1985 through  December 1986,
and about $3.9 million of  receivables were  recorded
for the  construction project from April  1986  through
May 1987.   In  total,  29  transactions  were  recorded.
The receivables  were based  on monthly bills  sent  to
the  Environmental  Protection Agency.  Of  12  trans-
actions  reviewed,   11 were  promptly  and  accurately
recorded  within  the  same  month that  the bills  were
sent  to   the  Environmental  Protection   Agency  for
reimbursement.   Problems with an  update  of  computer
software caused a 2-month delay in recording the other
transaction reviewed.

About  $72,400  of collections  were  recorded from May
1985 through January  1987 for  the  design  project, and
about  $1.6 million  of collections  were recorded for
the construction project  from March 1986  through May
1987.   All nine  collection transactions reviewed were
promptly  and  accurately  recorded  within  3 workdays
after receipt of the check.

A total  of 15  rejected transactions occurred from May
1985 through November 1986 for the design project, and
8 rejected  transactions  occurred  from February  1987
through  June  1987  for  the   construction project.  All
10 rejects reviewed  were corrected  promptly and reen-
tered to  the accounting records within the same month
that the rejects occurred.

-------
     Direct and indirect Corps costs charged to the Jibboom
Junkyard  cleanup were  consistent  with established  Corps
procedures for the design project but were inconsistent for
some costs  of the construction project.  About  $26,200 of
Corps  costs  were incurred  for  the design  project through
November  1986  and  about  $153,600 of  Corps  costs  were
incurred  for the  construction project  through Hay  1987.
According to  Engineer Regulation  37-2-1O,  in-house expense
such as  labor,  travel,  supplies,   and  reimbursable  orders
that can  be directly related  to  a specific  Corps project
should be charged to the specific project.  Overhead  and
indirect  costs  are then charged to the project  based on a
predetermined rate  applied  to actual  direct labor  hours
incurred.  Fifteen Corps  personnel charged  direct  labor
hours to  the  design project  and 21 Corps personnel charged
direct labor  hours  to the construction  project.   The five
personnel reviewed for  the design  project  performed  tasks
that benefited  the Jibboom Junkyard design project.   About
$23,700 for  Corps  expenses of labor and district  overhead
was  improperly  charged  to  the  construction project  for
13 personnel  who had  not performed services  in  support of
the project.  Cost transfers were made  from  flood central
projects  to  the Superfund  construction project for  which
accumulated  costs were  under the  budgeted amount.  Action
was  needed  to  transfer  the improper  labor  and  district
overhead  costs  to  the appropriate  flood  control projects.
Travel  and reimbursable work charged to the design and con-
struction projects  were  expenses  that  directly benefited
the projects.  The only overhead and indirect costs charged
to the projects were  amounts based on direct labor  hours.
Overhead and indirect costs charged to the Jibboom Junkyard
Superfund site  projects  were based on the  same  allocation
method that was used for all reimbursable work performed by
the Corps.

     Actions taken to implement the Army's Internal Control
Program,   as  it relates  to  Superfund construction,  were
adequate.  Superfund  functions  were  not  designated  as  a
separate assessable unit, but rather the various aspects of
Superfund functions  were  included  in several  assessable
units.   No  DA or Corps  published  internal control  check-
lists  specifically for  Superfund  functions were available
at  the  time  of  our  review.  Both  Omaha  District  and
Sacramento  District  required key  managers with Superfund
responsibilities to have  internal  control responsibilities
in their job  descriptions and performance standards.  Omaha
District  completed  10 internal control checklists  during
the  19 month  period ending  June 1987  and 10  were  in
progress  at  the  time of  our  audit.  Sacramento  District

-------
                     FOR THE COMMANDER,
          U.  S.  ARMY ENGINEER DISTRICT,  SACRAMENTO
                     A - PROJECT DESIGN

FINDING

     Design of the  cleanup  effort  for the Jibboom Junkyard
Superfund  site  underestimated the  amount  of  material
requiring excavation and disposal by about 100 percent, did
not identify three  additional  types of hazardous materials
present, and did not consider  the  presence  of underground
concrete structures  at  the  site.   As a result,  the cost of
the  construction  contract,  initially  awarded  for  about
$2 million, increased to about $4 million to cover the work
not identified during project design.  Additionally, a work
stoppage of  2  weeks resulted  due  to  a  shortage  of funds
for the construction contract cost increase.  The U. S. Army
Engineer  District,   Omaha  contracted with  an  architect-
engineer firm to develop construction plans  and specifica-
tions   based   on   information  obtained  from   documents
furnished by the U. S. Environmental Protection Agency.   A
different  architect-engineer  firm  under  contract  with the
Environmental Protection Agency prepared some  of the docu-
ments furnished  to  the Omaha District.  Procedures used to
investigate apparent design omissions and problems identi-
fied  during  the  cleanup  were  not  in  accordance  with
regulatory guidance, and local  implementing  procedures did
not cover  instances where  design  was accomplished  by an
activity other than the construction district.  Therefore,
architect-engineer  liability was not properly  assessed for
possible  cost   recovery and   lessons  learned  were  not
evaluated  by  the design  activity  for possible  changes in
methods on  future  projects.  Also, unit  costs of  the con-
struction contract  may  have been lower due to efficiencies
in  larger  quantities   and  increased  competition  had  the
scope of*work been reasonably determined during design.

