\ Office of Inspector General
Audit Report
Procurements Made by
Assistance Agreement Recipients
Should Be Competitive
Report No. 2002-P-00009 March 28, 2002
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Inspector General Divisions
Conducting the Audit:
Mid-Atlantic Division
Philadelphia, PA
Central Division
Denver, CO Office
Dallas, TX Office
Northern Division
Chicago, IL
Southern Division
Atlanta, GA
Western Division
San Francisco, CA
EPA Headquarters
Offices Involved:
Administration and Resources
Management
Air and Radiation
Enforcement and Compliance
Assurance
Policy
Prevention, Pesticides, and Toxic
Substances
Research and Development
Water
EPA Regions Involved:
Nationwide
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
MID-ATLANTIC DIVISION
1650 Arch Street
Philadelphia, Pennsylvania 19103-2029
(215) 814-5800
March 28, 2002
MEMORANDUM
SUBJECT: Audit Report:
Procurements Made by Assistance Agreement Recipients
Should Be Competitive
Report No. 2002-P-00009
FROM: Carl A. Jannetti
Divisional Inspector General
Mid-Atlantic Division (3AIOO)
TO: Morris X. Winn
Assistant Administrator for Administration and
Resources Management (3101)
Attached is a copy of the audit report on procurement practices by recipients
receiving financial assistance under grants and cooperative agreements awarded by
the Environmental Protection Agency (EPA). This is the third in a series of audits
that shows the need for more EPA oversight of assistance agreements. The
objective of the audit was to determine whether assistance agreement recipients
adhered to the Code of Federal Regulations when obtaining goods and services from
contractors.
This audit report contains findings that describe problems the EPA Office of
Inspector General (OIG) has identified and corrective actions the OIG recommends.
This audit report represents the opinion of the OIG and the findings contained in
this audit report do not necessarily represent the final EPA position. Final
determination on matters in this audit report will be made by EPA managers in
accordance with established EPA audit resolution procedures.
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ACTION REQUIRED
In accordance with EPA Order 2750, you are requested to provide a written
response to the audit report within 90 days of the date of this report. We have no
objections to the further release of this report to the public.
If you or your staff have any questions regarding this report, please contact me or
Richard Howard at (215) 814-5800. For your convenience, this report will be
available at http://www.epa.gov/oigearth/eroom.htm.
cc: Howard Corcoran (3901R)
Martha Monell (3903R)
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Executive Summary
Purpose
Prior audits by the Environmental Protection Agency (EPA) Office of
Inspector General (OIG) disclosed numerous problems related to
procurement practices of assistance agreement recipients. As a result,
we took a nationwide statistical sample of agreements to provide an
overview of recipient procurement practices. The intent was to
identify systemic issues that need nationwide attention. With that in
mind, our audit objective was to determine whether recipients making
procurements with Federal funds: provided for competition, justified
non-competitive awards, performed cost or price analyses, and
maintained the proper policies and management controls.
Results in Brief
EPA had no assurance that as much as $187 million spent by
assistance agreement recipients for procurements was used to obtain
the best products, at the best price, from the most qualified firms. We
found that recipients did not compete contract awards or perform cost
or price analyses as required by regulations.
The conditions noted occurred because EPA did not monitor recipients'
procurement transactions. Also, recipients said they did not have
sufficient knowledge of procurement regulations, and often procured
services as a result of familiarity and long-term relationships with
contractors.
Obtaining the best price allows EPA to fund the maximum number of
projects to support its environmental mission. It is also important to
have the most qualified firm perform each task, and even when a firm
is qualified, failure to compete the work can result in a contract price
that is not competitive with the market. Also, lack of competition can
result in other problems, such as conflicts of interest.
Recommendations
We recommended that the Assistant Administrator for Administration
and Resources Management require EPA grants specialists and project
officers to perform the level of monitoring of assistance agreement
procurement transactions required by the Post Award Management of
Assistance Agreements Policy (GPI-98-6) and the EPA Project Officers
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Manual. We also recommended that the Assistant Administrator
require EPA personnel to ensure that when assistance agreement
recipients identify proposed contractors in their application that the
sole source justification provided is adequate and a cost or price
analysis is performed.
Agency Response and OIG Evaluation
The Agency agreed with the OIG on the need to foster competition in
recipient procurements to achieve high quality work under EPA
assistance agreements at the lowest cost. The Agency noted that it has
taken corrective action to address specific procurement violations
noted in the report. Further, EPA stated it is moving aggressively to
educate recipients and EPA personnel on grant procurement
requirements. However, the Agency disagreed with the level of
oversight proposed by the OIG for procurement transactions under
$100,000. The Agency also suggested that rather than monitor every
recipient procurement transaction, the Office of Grants and
Debarment work with the OIG to develop a risk-based strategy to
monitor recipient procurements.
