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U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Quick Reaction Report
Village of Wellsville, Ohio -
Ineligible Costs Claimed
Under EPA Grant XP97582801
Report No. 08-2-0204
July 21, 2008
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Report Contributors:
Lawrence Gunn
Rich Howard
Matthew Simber
Janet Kasper
Abbreviations
CFR Code of Federal Regulations
DDA Dallis Dawson and Associates
EPA U.S. Environmental Protection Agency
Grant EPA Grant XP97582801
Grantee Village of Wellsville, Ohio
OIG Office of Inspector General
Cover Photo:
The building pictured and its contents were part of wastewater treatment
plant improvements funded for the Village of Wellsville under the EPA grant
discussed in this report (EPA OIG photo).
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
08-2-0204
July 21, 2008
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA)
Office of Inspector General
conducted reviews of
earmarked grants known as
Special Appropriation Act
Projects issued to local and
tribal governments. We
selected the Village of
Wellsville, Ohio, for one of
these reviews.
Background
The Village of Wellsville
received an EPA Special
Appropriation Act Project
grant, XP97582801. The
purpose of the grant was to
provide federal assistance of
$2,419,665 to improve and
upgrade the wastewater
treatment plant and the
combined sewer collection
system. The Village of
Wellsville was required to
provide local matching funds
equal to 45 percent of all
eligible project costs.
Village of Wellsville, Ohio - Ineligible Costs
Claimed Under EPA Grant XP97582801
What We Found
The Village of Wellsville (grantee) did not meet the Title 40 Code of Federal
Regulations Part 31 requirements for financial management. In particular, the
grantee did not have support for required matching costs and received grant funds
it never expended. As a result, EPA will need to recover $1,241,591 under Grant
XP97582801. The grantee also made two improper procurements for engineering
services, and did not maintain acceptable procurement or contract administration
systems. Further, the grantee did not conform to the terms and conditions of its
grant. Therefore, EPA should classify the Village of Wellsville as a high risk
grantee.
What We Recommend
We recommend that the Regional Administrator, EPA Region 5:
1. Recover the $1,241,591 in questioned costs.
2. Require the grantee to re-bid both engineering contracts with Dallis Dawson
and Associates in accordance with federal regulations.
3. Require the grantee to strengthen its accounting and procurement systems to
meet the requirements of Title 40 Code of Federal Regulations Part 31.
4. Classify the Village of Wellsville as a high risk grantee, and apply special
conditions to this and future awards until improvements are made to the
accounting and procurement systems.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2008/
20080721-08-2-0204.pdf
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF
INSPECTOR GENERAL
July 21,2008
MEMORANDUM
SUBJECT: Village of Wellsville, Ohio - Ineligible Costs
Claimed Under EPA Grant XP975 82801
Report No. 08-2-0204
FROM: Janet Kasper
Director of Contr;
Agreement Audits
TO: Bharat Mathur
Acting Regional Administrator
EPA Region 5
This report contains time-critical issues the Office of Inspector General (OIG) identified and
recommends recovery of federal funds drawn down by the recipient. This report represents the
opinion of the OIG and does not necessarily represent the final position of the U.S.
Environmental Protection Agency (EPA). EPA managers will make final determinations on
matters in this report.
The estimated cost of this report, calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $134,457.
Action Required
In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us
your proposed management decision for resolution of the findings contained in this report before
any formal resolution can be completed with the recipient. Your proposed decision is due in
120 days, or on November 18, 2008. To expedite the resolution process, please e-mail an
electronic version of your proposed management decision to kasper.j anet@epa.gov.
We have no objections to the further release of this report to the public. This report will be
available at http://www.epa.gov/oig. If you have any questions, please contact Janet Kasper,
Director, Contract and Assistance Agreement Audits, at 312-886-3059 or the e-mail address
above.
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08-2-0204
Purpose
The Office of Inspector General is reviewing Special Appropriation Act Project grants to
identify issues warranting further analysis. This includes reviewing the total project costs
incurred by selected grant recipients. During our review of the Special Appropriation Act
Project grant awarded to the Village of Wellsville, Ohio (grantee), we found that the
grantee did not meet the Title 40, Code of Federal Regulations (CFR), Part 31
requirements for financial management.
Background
U.S. Environmental Protection Agency (EPA) Region 5 awarded Grant XP97582801
(grant) on May 29, 2002. The grant provided federal assistance of $2,419,665 to improve
and upgrade the existing wastewater treatment plant and the combined sewer collection
system for the Village of Wellsville. The $2,419,665 represents EPA's contribution of up
to 55 percent of the eligible project costs and is limited by the amount of the
congressional appropriation. The grantee is responsible for providing the remaining
45 percent of all eligible project costs as a match to the federal funding. In November
2006, EPA extended the budget and project period to December 31, 2008, due to delays
the grantee experienced in receiving non-federal funding. As of March 28, 2008, federal
funds totaling $621,994 remained on the grant.