                         DISCUSSION

1.   Background.  Architect-engineer contractors are respon-
sible for the professional quality, technical accuracy, and
coordination   of   all   services   required   under   their
contracts.  An architect-engineer  firm  may  be  liable for
government costs resulting  from errors and deficiencies in
designs furnished under  its contracts.  When a modification
to a construction contract  is  required because of an error

-------
or deficiency in the  services  provided under an architect-
engineer  contract,   the   Federal   Acquisition  Regulation
requires that the potential for liability of the architect-
engineer  be  evaluated.  Procedures  and  responsibilities
within the U. S. Army Corps of Engineers for investigating
and  pursuing  possible  architect-engineer  liability  are
included  in  Engineer  Regulation 715-1-10.  The  U. S. Army
Engineer District,  Sacramento has a local written procedure
that    covers    assessing   possible    architect-engineer
liability.  Lessons   learned   concerning  design  problems
should  also  be furnished  to  the  design activity  so that
changes  in  methods  can be  considered  for future  design
projects.

2.   Construction.   The scope  of work  needed  to  clean  up
the  Jibboom  Junkyard  Superfund  site  was  significantly
understated by the design.

     a.   Contract Award.   The  initial  construction  con-
tract was awarded for about $2 million.  About $1.6 million
of the  award price was for  the excavation, disposal,  and
related  work  for an  estimated 6,000 tons  of  contaminated
material.  Chemicals present  at the site according  to  the
description in the construction contract which was based on
the  design  were lead,  zinc,   and  copper in  concentration
levels  above  acceptable   State and  Federal  limits,  and
polychlorinated biphenyls  (commonly known as PCBs) in con-
centration levels  that did  not exceed State  and Federal
limits.  The  estimate  of  the   amount  of   contaminated
material and the specific  chemicals present at the site was
obtained  from  the  documents provided  to the Corps  by  the
Environmental Protection Agency.

     b.   Site Cleanup.  During    the    actual    cleanup,
11,910 tons of  contaminated  material  (twice the estimate)
were  excavated  and  removed   from  the  site.  Asbestos,
cadmium, and polynuclear aromatics pesticides  were encoun-
tered during  cleanup. These hazardous  materials  were  not
shown  on the construction contract statement  of  work  as
present  at  the  site.   The  construction  contractor  was
highly concerned about the unexpected discovery of asbestos
at the  site because of  the potential  adverse  impact on the
health  and safety  of his  workers.  Buried  concrete struc-
tures' .were also encountered at the site that were not shown
on the'contract plans and  specifications.   The presence of
concrete  made  excavation  at  the  site more difficult  and
costly.  The  value of  the construction contract  grew  by
about $2 million, to  a  total  of about  $4 million,  to cover
the additional work.
                             10

-------
3.   Administration    and   Noncompetitive    Acquisition.
Increased administrative  effort and a  form  of noncompeti-
tive acquisition occurred because the scope of work was not
reasonably estimated for the construction contract.

     a.   Funds.  Additional  fund   authority   had  to  be
requested and received  from the Environmental  Protection
Agency  before additional  contractor work  was  allowed  to
occur.  The initial interagency agreement between the Corps
and the Environmental Protection Agency for the cleanup had
to  be  modified   six   times  to provide  increased  fund
authority for the  site.   The   contractor  was directed  to
stop  work  for  a  2-week  period during March  1987  due  to
insufficient funds.  The contractor requested reimbursement
for overhead  costs of  about $35,000 during  the  work stop-
page period.  At the time of our review, a contract modifi-
cation  for  this expense  was being  processed  but  had not
been finalized.  The expense for the contractor's overhead
costs  during  the  work  stoppage would  probably  not  have
occurred had  the  scope of work been reasonably determined
since  fund  availability  would have  been obtained before
construction start.

     b.   Contract Modifications.  Through    July    1987,
20 contract modifications were  processed  and issued valued
at about $390,000  and  expenses of  about  $1.6 million were
also  incurred for variations  in estimated  quantities  not
shown on contract modifications.  Administrative effort was
required to process each  modification  and to request funds
to  cover  the modifications  and variations in  estimated
quantities.   This  administrative  effort would  probably not
have been required had the  scope of work  been reasonably
determined during design.

     c.   Type  of  Acquisition.  The additional  work- not
covered in  the  design was  acquired  on a  noncompetitive
basis from the construction contractor.  Unit costs for the
construction  contract  (awarded  on a competitive basis) may
have  been   lower  had  the scope  of  work been  reasonably
determined  during design because  of  increased  potential
contractor  interest due  to a  larger  contract  value  and
efficiencies inherent in larger quantities.