We agree with the efforts EPA is undertaking to educate recipients
and EPA personnel. However, we disagree with the level of oversight
proposed by the Agency. We believe that EPA needs to monitor
recipients' procurements in accordance with the requirements of both
the Post Award Management of Assistance Agreements Policy
(GPI-98-6) and the EPA Project Officers Manual.
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Table of Contents
Executive Summary i
Introduction 1
Purpose 1
Background 1
Scope and Methodology 2
EPA Needs to Better Monitor Procurements
by Assistance Agreement Recipients 3
Lack of Competition a Continuing Problem 3
Procurement Regulations Not Sufficiently Followed 4
Various Causes Resulted in Insufficient Competition 7
EPA Funds May Not Be Efficiently Used 9
Conclusion 11
Recommendations 11
EPA Response and OIG Evaluation 11
Appendices 15
A: Details on Scope and Methodology 15
B: EPA Response to Draft Audit Report 19
C: Distribution 23
in
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Introduction
Purpose
Recent Office of Inspector General (OIG) audits of assistance
agreements have disclosed numerous problem areas related to the
procurement practices of recipients. Chief among them has been the
failure of recipients to obtain competition for contracts awarded with
Environmental Protection Agency (EPA) funds. As a result of these
concerns, the OIG decided to take a nationwide statistical sample of
assistance agreements, for the purpose of providing an overview of
procurement practices of agreement recipients. The intent was to
identify systemic issues that need nationwide attention, rather than
focus on individual recipients that may not represent the majority.
The specific objective of this audit was to determine whether these
recipients, when obtaining goods and services with Federal funds:
Q Provided open and free competition.
Q Justified non-competitive awards.
Q Performed cost or price analyses.
Q Maintained the proper policies and management controls.
Background
An assistance agreement is the legal instrument EPA uses to transfer
funds for a public purpose in the form of either a grant or cooperative
agreement. Fund recipients agree to follow the applicable Code of
Federal Regulations (CFR), including requirements for all
procurement transactions for goods and services needed to accomplish
projects. Oversight of agreements is conducted by EPA's Grants
Administration Division, Program Offices, and Regional Grants
Management Offices.
Recipients of assistance agreements include: states, interstate
agencies, counties, municipalities, Federal agencies, sub-state or
special purpose districts, public and private colleges and universities,
Indian tribes, profit and non-profit organizations, individuals,
research and development centers, and foreign entities.
For assistance agreements awarded to institutions of higher education
and other non-profit organizations, the applicable regulation is 40 CFR
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Part 30. For those awarded to state and local governments, 40 CFR
Part 31 applies. These regulations require recipients to:
Q Conduct all procurement transactions in a manner to provide
open and free competition.
Q Provide sole source justification for awards without competition
in excess of the small purchase threshold ($100,000).
Q Perform a cost or price analysis for every procurement.
Q Maintain proper policies and management controls.
The EPA Project Officers Manual states that project officers and
grants specialists are responsible for reviewing the recipient's
proposed contractors during the application review period. The
Manual notes these officials are to provide sufficient oversight
throughout the course of an agreement to ensure recipients make
procurements in accordance with Federal regulations. These EPA
representatives are also responsible for determining whether there is
adequate justification for any proposed sole source contracts.
However, the recipient is ultimately responsible for adhering to the
regulation.
Scope and Methodology
EPA awards about $4 billion in assistance agreements annually. For
our review, we selected a stratified, random sample from a population
of agreements totaling $1 billion for the 2-year period of fiscal years
1999 and 2000. Of that amount, 537 agreements had estimated
procurements of at least $100,000. Those procurements totaled
$340 million. We selected a stratified, random sample of
70 agreements involving $128 million in procurements. Of those 70,
we determined that 20 were exempt from the regulations, and
therefore focused on the remaining 50, which had procurements
totaling $108.5 million. We performed the audit in accordance with
Government Auditing Standards, issued by the Comptroller General of
the United States. Further details on our scope and methodology,
including the sample, are in Appendix A.
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EPA Needs to Better Monitor Procurements
by Assistance Agreement Recipients
EPA had no assurance that as much as $187 million spent by
assistance agreement recipients for procurements was used to obtain
the best products, at the best price, from the most qualified firms. This
amounts to nearly 1 out of every 5 dollars of the $ 1 billion awarded to
these recipients during the period reviewed. Specifically, we found
that recipients did not compete contract awards or perform cost or
price analyses, as required by regulations.
The conditions noted occurred because EPA did not monitor recipients'
procurement transactions. Also, recipients said they did not have
sufficient knowledge of procurement regulations, and often procured
services as a result of familiarity and long-term relationships with
contractors. We believe recipients need to be educated regarding
Federal procurement requirements, however, regardless of their level
of knowledge, recipients are still obligated to comply with the
regulations.
