Internal Controls Needed to Control Costs of Emergency and Rapid Response Services Contracts, as Exemplified in Region 6


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| U.S. ENVIRONMENTAL PROTECTION AGENCY
\pR0/° OFFICE OF INSPECTOR GENERAL
Internal Controls Needed
to Control Costs of
Emergency and Rapid
Response Services Contracts,
as Exemplified in Region 6
Report No. 14-P-0109
February 4, 2014

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Report Contributors:
Janet Kasper
Michael Petscavage
Andres Calderon
David Penman
Melinda Burks
Abbreviations
CO
Contracting Officer
EPA
U.S. Environmental Protection Agency
ERRS
Emergency and Rapid Response Services
FAR
Federal Acquisition Regulation
G&A
General and Administrative
OAM
Office of Acquisition Management
ODC
Other Direct Cost
OIG
Office of Inspector General
PO
Project Officer
QAP
Quality Assurance Program
Hotline
To report fraud, waste or abuse, contact
us through one of the following methods:
email:	OIG Hotline@epa.gov
phone:	1-888-546-8740
fax:	1-202-566-2599
online:	http://www.epa.gov/oiq/hotline.htm
write: EPA Inspector General Hotline
1200 Pennsylvania Avenue, NW
Mailcode 2431T
Washington, DC 20460
Suggestions for Audits or Evaluations
To make suggestions for audits or evaluations,
contact us through one of the following methods:
email:
OIG WEBCOMMENTS@eoa.oov
phone:
1-202-566-2391
fax:
1-202-566-2599
online:
http://www.epa.qov/oiq/contact.html#Full Info
write:
EPA Inspector General

1200 Pennsylvania Avenue, NW

Mailcode 241OT

Washington, DC 20460

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At a Glance
Why We Did This Review
The purpose of this review was
to determine whether the
U.S. Environmental Protection
Agency's (EPA's) Region 6 is
managing task orders under
the Emergency and Rapid
Response Services (ERRS)
contracts effectively and
whether contractors are billing
Region 6 in accordance with
contract terms.
Region 6 awarded its two
current ERRS contracts
(EP-S6-07-01 and EP-S6-07-
02) in May 2007. At the time of
our preliminary review,
EP-S6-07-01 had 124 issued
task orders and EP-S6-07-02
had 50 issued task orders.
The combined total expended
amount on both contracts was
$77,579,001 as of October
2012.
This report addresses the
following EPA theme:
• Embracing EPA as a high
performing organization.
For further information,
contact our public affairs office
at (202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2014/
20140204-14-P-0109.pdf
Internal Controls Needed to Control Costs of
Emergency and Rapid Response Services Contracts,
as Exemplified in Region 6
What We Found
Region 6 manages field activities under the ERRS contracts within the terms of
the contract. However, our review of task order files and invoices submitted under
those task orders showed us that infrequent internal control reviews and
inadequate staffing levels hamper Region 6's ability to prevent and detect many
contract management shortcomings, such as:
Improper application of
general and administrative
rates resulted in higher
costs to the government.
•	Performing required annual invoice reviews.
•	Monitoring contractor adjustment vouchers.
•	Receiving prime contractor negotiated team
subcontract agreements on time.
•	Correctly coding task orders in the EPA Acquisition System.
•	Performing adequate internal control reviews.
Without adequate staffing levels, Region 6 is unable to conduct internal control
reviews. Such reviews are a tool for ensuring that products comply with
regulations and are consistently of high quality. Without internal control reviews,
crucial aspects in the acquisition cycle cannot be assessed and management
cannot determine and properly address weaknesses and vulnerabilities.
We identified two conditions that resulted in higher costs to the government. One
prime contractor was applying a general and administrative indirect rate to its
team subcontractors' other direct costs, which went against the prime contractor's
proposal and indirect cost rate letter. Also, both prime contractors were receiving
additional profit because the fixed labor rates negotiated between the EPA and
the ERRS prime contractors were based solely on the prime's labor rates.
Recommendations and Planned Corrective Actions
We recommend that the Region 6 Regional Administrator require procurement
personnel to conduct internal control reviews twice a year or declare contract
management as a weakness in Region 6's next Federal Managers' Financial
Integrity Act submission until Region 6 starts conducting internal control reviews.
We also recommend that the Regional Administrator address issues related to
subcontract other direct costs in the existing ERRS contracts, and require that
proposals for future ERRS contracts include subcontractor rates as required.
Region 6 concurred with three out of five recommendations. Region 6 did not
concur with recommendations 3 and 4, to require the contractor to adjust all
billings to reflect application of the correct rate to team subcontract other direct
costs, and to modify future billings. Region 6 believes the amounts involved are
immaterial and do not justify the investment in time that would be needed to
adjust all past invoices. These recommendations remain unresolved.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
February 4, 2014
MEMORANDUM
SUBJECT: Internal Controls Needed to Control Costs of Emergency and
Rapid Response Services Contracts, as Exemplified in Region 6
Report No. 14-P-0109
FROM: Arthur A. Elkins Jr.
TO:
Ronald Curry, Regional Administrator
Region 6
This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). This report contains findings that describe the problems
the OIG has identified and corrective actions the OIG recommends. This report represents the opinion of
the OIG and does not necessarily represent the final EPA position. EPA agreed with three
recommendations and provided corrective actions with completion dates, and these recommendations
are considered resolved. For the other two recommendations, the agency disagreed and these
recommendations will be resolved through the audit resolution process. EPA managers, in accordance
with established audit resolution procedures, will make final determinations on matters in this report.
The audit report identifies improvements that can be made to the Emergency and Rapid Response
Services (ERRS) contracts in Region 6. Other regions also have similar contracts. The OIG encourages
other regions to review the issues in this report and determine whether they may exist for their ERRS
contracts. Addressing such issues will assist in controlling costs, which is imperative in the current
budget environment. If you have any questions about the issues in the report, please contact the
OIG staff listed below.
Action Required
In accordance with EPA Manual 2750, the resolution process begins immediately with the issuance of
this report. We are requesting a meeting within 30 days between the Region 6 Regional Administrator
and the OIG's Assistant Inspector General for Audit. If resolution is still not reached, the Region 6
Regional Administrator is required to complete and submit the dispute resolution request to the
Chief Financial Officer to continue resolution.
We will post this report to our website at http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact Richard Eyermann,
acting Assistant Inspector General for Audit, at (202) 566-0565 or evermann.richard@epa.gov;
or Janet Kasper, Product Line Director, at (312) 886-3059 or kasper.ianet@epa.gov.