4.   Reviews.  The   potential    for    architect-engineer
liability was not  properly  assessed and documented for the
apparent design omissions. Of the 20 contract modifications
issued,  4  valued  at   about $250,000  specifically  cited
insufficient  field investigation as  the  reason  for  the
changes.  Other contract modifications also could have been
caused  by  design  omissions.  The construction contractor,
in a  letter to  the contracting officer's representative on
                             11

-------
the unexpected discovery of  additional  chemical ha    Is
the site, stated that it would seem unlikely that t    j;
ence of asbestos was not detected during design.

     a.   Design.  Design  for  the  cleanup  of  the  Jib.'
Junkyard  Superfund site  was  based on  architect-engi:
services provided by two firms.   The Environmental Pro
tion Agency  contracted  with an architect-engineer  fin
develop the final feasibility study and other related d
ments  that  included a list  of hazardous materials  at
site plus an estimate of the amount of material for exc
tion   and  disposal.  The  results   of   this  effort
provided to  the  Corps  of Engineers  and  the  Omaha Dist
contracted  with  a different  architect-engineer  firi
develop the final design that included plans and speci.1
tions and a statement of work for the construction pro
The Corps'  final design was based  on  information  ir
feasibility study and other  documents to include the •
and  final   Pre-Design  Studies   (both  prepared   bj
architect-engineer firm) and the  Record of  Decision a:
amendment to the Record of Decision obtained from the
ronmental  Protection   Agency.  In  accordance   with
interagency   agreement,    the   Corps'   architect-eng
contractor  did  not  perform site surveys  or  other
investigations  and this was  not required  by the  c
contract.

     b.   Evaluations.   The    potential   for   «.  A:
engineer liability was not assessed by  Omaha Distrid
Corps'  design activity, for  the  apparent design omis:
According to Engineer  Regulation 715-1-10,   when con
tion  is  accomplished  by  a district  different  tha
design activity, the design activity has responsibili
investigating   and,   if  warranted,  pursuing  arch
engineer   liability.  The   construction    district
responsibility for providing all  necessary  informati
cooperating  fully  with the  design  activity.  Sacr
District has  local  written guidance that covers ass
possible liability but the guidance does not provide
dures  for   when  the   design  activity  is  outsid
Sacramento District.  Information on apparent desigr
sions  and  problems was provided  orally to  Omaha D:
and the  Environmental  Protection Agency by  the Sac:
District.  But,   Omaha  District  personnel   did  no
assessments  for possible  architect-engineer  liabil
lessons learned based on the oral information provid
addition to  being able to assess  for  possible lia
specific  information  on  design  omissions  might
design activities with  lessons learned  concerning p
that  could  be  avoided  on  future  designs  if  chai
methods were made.
                             12

-------
     c.   Documentation.  Conclusions reached on the poten-
tial for  architect-engineer liability  were not documented
and    included    in    the   contract     files.  Engineer
Regulation 715-1-10  requires  that a  written determination
be  made  for  all  apparent  design  omissions covering  the
extent  of liability  and the  appropriateness  of  pursuing
recovery  action.  The  written  determinations   are  to  be
included  in the contract file.  Sacramento District person-
nel  told  us  that design  omissions  and  problems for  the
Jibboom Junkyard Site  were not  the fault of  the  Corps'
architect-engineer; but, this  conclusion  and the rationale
for  this   conclusion  were  not' documented.  Personnel  at
Omaha  District  did  not  make  any  liability  reviews,  so
results were not  documented  and  included in  either  the
architect-engineer or construction contract files.  Also, a
Corps conclusion was not provided to the Environmental Pro-
tection Agency.

RECOMMENDATIONS AND COMMAND COMMENTS

A-l  Provide  Omaha  District  with complete information  on
apparent  design  omissions and  construction changes for the
Jibboom Junkyard Superfund site.  Request Omaha District to
provide the   information  to  the Environmental Protection
Agency, if appropriate, after reviews are made for possible
architect-engineer liability and lessons learned.