Obtaining the best price allows EPA to fund the maximum number of
projects to support its environmental mission. It is also important to
have the most qualified firm perform each task. However, even when
a firm is qualified, failure to compete the work can result in a contract
price that is not competitive with the market, since contractors will not
have any incentive to offer such a price. Also, lack of competition can
result in other problems, such as conflicts of interest.
Lack of Competition a Continuing Problem
OIG audits of assistance agreements performed during the past
several years disclosed numerous problem areas related to
procurement practices of assistance agreement recipients. Chief
among them has been the failure of recipients to obtain competition for
contracts awarded with EPA funds. For example, a non-profit
assistance agreement recipient awarded two sole source contracts to its
for-profit subsidiary under the grant we reviewed. Likewise, this
recipient awarded sole source contracts to three for-profit companies
created by its for-profit subsidiary to market technology developed by
the recipient. This example and numerous other OIG audits have
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shown that circumventing competition had various adverse effects.
Specifically, we found that assistance agreement recipients:
Q Awarded contracts without determining the reasonableness of
the contractor's price.
Q Awarded contracts based on familiarity instead of market
searches to find the best contractor.
Q Awarded contracts to their own subsidiaries without
competition.
Q Provided favored contractors with advance knowledge of
procurement information.
Q Permitted contractors to develop requirements and statements
of work for contracts received, as well as budgets and estimates
for contracts awarded to them.
Q Authorized contractors to provide services without contracts.
Procurement Regulations Not Sufficiently Followed
Our review disclosed numerous instances where recipients of EPA
assistance agreements did not adhere to regulations when awarding
contracts. We reviewed 50 recipients, with procurements totaling
approximately $108.5 million. Of the 50 recipients, 28, with
procurements totaling $37.7 million, did not sufficiently follow
procurement requirements regarding competition and conducting a
cost or price analysis. As a result, there was no assurance that the
recipients obtained the most qualified contractor at the best price.
Details are summarized in the table and paragraphs that follow.
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Status
Procurements made with no competition, no sole
source justifications, and no cost/price analysis.
Procurements made with no competition and no
required cost/price analysis. Sole source justification
not required since procurements below $100,000
threshold.
Procurements made with no competition but adequate
sole source justification performed. However, no
cost/price analysis performed.
Procurements made with competition but no cost/price
analysis.
Total
No. of
Agreements
10
10
3
5
28
Value of
Contracts
(millions)
$12.91
5.02
6.04
13.68
$37.65
Lack of Competition
We concluded that 23 recipients did not compete their procurements.
Of greatest concern were the 10 recipients who did not compete
procurements over the $100,000 threshold and did not have sufficient
documentation to justify their sole source awards. Another 10
recipients did not compete procurements or perform required cost or
price analyses, but because the procurements were under the $100,000
threshold, the recipients were not required to document sole source
justifications. The remaining three recipients who did not compete
had adequate sole source justifications, but they did not conduct
required cost or price analyses.
These 23 recipients did not place advertisements seeking bids or could
not provide any documentation indicating that bids were received and
reviewed. For those recipients under the $100,000 threshold, although
documentation was not required, we confirmed through discussions
with recipient personnel as well as review of records that there was no
competition. Included in 40 CFR § 30.43 is a statement requiring that,
"all procurement transactions shall be conducted in a manner to
provide, to the maximum extent practical, open and free competition."
A similar statement is in 40 CFR § 31.36 (c)(l). In effect, these
recipients did not perform market searches to find the most qualified
firms to help accomplish EPA's mission at the most competitive price.
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Sole Source Justifications Not Provided or Inadequate
As noted, 10 of the recipients with procurements over $100,000 did not
have the documentation required by 40 CFR § 30.46 and 31.36 to
justify sole source awards. Specifically, two recipients did not provide
us with any justifications when requested, and we do not consider the
justifications provided by the other eight to be adequate. Examples of
inadequate justifications follow:
Q "...the project was highly specialized...our engineers are aware of
how much labor should cost and what should be involved...."
Q "...working with them would result in faster test plan
development...."
Q "Going through a full solicitation, with advertising, proposal
submittal and review, would have taken several months."
Q "The organization or consultant with the most expertise in the
particular area was easily recognized."
Q "The subcontractor was extremely responsive and thorough on
previous work."
Recipients who do not adequately document justification for
noncompetitive awards provide little assurance the selection was made
with regard for efficiency and cost effectiveness.
Cost or Price Analyses Not Conducted
As already noted, 28 of the recipients reviewed did not perform a cost
or price analysis for their procurements. This included the 23
discussed previously who did not compete plus an additional 5 who
did.
As outlined in 40 CFR § 30.45 and 31.36 (f), a cost or price analysis
must be performed in connection with every procurement action
regardless of whether or not provision was made for competition.
Cost analysis is the review and evaluation of each element of cost to
determine reasonableness, allocability, and allowability. Price
analysis may be accomplished in various ways, including the
comparison of price quotations submitted and market prices.