Scope and Methodology
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit
objectives. We conducted our field work between February 4 and March 28, 2008. We
made site visits to the grantee and its engineering firm and performed the following steps:
• Obtained and reviewed grantee support for payment requests;
• Conducted interviews of current grantee and former engineering firm personnel;
• Obtained and analyzed the grantee's bank statements, canceled checks,
construction contracts, and change orders; and
• Obtained and analyzed information from the engineering firm regarding grantee
payment requests and matching funds.
Findings
The grantee did not meet the Title 40 CFR Part 31 requirements for financial
management. In particular, the grantee did not have support for required matching costs
and received grant funds it never expended. As a result, EPA will need to recover
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08-2-0204
$1,241,591 under Grant XP97582801. Also, the grantee made two improper
procurements. EPA should designate the grantee a high risk grantee.
Unsupported Matching Costs and Payment Request
The grantee did not have supporting documentation for $1,003,155 in matching costs.
The grantee provided support for $467,667 of its required $1,470,822 match for project
costs to date. Title 40 CFR 31.24 (a)(l) and (b)(6) require matching costs to be verifiable
from the grantee's records. Any reduction in the grantee's matching costs requires that a
portion of the EPA grant be reduced. Without adequate supporting documentation to
demonstrate that claimed matching costs of $1,003,155 were incurred, the allocable
federal share of $1,226,078 is questioned. The federal share was calculated using the
federal funds-to-match ratio of 55 percent/45 percent, respectively.
The grantee retained $15,513 from a June 2002 payment request that had not been
expended as of March 28, 2008. Office of Management and Budget Circular A-87,
Attachment A, Section C, requires that to be allowable under a federal award, a cost must
be necessary and reasonable for proper and efficient performance and administration of
federal awards. Since the $15,513 was not spent, the grantee should have credited the
$15,513 back to the EPA grant. However, the grantee retained these funds in its general
fund. As a result, the $15,513 is ineligible for reimbursement.
Improper Procurements
The grantee awarded two engineering contracts to Dallis Dawson and Associates (DDA),
but did not follow the procurement requirements of Title 40 CFR 31.36. The first
contract was awarded in October 2006 for the design of a new sanitary sewer pump
station and sanitary force main. The second contract was awarded in October 2007 for
sanitary sewer and drainage improvements. The grantee did not:
• Maintain records documenting the process it used to award each contract to DDA,
• Perform a cost or price analysis for either contract,
• Adequately compete the first contract,
• Properly advertise the second contract, or
• Preclude awarding a contract to DDA when the appearance of a conflict of
interest existed.
The grantee informed us that no work had been billed under these contracts. Therefore,
EPA should require that both contracts be re-bid in accordance with federal regulations.
The grantee did not have documentation to support the process for awarding either
contract. Title 40 CFR 31.36(b)(9) requires grantees to maintain records sufficient to
detail the significant history of a procurement. These records will include, but are not
limited to: rationale for the method of procurement, selection of contract type, contractor
selection or rejection, and the basis for the contract price. The grantee did not have
records detailing its method of procurement, how it selected DDA, or how it determined a
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08-2-0204
basis for the price of the contracts. Without documentation to support the award of these
contracts, the grantee cannot demonstrate that it followed federal procurement
requirements or selected the best firm for the best price.
The grantee did not perform a cost or price analysis for either engineering contract.
Title 40 CFR 31.36(f) requires grantees to perform and document a cost or price analysis
in connection with every procurement action. According to EPA guidance, a cost
analysis is the review and evaluation of each element of cost to determine reasonableness.
A price analysis includes the comparison of price quotations submitted, market prices,
bid prices for firm fixed price contracts, or similar information. Because the grantee did
not perform a cost or price analysis, it had no assurance that DDA's proposed prices for
either contract were fair and reasonable. The grantee could be overpaying for
engineering services under both contracts.
The grantee did not adequately compete the first contract. The grantee awarded this
contract to DDA for "emergency" work. However, at the time of our field work,
17 months after the contract was signed, construction had still not started. We found no
evidence that the grantee competed this contract or supported that it was for "emergency"
work. Title 40 CFR 31.36(c)(l) generally requires that all procurement transactions be
conducted in a manner providing full and open competition.
The advertisement for the second engineering contract did not meet federal regulations
and did not provide for open competition. According to Title 40 CFR 31.36, grantees
must publicize and identify all evaluation criteria and their relative importance.
However, the grantee did not specify the relative importance of each evaluation factor.
Instead, the advertisement informed potential bidders that they must have experience in
areas such as sanitary sewer and roadway projects with the grantee, and experience
regarding acquisition of funding for various types of projects, specifically for the grantee.
By specifying that this work had to have been previously performed for the grantee, the
grantee limited the number of qualified firms.
In October 2007, the grantee awarded the second contract to DDA when the appearance
of an organizational conflict of interest existed. An organizational conflict of interest
exists when a set of facts or circumstances or a relationship provide the contractor an
unfair competitive advantage in future procurements. DDA had such an advantage as it
performed "pro-bono" work for the grantee prior to the contract award. This "pro-bono"
work included identifying the remaining two projects under the EPA grant that the
grantee later awarded DDA contracts to perform. According to the grantee, the firm also
helped the grantee write the advertisement for the second contract. Title 40 CFR 31.36,
(c)(l)(v) states that organizational conflicts of interest restrict competition. DDA's
previous relationship with the grantee and its involvement in developing the
advertisement provided an unfair competitive advantage and created the appearance of an
organizational conflict of interest. Therefore, the grantee should not have allowed DDA
to bid on this contract.