Command agreed  and  stated  that  information  on  apparent
design omissions  and construction changes  for  the Jibboom
Junkyard  Superfund site will be  provided  to the Omaha Dis-
trict by third quarter FY 88.   Command also stated that the
Environmental  Protection Agency had  an   on-site  Project
Manager who  was  fully aware of  all  contract modifications
and  the  basis for  the modifications.   The  Army  auditors
should  consider  contacting the  Environmental  Protection
Agency's  auditors to ensure that the Environmental Protec-
tion  Agency  is  properly  assessing;  possible  architect-
engineer  liability.  It seems that Environmental Protection
Agency's procedures and actions are of primary concern here
and not the Corps'.

U. S.  Any   Audit  Agency  Evaluation.   This   audit  was
requested by  the Inspector General,  Environmental Protec-
tion Agency  and  the  results of audit will be furnished to
the Environmental Protection Agency's auditors. The purpose
of this audit was to determine if the Corps carried out its
responsibilities.

A-2  Revise the local written guidance covering reviews for
architect-engineer liability to include procedures for when
the design activity is outside the District.
                             13

-------
Command agreed  and  stated that Sacramento  District Office
Memorandum 715-1-3  will  be  revised  by  30 June  1988  to
include procedures for architect-engineer liability reviews
in  instances  when  the  responsible   design  activity  is
located outside  the District.    Copies of  Sacramento Dis-
trict Form 84,  Request  for Approval of  Contract Modifica-
tion, for the Jibboom Junkyard Superfund  site  will be sent
to  the  Omaha  District  Project  Manager  for  review  and
completion of the architect-engineer liability part  on the
back side of  the form.   This procedure is  currently being
used on the Celtor Chemical Works (Hoopa) Superfund site.

The  Commander,  U. S. Army Engineer District, Omaha  also
provided comments  on the  finding  and recommendations and
stated that:

   - Omaha District personnel performed  the design assign-
     ment in  accordance with the Environmental Protection
     Agency guidance and intent.   During the design period,
     there  were  no  discussions  dealing  with  a  Corps'
     responsibility  to  secure  additional  field data.  The
     Environmental  Protection  Agency  representative  main-
     tained that the site had been investigated 6 times and
     that  about  99 soil  samples  had  been  obtained  and
     analyzed.  The  amount  of  contaminated  material  ulti-
     mately removed merely proves that the  unknown hazards
     on the  site may  not have  been  properly identified,
     even if  additional  field  work had been authorized.
     Contamination within the site varied immensely.

   - Omaha District personnel believe that  the Environmen-
     tal  Protection  Agency  decided  to  accept  the  site
     information available rather  than spend  thousands of
     dollars  performing  additional  field  work.  Unfortu-
     nately,   this  decision  led  to the  construction  cost
     exceeding   the  original    low  bid   by   more   than
     100 percent.  This  is  unfortunate but understandable
     based on the  data  available at the time  the  decision
     was made.

   - The Omaha District  will conduct a  review  for  possible
     architect-engineer liability after receipt of informa-
     tion on apparent  design  omissions  and  construction
     changes from the Sacramento  District.
                             14

-------
                     FOR THE COMMANDER,
             S.  ARMY ENGINEER DISTRICT,  SACRAMENTO
         B - CONTRACT MODIFICATIONS AND OBLIGATIONS

FINDING

     The  construction  contract  for  the Jibboom  Junkyard
Superfund site was not  modified  to increase the total con-
tract  price  by   about  $1.6 million  for   variations  in
estimated  quantities paid.  As  a  result,  payments  to the
contractor  exceeded  the  total value  of the  contract and
contract  documentation  did not  show the actual  amount  of
services covered by the contract.  In addition, obligations
were not recorded in  accordance with  regulatory  guidance
for  the  construction  contract.   Obligations  of  $185,445
were recorded improperly,  obligations of $246,614  were not
recorded,  and obligations of  about  $3 million  were  not
recorded in a timely manner because of lack of coordination
within  the Sacramento  District  between personnel  of the
Construction-Operations  Division   and  personnel   of  the
finance  and  accounting  office.   Therefore,  the balances  of
funds available for  future obligations and  monthly reports
of funds  obligated were inaccurate due  to  the way obliga-
tions were recorded for the contract.