Recipients that do not perform a cost or price analysis provide little
assurance that the firms they select are completing the work at the
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best prices. Furthermore, when recipients also do not provide for
competition, no assurance exists that the contract price is reasonable.
Various Causes Resulted in Insufficient Competition
EPA Did Not Provide Sufficient Oversight
EPA officials did not provide sufficient oversight to ensure that
assistance agreement recipients made procurements in accordance
with the regulations. Most project officers had limited or no
information regarding
recipient procurement
contracts, including the
number or type of contracts
EPA On-site Reviews
Can Be Beneficial
The Grants Administration Division
conducted on-site reviews for three
recipients selected in our sample. We
believe these reviews help to ensure that
recipients are complying with Federal
procurement regulations. We encourage
the Division to continue and further
increase these recipient reviews, and to
perform an on-site review of a recipient
who did not respond to our information
requests.
and whether they were
awarded competitively or
non-competitively.
In general, EPA did not
appear to place sufficient
emphasis on competition.
We noted in a prior audit,
EPA's Competitive Practices
for Assistance Awards
(200l-P-00008), issued
May 21, 2001, that EPA itself
did not have a policy to
require program officials to competitively award assistance
agreements when appropriate. EPA often awarded noncompetitive
agreements based on unsupported belief that the recipients were the
only entities capable of performing the work. EPA's lack of emphasis
on competition is perpetuated by the very recipients to whom EPA
awarded assistance agreements.
As required by the EPA Project Officers Manual and the Post Award
Management of Assistance Agreements Policy (GPI-98-6), EPA is to
provide sufficient oversight to ensure assistance agreement recipients
make procurements in accordance with Federal regulations. The
project officer is responsible for determining whether proposed
contract costs appear reasonable. Both the project officer and grants
specialist are responsible for determining whether there is adequate
justification for any proposed sole-source contracts. Also, 40 CFR §
30.44 (e) provides EPA the ability to request bid information or a cost
or price analysis and, if necessary, question recipient procurements.
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Recipients Had Insufficient Knowledge of Regulations
EPA did not ensure that recipients had sufficient knowledge of the
requirements or the procurement standards. The applicable
regulations are listed on the front page of the assistance agreement
signed by the recipient. However, some recipients said they were
unaware that the CFR governed their agreement. At least two
recipients indicated they did not even know what the CFR was, and
another thought it only applied to EPA contracts and not contracts
awarded by assistance agreement recipients.
Also, several recipients believed that EPA approval of their assistance
agreements constituted approval of the contractors listed in their
applications. These recipients thought that this approval existed
regardless of how those contractors were selected, and used this
reasoning as justification for sole source contract awards. These
recipients claimed that since EPA reviewed and approved their
applications, it also approved the use of the contractors listed therein.
One recipient stated that "...bids were not obtained for the
subcontractor, since the subcontractor was named in the proposal and
accepted by the U.S. Environmental Protection Agency." EPA's
position is that it is not approving contractors when it approves
funding. Without clarifying this position, recipients may continue to
mistakenly assume that they can award contracts without following
Federal requirements.
Recipients Often Relied on Familiarity With Contractors
We noted many instances where the recipient continually procured
services from the same contractor as a result of familiarity with the
firm and a long-term relationship. Two recipients responded that the
reason for hiring a particular firm was due to their over 10-year
relationship with the firm. Another recipient, located in Nevada,
stated that since it was in "an extremely remote, isolated" area, it was
"difficult to obtain quotes from nearby consulting firms." Thus,
through a referral by community officials, the recipient contracted
with an Idaho firm. However, since this recipient was able to procure
these services out of state, we question why they were not able to seek
bids from other firms. Such cities as Las Vegas, Nevada; Salt Lake
City, Utah; and Sacramento, California, are all geographically closer to
the recipient than the Idaho firm used and, likely, have qualified
firms.
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EPA Directed a Noncompetitive Contract Due to Timing
We noted one instance in which EPA directed a recipient to establish a
contract with a specific company, contrary to EPA's Code of Conduct.
A regional employee did this by writing the sole source justification,
along with the scope of work for the contract. In this sole source
justification, the regional employee listed the objectives for the
contract and concluded that the contract should be awarded without
competition. According to the regional employee, the region wanted
specific work performed, and, due to timing and familiarity with the
contractor, decided to award the contract without competition. This
action, which is discussed in a separate report, was inappropriate.
EPA Funds May Not Be Efficiently Used
Inadequate Assurance That Best Price Obtained
Obtaining the best price through competition allows EPA to fund the
maximum number of projects to support its environmental mission.
Even if a contractor is qualified and responsible, when a contractor
knows a bid is not being competed and they will automatically be
getting the work, their price is less likely to be competitive with the
market. If there is a range that can be charged for a certain service,
there is no incentive for the contractor to offer those services at the low
rather than high end of the range in the absence of competition. Also,
the failure of recipients to perform cost or price analyses prevents
them from knowing whether the contractor's price is competitive with
the market. Without a market search, neither recipients nor EPA
know whether services have been obtained from the best contractor.