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08-2-0204
Grantee representatives told us that DDA has not billed them for any EPA grant-related
work as of March 27, 2008. The grantee also has not drawn down any grant funds since
June 2007, and had not issued any payments to DDA as of the end of our field work.
Therefore, EPA should require the grantee to re-bid both engineering contracts in
accordance with federal regulations.
High Risk Grantee
As noted, the grantee did not maintain an acceptable financial management system,
procurement system, or contract administration system. Also, the grantee did not
conform to the terms and conditions of the award. When grantees do not have systems
that meet financial management standards, EPA can identify them as "high risk."
According to Title 40 CFR 31.12, a grantee may be considered "high risk" if an awarding
agency determines that the grantee:
• Has a history of unsatisfactory performance,
• Is not financially stable,
• Has a management system that does not meet management standards,
• Has not conformed to terms and conditions of previous awards, or
• Is otherwise not responsible.
We found that the grantee meets two of the five criteria for high risk. The grantee's
management system was not adequate and the grantee did not conform to the terms and
conditions of its award. The grantee did not maintain adequate accounting records to
support its matching costs, it requested grant funds for ineligible costs, and it violated the
procurement requirements of Title 40 CFR 31.36 in selecting an engineering firm.
The grantee also did not have an adequate contract administration system. Title 40 CFR
31.36(b)(2) requires grantees to maintain a contract administration system that ensures
contractors perform in accordance with the terms, conditions, and specifications of their
contracts. The grantee did not have such a system. For example, it approved four change
orders under a construction contract more than 4 months after the contract expired.
As of March 28, 2008, the grantee had not spent the remaining $621,994 in grant funds,
and we identified numerous issues previously discussed. Therefore, EPA should classify
the Village of Wellsville as a high risk grantee and apply special conditions until
improvements are made to its accounting and procurement systems.
Recommendations
We recommend that the Acting Regional Administrator, EPA Region 5:
1. Recover the $1,241,591 in questioned costs.
2. Require the grantee to re-bid both engineering contracts awarded to DDA in
accordance with federal regulations.
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08-2-0204
3. Require the grantee to strengthen its accounting and procurement systems to meet
the requirements of Title 40 CFR Part 31.
4. Classify the Village of Wellsville as a high risk grantee, and apply special
conditions to this and future awards until improvements are made to the
accounting and procurement systems.
Grantee Comments
We held an exit conference with grantee and EPA Region 5 representatives on May 29,
2008. The grantee did not have any concerns with the factual accuracy of the report, but
did raise concerns about EPA's approval of its pre-award costs and stated that it had
documentation to support the contract procurements.
The grantee prepared its EPA grant application with its congressman's office. The
application included pre-award matching costs, which the grantee believed were eligible.
EPA approved the entire grant amount requested in the application. The grantee will
submit supporting documentation for the matching costs to EPA.
The grantee believes that it followed procurement guidelines when it established both
contracts with DDA. The Village Administrator placed the advertisement for the second
contract in the newspaper, and scored the applicants based on a point system. The
grantee selected DDA because it received the highest score. The grantee will obtain the
supporting documentation for the procurements from the Village Administrator and
submit it to EPA.
OIG Response
Our position remains unchanged and we continue to believe that EPA Region 5 should
recover the questioned costs totaling $1,241,591.
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08-2-0204
Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (in SOOOs)
Planned
Rec.
No.
1
2
3
4
Page
No.
4
4
5
5
Subject Status1
Recover the $1 ,241 ,591 in questioned costs.
Require the grantee to re-bid both engineering
contracts awarded to DDA in accordance with
federal regulations.
Require the grantee to strengthen its accounting
and procurement systems to meet the
requirements of Title 40 CFR Part 31 .
Classify the Village of Wellsville as a high risk
grantee, and apply special conditions to this and
future awards until improvements are made to the
accounting and procurement systems.
Completion
Action Official Date
Acting Regional
Administrator, Region 5
Acting Regional
Administrator, Region 5
Acting Regional
Administrator, Region 5
Acting Regional
Administrator, Region 5
Claimed Agreed To
Amount Amount
$1,241.6
1 0 = recommendation is open with agreed-to corrective actions pending;
C = recommendation is closed with all agreed-to actions completed;
U = recommendation is undecided with resolution efforts in progress
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08-2-0204
Appendix A
Distribution
Acting Regional Administrator, Region 5
Director, Office of Wastewater Management, Office of Water
Director, Office of Wastewater Management - Municipal Support Division, Office of Water
Director, Office of Grants and Debarment
Director, Grants and Interagency Agreements Management Division
Agency Follow-up Official (the CFO)
Agency Follow-up Coordinator
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Region 5 Audit Follow-up Coordinator
Region 5 Public Affairs Office
Deputy Inspector General
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