                        DISCUSSION

1.   Background

     a.   Contract.  The  Jibboom  Junkyard  Superfund  site
construction  contract  included  three line  items of  work
that  were  identified  as  subdivided  items and  estimated
quantities were shown for the lines.  The first subdivision
of each  line  reflected  the minimum amount of work expected
and  the  second  subdivision  reflected   an  additional
estimated quantity.  A  variations  in estimated quantities-
subdivided items clause was included in the contract.  This
clause, discussed in the Engineer Federal Acquisition Regu-
lation Supplement, is used when costs to perform  units  of
work are  expected  to go down as  the quantities go up.  Bid
items  are  subdivided  so  the  contractor  can  distribute
indirect  costs in  the bid  price to  the  first subdivision.
The  clause does  not allow the  government  to request  an
equitable adjustment  to the unit price when actual quanti-
ties  are significantly greater  than the total  subdivided
items.  Contract modifications are issued to cover changes
in  requirements  after  contract  award.   Basic policy and
procedures   for   processing   contract   modifications   are
included  in  the  Federal  Acquisition  Regulation  and the
Engineer Federal Acquisition Regulation  Supplement.
                             15

-------
     b.   Recording Obligations.  Each government agency is
directed by  law  to  establish and maintain an adequate sys-
tem  of  accounting and internal  controls  over obligations,
accrued expenditures, applied costs and outlays.  The Corps
uses the  finance and accounting subsystem of  the Corps of
Engineers Management  Information System to record account-
ing  transactions for site-specific  funds provided  by the
Environmental Protection Agency  for  Superfund work.  Guid-
ance for recording  obligations  is  provided in AR 37-21 and
Engineer   Regulation 37-2-10.   With    minor   exceptions,
obligations  incurred  shoqgfcd  be  charged immediately against
the applicable fund.

2.   Contract: Modification

     a.   Variations in Quantity.  Variations  in  estimated
quantities occurred for the Jibboom Junkyard Superfund con-
struction contract,  but the contract value was not modified
to cover about $1.6 million  for  variations that were paid.
Variations in quantities occurred for excavation and trans-
portation   of   5,910 tons   of   contaminated   material,
additional  air  monitoring  and -perimeter  sampling,  and
extended security and contractor supervision.   Only 220 of
the 5,910 ton variation was covered by '• contract modifica-
tion.  Personnel of the Sacramento District's Construction-
Operations Division stated that contract modifications were
not  needed  because  the contract,  as written,  allowed for
variations and the  only change  was  in the  amount  of work
performed.  We believe  thats^the use  of  contract modifica-
tions  for all  variations  in  estimated quantities  would
ensure  proper  documentation  for recording  obligations  as
well as help to  ensure^ayments to  contractors are within
the total contract price.

     b.   Obligations.  Obligations  totaling  $372,059  for
variations   in   estimated  quantities  were   not  properly
recorded  on  the  accounting --^records.   The District  used a
local forn covering, variation*, liv- estimated quantities for
fund   control    purpose*4.  The   fora  *was  -Initiated   by
Construction-^peratieaa^Dibrision, pe*eafliii'e^-:.j|pufe«iater- for-
warded to the  finance and accounting  office- for" recording
obligations.  The form,  however/ was not signed by the con-
tracting officer.  There were four local forms prepared for
the  variations  in  estimated  quantities  for  the  Jibboom
Junkyard Superfund site and  a cumulative dollar amount was
shown on the forms.   The forms showed the following:
                             16

-------
        Form                             Cumulative
       Number       	Date	        Amount
        10          8 December 1986      $  125,445
        10R         3 February 1987         597,815
        10R3        5 March 1987          1,443,407
        10R4        22 April 1987         1,690,021
Obligations  totaling  $1,568,852  were  recorded  for  the
variations  in  estimated quantities.  Correct  amounts were
recorded  for form numbers  10 and  10R3,  but  $125,445  too
much  was  recorded for form 10R  because  the  total  rather
than the difference between forms 10 and 10R3 was recorded.
No amount  was  recorded for form  10R4 when  $246,614  should
have been  recorded.  We could  not determine why an obliga-
tion was  not recorded for  form 10R4 but the  omission  was
not identified  by Construction-Operations  Division person-
nel and the  finance  and accounting  office  due  to a lack of
coordination or reconciliation.

     c.   Payments.  Total payments  made to the contractor.
exceeded  the total  contract  price as  shown   on  contract
documentation.   According  to  the payments  clause of  the
contract,  the government will  pay the  contractor the price
as provided  in  the contract.  About $3.9 million  had been
paid  to  the contractor  as of  the   12th progress  payment,
made  during June  1987,  but  the price  shown   on  contract
documentation was  only about $2.4 million.   The difference
was funds for variations not included in contract modifica-
tions  (about $1.6 million),  less unliquidated obligations
for amounts  shown on  the contract (about  $100,000),  and
retained  amounts  ($6,500).   Unless  estimated  quantities
are adjusted to actual amounts, contract documentation will
be incomplete because the actual contract price will  not be
shown.  The  use of modifications would provide a maximum
total contract value.