We determined that EPA assistance agreement recipients did not
award $37.7 million of the $108.5 million in procurement contracts in
accordance with regulations. Based on our random sample, from a
universe of $340 million in procurements, we made projections with a
confidence level of 95 percent. We projected that between $88 million
and $187 million was awarded by EPA assistance agreement
recipients without assurance that contracts were awarded at the best
price.
Inadequate Assurance That Most Qualified Firm Performs Task
When there is a lack of competition, neither the recipient nor EPA has
any assurance that the firm selected is the most responsible, qualified,
and economical. Just because a firm was well qualified to perform a
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certain service 10 years ago does not mean it remains the most
qualified. Also, a firm awarded contracts in the past may not be the
most appropriate firm to conduct subsequent work. For example, one
recipient awarded two contracts, totaling nearly $1 million, to an
engineering firm without competition based on a long-term
relationship. However, for these particular contracts, the firm was
tasked to perform many non-engineering functions (such as preparing
mailing lists and brochures and developing a web site). These
functions should have been performed by someone else at a
significantly lower cost.
Other Problems May Arise, Such As Conflicts of Interest
Lack of competition can result in other problems, such as conflicts of
interest. For example, one recipient, a watershed management
district, did not follow Federal procurement procedures when using
EPA funds to hire an engineering firm through two contracts totaling
$907,000. Events that preceded award of the first contract should
have precluded the firm from obtaining the contract due to potential
conflicts of interest. The district's application, work plan, budget, and
work schedules all displayed that the engineer, and not the recipient,
prepared those documents. Furthermore, the district's administrator
and several members of the Board of Directors told us that the firm:
Q Solicited assistance agreement funds on behalf of the recipient.
Q Proposed assistance agreement projects to the Board of
Directors.
Q Advised the district to use the "request for qualifications"
procurement method for the engineering contract.
Q Wrote the request for qualifications advertised in newspapers
(for the contract then awarded to the firm).
Q Wrote both contracts it entered into with the district.
The above clearly represent a conflict of interest, according to 40 CFR
§ 31.36(b)(3), which states in part that:
No employee, officer or agent of the grantee or subgrantee
shall participate in selection, or in the award or
administration of a contract supported by Federal funds if
a conflict of interest, real or apparent, would be involved.
Such a conflict would arise when the employee, officer or
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agent. . . has a financial or other interest in the firm
selected for award.
By preparing the original application, work plan, budgets, and work
schedules for the EPA assistance agreement awarded to the district,
the engineer, as an agent of the grantee, had advance knowledge about
the assistance agreement, intended contracts, their amounts, and
proposed work schedules and forecasts for subsequent years. The
district's actions in giving the firm the "inside track" compromised the
integrity of the contract award and violated EPA regulations.
Conclusion
The regulations governing assistance award procurement activities
were established to maintain management controls over the funds and
provide assurance that funds would be used in an efficient and cost
effective manner. By allowing recipients to forego these requirements,
EPA diminishes the effectiveness of its programs, the number of
projects funded, and, ultimately, its ability to achieve its
environmental mission.
Recommendations
We recommend that the Assistant Administrator for Administration
and Resources Management require EPA grants specialists and project
officers to:
1. Perform the level of monitoring of assistance agreement
procurement transactions required by the Post Award
Management of Assistance Agreements Policy (GPI-98-6) and
the EPA Project Officers Manual.
2. Ensure that when assistance agreement recipients identify
proposed contractors in their application that the sole source
justification provided is adequate and a cost and price analysis
is performed.
EPA Response and OIG Evaluation
In this section, we have summarized EPA's response, followed by our
evaluation of the response. The complete response is included as
Appendix B to the report.
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EPA Response
EPA stated that it fully agreed with the OIG on the need to foster
competition in recipient procurements to achieve high quality work
under EPA assistance agreements at the lowest cost. EPA noted that
the Office of Grants and Debarment and the Regional Grants
Management Offices have taken corrective action to address a number
of the project-specific procurement violations identified in the report.
Further, they stated that the Office of Grants and Debarment is
moving aggressively to educate recipients and EPA personnel on grant
procurement requirements. The Agency also stated that adherence to
the regulations remains a mandatory prerequisite for the receipt of an
EPA grant, regardless of a recipient's level of knowledge.
EPA agreed with the OIG that review and monitoring of procurement
transactions is an important part of fostering competition in recipient
contracts. However, the Agency stated that the level of oversight
contemplated by the OIG appears to be inconsistent with government-
wide procurement requirements for procurement transactions under
$100,000. Further, it suggested that, rather than monitor every
procurement transaction, a better use of Agency resources may be to
concentrate on recipients that meet specified, risk-based criteria. EPA
has directed the Office of Grants and Debarment to work with the OIG
on this issue.
OIG Evaluation
We agree with the efforts the Office of Grants and Debarment is
undertaking to educate recipients and EPA personnel on grant
procurement requirements. We also agree that, regardless of their
level of knowledge, recipients are responsible for complying with
Federal procurement regulations. Although education will assist
recipients with the administration of their agreements, education
alone will not ensure that recipients comply with procurement
regulations. We believe that adequate monitoring by EPA, in
conjunction with education, would best provide assurance of
compliance with the regulations.
We disagree with the Agency's position regarding the appropriate level
of oversight. It is our opinion that we are not requesting a level of
oversight beyond that already established by current policies.
EPA's Post Award Monitoring of Assistance Agreements Policy
(GPI-98-6) includes requirements for Baseline Monitoring (Tier I) of all
assistance agreements by Grants Management Offices. The first
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Baseline Monitoring strategy is to "monitor recipients' compliance with
all terms and conditions in all grants." One of the conditions of nearly
all grants is the recipient's compliance with the applicable CFR, which
includes procurement requirements. The selection of recipients using
risk-based criteria as suggested by EPA may be appropriate for Tier II
monitoring activities1; however, the Policy requires that all awards
receive Tier I Baseline Monitoring.
According to the Project Officers Manual, monitoring of a recipient's
procurements should begin with the receipt of the application and
continue throughout the life of the agreement. Both the project officer
and Grants Management Office are responsible for monitoring. The
project officer is responsible for determining whether proposed
contracting and subcontracting costs are reasonable and necessary.
If an applicant is proposing to award a sole-source contract, it must
provide its reasoning so both the project officer and Grants
Management Office can determine whether there is adequate
justification for the proposed contract. Both the project officer and
Grants Management Office must ensure the recipient complies with all
terms and conditions of the award. We are not asking that EPA obtain
documentation for every procurement transaction. Rather, we are
asking that EPA monitor recipients and inform them of their
obligation to follow Federal procurement requirements. We believe
recipients would be more likely to adhere to these requirements if they
are aware that EPA is monitoring them.
The Agency noted in its response that the level of oversight
contemplated by the OIG appeared to be inconsistent with
government-wide procurement requirements for transactions under
$100,000. We recognize that the level of monitoring necessary for
procurements under $100,000 is less than that for procurements
greater than $100,000, and have revised our recommendation
accordingly. However, 40 CFR Parts 30 and 31 require recipients to
prepare a cost or price analysis for every procurement transaction
regardless of the amount. For procurements under $100,000, this
analysis is the only assurance that the procurement was made at a
market-level price. Unless EPA monitors recipients and determines if
this analysis has been performed, it does not know if the most
economical contractor was selected. However, we will evaluate Agency
plans to implement a risk-based monitoring criteria for procurements
under the small purchase threshold.
Tier II Monitoring goes beyond the usual baseline activities, and includes things such as on-site evaluations,
training, and in-depth telephone reviews. One of the factors in determining Tier II monitoring includes, but is not limited to,
grantees designated as high risk.
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By educating recipients and monitoring recipients' procurements, EPA
can better assure that recipients are getting the best products, at the
best price, from the most qualified firms.
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Appendix A
Details on Scope and Methodology
We performed this audit in accordance with Government Auditing
Standards, issued by the Comptroller General of the United States.
This audit included tests of the program records and other auditing
procedures deemed necessary.
We reviewed management controls and procedures specifically related
to our objectives. However, we did not review the internal controls
associated with the input and processing of information in EPA's
Grants Information Control System.
We reviewed Federal procurement standards provided in 40 CFR Parts
30 and 31, and the EPA Project Officers Manual.
We interviewed project officers and grants specialists at EPA
Headquarters and EPA Regions 2, 3, 4, 5, 6, 9, and 10. We reviewed
both Grants Administration Division files and project files maintained
by individual program officials. We obtained copies of assistance
agreement applications and work plans, program decision memoranda,
assistance agreements, budget proposals, and limited documentation
regarding procurement. We reviewed files to determine whether
recipients followed Federal procurement regulations regarding:
Q Providing open and free competition for all procurements.
Q Preparing justifications for non-competitive awards over
$100,000.
Q Performing cost or price analyses for procurements.
Q Maintaining proper policies and management controls, such as
those related to daily rate restrictions for consultant payments,
written codes of conduct, and written procurement procedures.
We also requested from recipients procurement documentation,
pertaining to the items listed above, and recorded their responses.
We selected a stratified, random sample from a population of
recipients totaling $1 billion, for the 2-year period of fiscal years 1999
and 2000. We limited this population to: interstate agencies, sub-state
or special purpose districts, public and private colleges or universities,
Indian Tribes, profit and non-profit organizations, and research and
development centers. We stratified the recipients by estimated
contract amounts provided by the Grants Information Control System.