3.   Contract Obligations.  Untimely    obligations    were
recorded for over 70 percent of  the construction  contract
dollars and an obligation was recorded twice for a contract
modification. We  considered  an obligation  untimely when it
was not recorded in  the same  month  that the  liability
occurred.   Recorded   obligations   for   the   construction
project .totaled  about $4.2 million as  of   31 May  1987.
Obligations  of  about $3 million  had not been recorded in a
timely manner.  The  largest  untimely obligation was about
$2 million  for  the  initial  construction  contract awarded
during July  1986  but not  recorded in the financial records
until November  1986.  The untimely obligations  resulted from
lack of coordination between personnel of the  Construction-
Operations Division  and the  finance and accounting office.
                             17

-------
Also, an obligation of $60,000 was  recorded twice for con-
tract  modification number  14.  The first  obligation  was
recorded during January 1987 when a request was being pro-
cessed  for  approval  of  the  modification  and the  second
obligation was recorded during April 1987 after the modifi-
cation was  issued.  The  duplicate  obligation had  not been
detected  and  corrected  as  of  30 June  1987.   Balances  of
funds available for future  obligations were overstated and
reports of monthly funds obligated  were  understated due to
the way obligations were recorded for the contract.  Proper
accounting for  obligations  is necessary at all  times  for
fund control to prevent actual expenditures from exceeding
authorized  expenditures  and  to ensure  accurate  monthend
financial reports.

RECOMMENDATIONS AND COMMAND COMMENTS

B-l  Issue a contract modification  to  cover all variations
in estimated quantities  on  the Jibboom  Junkyard Superfund
site construction contract.

B-2  Direct that contract modifications  be issued for  all
variation  amounts  in   estimated  quantities   on  future
Superfund site  construction contracts having  a variations
in estimated quantities clause.

Command did not agree with  Recommendations  B-l  and B-2 and
stated  that no  Federal Acquisition Regulation   or  other
regulatory  authority  has  been  cited showing  a  need  or
requirement   for   such    a   modification   action.  The
recommended action for modification  is,  therefore, based on
the  auditor's  opinion  as   to  the  need  for  additional
documentation.   However,   the  variation in   quantity  is
already authorized by the Special Clause 11,  Variations in
Estimated Quantities,  to  the contract.  Unit prices  and
variations in quantity are  allowed  by  the Federal Acquisi-
tion Regulation 12.402,  12.403,  and  36.207.   Not  only  is
authority already  provided  in the  contract,  but  the Con-
tracting  Officer,   Authorized  Representatives  of   the
Contracting Officer, and the  Resident  Contracting Officers
signed  the  progress   payments   and  final   payments   as
required.  A  modification  would be  redundant,  increase
administrative costs, make  project  management  more diffi-
cult,  and  could   increase  the  contract  cost  because  a
modification may allow the contractor to renegotiate higher
unit  prices.   The  variations  in  estimated  quantities
clause has been consistently  administered by  this District
for years and is adhered to by  other Corps Districts.  The
recommendation  would be acceptable  only  after  a  clear
demonstration that  a  valid  need or requirement exists for
                             18

-------
the  modification and  that the  requirement  outweighs  any
negative impact.  The  auditors  should address this finding
to Headquarters, Corps  of  Engineers since other Corps Dis-
tricts may be affected.

U. S. Any Audit Agency Evaluation.  The total dollar value
of  the  contract increases  or  decreases when  variations
occur in the  estimated quantities.   This  changes the terms
of  the  contract  (total  value)   and a modification  to  the
contract is  required.   Part 43  of  the  Federal Acquisition
Regulation  states  that modifications  are used  to reflect
other agreements of the parties modifying the terms of con-
tracts.  If  modifications  are  not  issued  for variations,
the contract  has no  maximum authorized total value.  Issu-
ing  contract  modifications  for   variations  provides  a
control over  the total dollars  authorized  since a maximum
amount is specified  and this  ensures that funds are avail-
able before  the  government creates a liability.  Modifica-
tions  should  be  periodically  issued  to  increase  the
authorized ceiling as new estimates of the quantities above
the ceiling are determined.  The need for modifications for
variations in  estimated quantities was discussed  with  the
Principal Assistant  Responsible  for Contracting, Headquar-
ters, Corps  of Engineers.   The  Principal  Assistant agreed
with our conclusion that formal modifications are appropri-
ate for variations in estimated quantities.

B-3  Make a review of  the  accuracy of obligations recorded
for the  Jibboom  Junkyard Superfund site  construction con-
tract.  Adjust  the  obligations   recorded  based  on  the
review.

Command agreed and stated on 9 December 1987 that the obli-
gations  had  been  reviewed.   The  program  management  and
finance and  accounting records were  reconciled  and neces-
sary adjustments were made.

B-4  Issue guidance  reemphasizing the need to follow local
existing procedures for recording obligations promptly  and
accurately.