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There were 537 EPA assistance agreements with estimated
procurements of at least $100,000. The procurements for these totaled
$340 million. The sample, of 70 assistance agreements involving
$128 million in procurements, was separated into two strata, as
follows:
Q The first strata, from which we reviewed 40 agreements, consisted
of recipients estimated as having contract amounts between
$100,000 up to $999,999. For some recipients, although total
procurements were more than $100,000, some of the individual
procurements were less than that amount.
Q The second strata, from which we reviewed 30 agreements,
included recipients with estimated contract amounts greater than
$1 million.
Of the 70 recipients, 20 were determined to be exempt from the
regulations. Specifically, 6 recipients were Federal Demonstration
Partnerships and had the applicable regulations waived by EPA, and
14 received Office of Research and Development Grants for which EPA
had a rigorous pre-award evaluation process in place. We therefore
focused on the remaining 50 recipients, which had $108.5 million in
procurements.
During our audit, we noted several minor issues that we brought to
EPA's attention for action. These involved such issues as an out-of-
date subsection of the CFR, and the absence of written codes of
conduct or written procurement procedures for some recipients.
We conducted an entrance conference with officials from EPA's Office
of Administration and Resources Management on August 9, 2000. We
held several teleconferences with Grants Administration Division
officials and informed them of our preliminary findings and
recommendations, and requested their input. Generally, they agreed
with our recommendations and provided input regarding corrective
action. We completed our fieldwork on November 29, 2001. We issued
the draft report on December 26, 2001 and held an exit conference
with the Office of Administration and Resources Management on
March 15, 2002. The comments from that Office and our evaluation
are summarized after the report recommendations, and the complete
response is provided in Appendix B.
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Separate Memorandum Reports Issued
During this audit on procurements made by assistance agreement
recipients, we issued two separate memorandum reports addressing
specific problems found at individual recipients. In addition to a lack
of competition and the failure to conduct cost or price analyses, we
found the following:
Q One recipient did not follow Federal procurement regulations
regarding conflicts of interest when it awarded contracts to an
engineering firm. In particular, the firm, which had a 20-year
relationship with the recipient, had prepared the recipient's
application, work plan, budget, and work schedules for the
contracts it received.
Q For another recipient, we found several violations of Federal
procurement regulations and potential conflicts of interest. This
recipient issued one unallowable type of contract, and issued
contracts that exceeded the maximum allowable consultant
rates. Further, an EPA region employee directed the hiring of
one of the contractors and wrote the sole source justification for
the recipient.
Prior Audit Coverage
On May 21, 2001, EPA OIG issued Report No. 2001-P-00008,
EPA's Competitive Practices for Assistance Awards. This audit
disclosed that EPA did not have a policy that requires program
officials to award discretionary assistance funding competitively. The
OIG recommended that EPA issue a policy stating that program offices
compete their assistance agreements to the maximum extent possible,
and ensure there are sufficient written justifications to support non-
competitive awards. The OIG also made recommendations related to
improving the accuracy of EPA's assistance program information.
In April 2001, the U.S. General Accounting Office issued Report No.
GAO-01-366, EPA's Oversight of Nonprofit Grantees' Costs Is Limited.
This audit found that, as currently implemented, EPA's post-award
grant management policy provides minimal assurance that
unallowable costs for nonprofit grantees will be identified.
On January 29, 2002, EPA OIG issued Report No. 2002-2-00008,
Procurement Practices Under Grant No. X825532-01 Awarded to
MBI International. This audit report, on a nonprofit organization that
received EPA grant funds, disclosed that the recipient awarded two
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sole source contracts to its for-profit subsidiary under the grant.
Likewise, this recipient awarded sole source contracts to three
for-profit companies created by its subsidiary to market technology
developed by the recipient. We also noted the appearance of a conflict
of interest.
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Appendix B
EPA Response to Draft Audit Report
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1 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
— | WASHINGTON, B.C. 20460
OFFICE OF
T7 K 10 onno ADMINISTRATION
February 19, 2002 ^ RESOURCES
MANAGEMENT
MEMORANDUM
SUBJECT: Draft Audit Report: Procurements Made by Assistance Agreement Recipients
Should Be Competitive, Report No. 2000-001394 (December 26, 2001)
.0
FROM: David J. O'Connor
Acting Assistant Administrator (J
TO: Carl A. Jannetti
Divisional Inspector General
Mid-Atlantic Division
This memorandum is in response to the Office of Inspector General's (OIG) draft audit
report (Draft Report) an procurement practices of recipients awarded assistance agreements by
the Environmental Protection Agency (EPA), addressed to Deputy Administrator Linda Fisher.
Based on a nationwide statistical sample of assistance agreements, the Draft Report finds
that there is insufficient competition in recipient procurements. To address this finding, the Draft
Report recommends: 1) that the Agency increase its monitoring of recipient procurement
transactions to ensure that all transactions are conducted in accordance with regulatory
requirements; and 2) that the Agency review all proposed contracts identified in grant applications
to ensure that the sole source Justification is adequate and a cost and pricing analysis has been
performed.