Command  agreed  and  stated that Operating  Manual 37-1-1,
Administrative Control of  Funds,  was issued  on 5 October
1987.  The   manual   reemphasizes    timely   and  properly
recording of obligations and clarifies the responsibilities
of  the  finance  and  accounting   staff  and  the  program
directors.
                             19

-------
                    FOR THE COMMANDER,
          U.  S.  ARMY ENGINEER DISTRICT, SACRAMENTO
                    C -  IN-HOUSE COSTS

FINDING

     About $23,700  was  improperly  charged to  the Jibboom
Junkyard Superfund construction project for Corps  of Engi-
neer  expenses of  labor  and district  overhead.  Improper
cost  transfers  were made  from  flood control  projects  to
the  Superfund project.  District procedures  and  controls
were  not  adequate  to preclude the cost  transfers. As  a
result, funds obtained from the Superfund Trust Fund were
used improperly for support of the District's  flood control
mission.

                         DISCUSSION

1.   Background.   Engineer   Regulation 37-2-10   provides
guidance concerning the  accounting  treatment of the Corps'
in-house costs incurred in support of its various projects.
The general rule is that costs  which directly  attribute to
a  specific project  should  be charged to  that  specific
project.  The Corps budgets for and receives funds  from the
flood control and coastal emergencies appropriation for its
flood control projects.  Interagency agreements between the
Environmental Protection Agency and  the  Corps  are  estab-
lished to provide funding for Superfund projects managed by
the Corps.

2.   Costs.  About  $23,700  was improperly  charged  to  the
Jibboom Junkyard  Superfund construction project for Corps
expenses  of  labor  and district overhead.  About  $153,000
was charged  to  the Jibboom  Junkyard project for  in-house
expenses through 31 May  1987.   Improper charges were about
15 percent of the total.

     a.   Labor.  Labor  was   charged  to  the  Superfund
construction project for  13 District personnel  who had not
performed services in support of the project.

          (1)  Cost Transfers.  During  February 1987,  two
cost transfers were processed moving 1,029 labor hours from
District  flood  control  projects  to  the Jibboom  Junkyard
Superfund construction project.  The labor hours  were  for
13 personnel  assigned  to a field office of the Sacramento
District and represented about $16,800 of labor expense for
the period 25 January through 7 February 1987.  The reason
for the transfers on  the documentation  was  erroneous labor
charging;   but  a  detailed   explanation  was   not  given.
                            20

-------
Through discussion  with personnel at the  field office and
review  of time reporting  records,  we determined  that six
personnel had  never  performed  any services for the Jibboom
Junkyard  construction  project  and the remaining  seven had
not  performed  services for  the  project during the period
25 January  through  7  February  1987.  The cost  transfers
were initiated by personnel of the District's Construction-
Operations  Division  and  the  initiator  signed  for  the
Division  Chief on  the  transfer authorizations.  We  dis-
cussed the cost transfers with the initiator and found that
there was no information  available  showing  that the labor
charges were erroneous.    District procedures and controls
were not adequate to prevent the improper cost transfers to
the Superfund project.

          (2)  Reason for Transfer.   Command personnel gave
the  following  explanation  for   the  transfers  made.  The
project  was  the  first  of  its  kind  in  the  Sacramento
District and it was  not charged  its  full  share of in-house
costs.  In-house  costs were  only  3.8 percent of  direct
costs  while the  expected charge should  have been  about
7 percent.  In-house costs on  civil  works  projects average
about  10  percent  and  a 10-percent  rate  for this  type of
work was  considered fair  and reasonable and was  agreed to
by the Environmental Protection Agency.   The administration
of numerous  cost codes by timekeepers,  the one-hour time
charge  rule,   and  this being  a  new project   resulted in
administrative  undercharges.  The  transfer  was  made  to
correct for  undercharges  to the  Superfund project because
of some probable timekeeping errors  in  handling labor cost
codes.  Personnel  probably  should have  been charging  the
Superfund project but had not.

          (3)  Interagency   Agreement.  The    interagency
agreement for  the  Jibboom Junkyard cleanup effort  states
that reimbursement  to  the Corps  is  to  be based  on actual
expenses  incurred,   and specific documentation supporting
the  costs is to be  maintained.  By  signing  the agreement,
the Corps agreed to comply with the terms of the agreement.
The  percentage rates   mentioned  by  command  for  in-house
costs  (paragraph  2a(2)) are maximum  allowable  ceilings or
targets  that  may  or  may  not  be  the  actual  expenses
incurred.  Costs charged to the project must be for actual,
supportable expenses.

     b.   Overhead.  Inappropriate overhead costs were also
charged as  a result of the  cost transfers for labor.  The
automated accounting system  of the Corps  is  programmed to
add  costs  for District  overhead  based  on  direct  labor
charges.  At the  time   of  the  cost transfer,  a 41-percent
                             21