At the outset, let me state that I fully agree with the OIG on the need to foster
competition in recipient procurements to achieve high quality work under EPA assistance
agreements at the lowest cost. To that end, I am pleased to note that EPA's Office of Grants and
Debarment (OGD) and the Regional Grants Management Offices have taken corrective action to
address a number of the project-specific procurement violations identified in the Report. Further,
OGD is moving aggressively to educate recipients and EPA personnel on grant procurement
requirements. These training efforts include:
Recipient Training - In September, OGD will present training to approximately 160
recipient representatives (primarily from the non-profit sector). The training will focus on
recipient responsibilities with specific instruction on applicable procurement regulations.
Grant Specialist Training - In June, OGD will present comprehensive grants
Internet Address (URL) 9 http://www.epa.gov
Recycled/Recyclable - Printed with Vegetable Oil Based Inks on Recycled Paper (Minimum 30%
Postconsumer)
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management training to EPA's Grant Specialists, including training on procurement
documentation for sole-source justifications and cost and pricing analyses.
Project Officer Training - OGD is modifying the Agency's basic Project Officer Training
to place greater emphasis on application, budget and procurement review.
Instructional Materials - OGD and the OIG are exploring the possibility of jointly
developing instructional materials on procurement and financial management requirements
that would be included in EPA grant application packages.
Turning to the Draft Report's recommendations, I agree with the OIG that review and
monitoring of procurement transactions is an important part of fostering competition in recipient
contracts. As noted in the Draft Report, OGD is continuing to perform on-site reviews of
selected recipients that cover, among other things, procurement practices. At the same time, the
level of oversight contemplated by the OIG appears to be inconsistent with government-wide
procurement requirements for procurement transactions under $100,000. I have therefore asked
OGD to discuss this issue with the Office of General Counsel. In addition, rather than monitoring
every recipient procurement transaction as suggested in the Draft Report, a more strategic use of
the Agency's resources may be to concentrate on procurement transactions that meet agreed-
upon, threshold criteria. For example, under the Agency's post-award monitoring policies, OOD
does not conduct desk or on-site reviews of all recipients, but instead focuses on recipients that
meet specified, risk-based criteria. I have directed OGD to work with you to determine whether a
similar methodology can be developed for the approval and monitoring of procurement
transactions.
Finally, to avoid confusion on the compliance obligations of recipients, I would suggest
that the OIG revise the discussion in the Draft Report addressing EPA's policy on grant
competition and the lack of recipient knowledge of procurement requirements. I concur with the
Draft Report's observation that EPA should have a clear policy for competition in the award of
grants, and the Agency is in the process of developing such a policy. Nevertheless, recipients
have an independent obligation, separate and apart from EPA's approach to grant competition, to
comply with the procurement regulations. Similarly, while the Agency needs to better educate
recipients about grant procurement standards, adherence to the regulations remains a mandatory
prerequisite for the receipt of an EPA grant, regardless of a recipient's level of knowledge. OGD
is exploring additional steps to remind recipients of their procurement obligations.
Thank you for the opportunity to comment on the Draft Report. The Agency looks forward to
working with you to develop approaches that will promote competition in recipient procurements
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in an efficient and effective manner. If you have any questions about these comments, please
contact Howard Corcoran, Director, OOD at (202) 564-1903 or Marty Monell, Director, Grants
Administration Division, at (202) 564-5387.
Attachment
cc: Morris Winn
Maria Diamond
Marty Monell
Marguerite Pridgen
Howard Corcoran
Senior Resource Officials
Grants Customer Relations Council
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Appendix C
Distribution
Office of Inspector General
Inspector General (2410)
EPA Headquarters
Assistant Administrator for Air and Radiation (6101)
Assistant Administrator for Enforcement and Compliance Assurance (2201 A)
Assistant Administrator for Policy (1805)
Assistant Administrator for Prevention, Pesticides, and Toxic Substances (7101)
Assistant Administrator for Research and Development (8101R)
Assistant Administrator for Water (4101)
Comptroller (2 731 A)
Agency Follow-up Official - the Chief Financial Officer (2710A)
Agency Audit Follow-up Coordinator (2724A)
Associate Administrator for Congressional and Intergovernmental
Relations (1301A)
Associate Administrator for Communications, Education, and Media
Relations (1701 A)
Director, Office of Regional Operations (1108A)
Director, Office of Grants and Debarment (3901R)
Director, Suspension and Debarment Division (3902R)
Director, Grants Administration Division (3903R)
Director, Office of Executive Support (1104)
Audit Follow-up Coordinator, Office of Grants and Debarment (3901R)
Regional Offices
Regional Administrators
Senior Resource Officials
Regional Audit Follow-up Coordinators
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