-------
rate for  district overhead was  applied to  labor  charges.
Therefore,   about  $6,900   for   District   overhead   was
improperly charged to the construction project.
3.   ReiBburseaent.  Funds  provided by  the  Environmental
Protection Agency  for  Superfund work were  improperly used
for  the  district's flood  control  mission  because of  the
cost transfers. The automated accounting system generates a
bill to the Environmental Protection Agency around the 15th
of  the  month  for  expenses   charged   against  Superfund
projects during the previous month.  Labor  expenses trans-
ferred  to  the  Jibboom  Junkyard  Superfund  construction
project were billed to  the  Environmental  Protection Agency
during March 1987,  and later reimbursed to the  Corps from
the Superfund  Trust  Fund.   The expenses for  flood control
should have been  paid  by the appropriation for  flood con-
trol and coastal emergencies.

RECOMMENDATIONS AND COMMAND COMMENTS

C-l  Transfer  the  improper labor  and  district  overhead
charges totaling  about $23,700  from the Jibboom  Junkyard
Superfund project  to  appropriate  flood control  projects.
Return the $23,700 to the Environmental  Protection Agency.

Command  agreed and  stated  on  9 December 1987  that  the
actual, invalid transferred amount of $22,210.79  has been
corrected  and   returned to the  Environmental  Protection
Agency.

C-2  Strengthen the controls over procedures for processing
cost transfers  affecting  Superfund projects.   Specifically
require:

   - Detailed reasons for each transfer  and supporting data
     that shows the transfer is proper.

   - An approval by an  individual  other  than  the initiator
     before a cost transfer is made.

Command  agreed and  stated  that  the  Resource  Management
Office will reissue, by third  quarter FY 88,  existing 1984
instructions as policy requiring specific documentation and
approval procedures for cost transfers.
                             22

-------
                                                     ANNEX
Copies of this report  are  being furnished to the following
activities:

Inspector General, U. S. Environmental Protection Agency
Assistant Secretary of the Army (Civil Works)
Assistant Secretary of the Army (Financial Management)
The Inspector General
Director of the Army Staff
Chief of Public Affairs
Deputy Chief of Staff for Personnel
Deputy Chief of Staff for Logistics
Chief of Engineers
Commanders
  U. S. Army Corps of Engineers
  U. S. Army Criminal Investigation Command
  U. S. Army Engineer Division, Missouri River
  U. S. Army Engineer Division, South Pacific
  Sixth Region, U. S. Army Criminal Investigation Command
Commandant, U. S. Army Logistics Management College
This report is not to be released outside the Department of
the Army  for  60 days.  After that period  has  elapsed,  the
report  may be released  in accordance with  the procedures
prescribed in Army Regulation  340-17  and Department of the
Army Memorandum  36-1.  However,  the results of audit will
be furnished to  the  Inspector  General,  U.  S. Environmental
Protection Agency, who requested this audit.
                             23

-------
                                                                 ATTACHMENT B
CEAO (CESPK-M/18 May 1988)  1st  End                   Mr. Bandy/las/272-0061
SUBJECT:  USAAA Audit Report  No.  MM  88-601, Superfund Construction,
           Jlbboon Junkyard Site, Sacramento,  California

HQUSACE,  MASH  DC  20314-1000                             1 ! JUL 1988

TO:   Secretary  of the Aray,  Inspector General;  ATTN:  SAIG-PA

1. This Command concurs with the Sacraaento District's  response except for the
additional facts,  and revised position In Recommendation  B-2  stated  below.

    Recommendation B-l:  Command agrees that a Modification should have been
Issued during the  closeout process to cover all  variations  In  estimated
quantities on  the Jlbboom Junkyard contract  that were  not covered  In modifi-
cations previously Issued.  However; Coaaand does not  believe that Issuing a
modification  at this juncture would serve any  meaningful purpose,  unless
requested by the customer  - EPA,  since  the contract  has  already been
finalized.  Guidance will  be Issued requiring future Superfund contracts to be
modified  during the closeout process,  as recommended.

   Recommendation B-2:  The revised Command  position  Is  that In  addition to
obligating cost overruns  on a  Miscellaneous Obligation Document (DA  Fora 3717)
and notifying  the contractor accordingly, a modification will be Issued during
closeout to reconcile the total contract cost to the Individual line Items for
all future Superfund  contracts.

2. The report did not  contain  any  reportable  monetary  benefits.   In our
opinion, there Is no need to classify or protectively mark any portion  of this
report  or responses thereto.
                                   8EORGE  K.  MITHERS. JR.
                                   Major General, USA
                                   Deputy Commander

                                                                                 I
                                                                       £7-60*

-------