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Internal Controls Needed to Control Costs of Emergency and
Rapid Response Services Contracts, as Exemplified in Region 6
14-P-0109
Table of C
Chapters
1	Introduction		1
Purpose		1
Background		1
Scope and Methodology		1
Prior Audit Coverage		2
2	Region 6 Needs More Frequent Internal Control Reviews		3
Contract Management Aspects Contained in EPA Guidance		3
Effective Contract Management Lacking in Crucial Areas		4
Infrequent Internal Control Reviews Hinder Effective
Contract Management		5
Recommendations		6
Agency Response and OIG Evaluation		6
3	Contractor Applying G&A Rate Inconsistent With Rate Letter		7
Recommendations		8
Agency Response and OIG Evaluation		8
4	By Not Separating Subcontracted Labor Rates,
Prime Contractors Receiving Additional Profit		10
Recommendation		11
Agency Response and OIG Evaluation		11
Status of Recommendations and Potential Monetary Benefits		12
Appendices
A Agency Response to Draft Report and OIG Evaluation	 13
B Distribution	 20

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Chapter 1
Introduction
Purpose
The U.S. Environmental Protection Agency (EPA) spends millions of dollars
annually under Emergency and Rapid Response Services (ERRS) contracts to
provide emergency, time-critical removal and quick remedial response cleanup
services. With the large spending comes a higher risk of fraud, waste and abuse.
As a result, the Office of Inspector General (OIG) conducted this audit to review
the ERRS contracts awarded in Region 6 because of the high dollar value of
contracts and volume of emergency response work performed. Our review sought
to answer the following questions:
•	Is Region 6 effectively managing task orders under ERRS contracts?
•	Are contractors billing costs in accordance with contract terms?
Background
ERRS contracts are regionally-based contracts and provide cleanup personnel,
equipment and materials to: contain, recover or dispose of hazardous substances;
analyze samples; and conduct site restoration. The broad range of cleanup
services needed and the rapid time frame within which the contractors must
respond make it likely that the contractors will do substantial subcontracting-
particularly in the area of transportation and disposal of hazardous wastes, which
is a mandated subcontracting activity under the ERRS contracts.
As of October 2012, there were 23 ERRS contracts operating in the 10 regions with
expenditures of $721.7 million. The maximum potential value of all 23 contracts is
$2.4 billion. These contracts are predominantly indefinite-delivery contracts that
issue task orders using various pricing arrangements. The predominant pricing
arrangement on ERRS contracts are time-and-materials. A time-and-materials
contract acquires services on the basis of direct labor hours at specified fixed hourly
rates that include wages, overhead, general and administrative (G&A) expenses, and
profit. These contracts also include materials at cost.
Scope and Methodology
We conducted this audit from November 2012 to August 2013 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, which we believe we have done.
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We identified internal controls regarding the management of task orders and the
billing of invoices by reviewing EPA policies and procedures. We assessed the
compliance with those internal controls in the sample of task orders and invoices
analyzed. We also reviewed Region 6's Federal Financial Management Integrity
Act review to determine whether it reported any internal control weaknesses
related to contract management.
Region 6 has two ERRS contracts: EP-S6-07-01 and EP-S6-07-02. As of October
2012, Region 6 had issued 124 task orders under EP-S6-07-01 and 50 task orders
under EP-S6-07-02. The combined total expended amount on both contracts, as of
October 2012, was $77,579,001.
To determine whether Region 6 effectively managed task orders under the ERRS
contracts, we used a non-probability sample and selected a total of 10 task orders,
five from each contract. We selected the sample based on higher obligation
amounts and the type of work that was performed. For example, given the scope
of our audit, we selected task orders that involved non-time critical removals and
also task orders that involved emergency responses.
To determine whether contractors are billing costs in accordance with contract terms,
we used a judgmental selection process. We selected recent invoices and invoices
with a large dollar value. We reviewed eight invoices, four from each contract.
We interviewed the Region 6 staff managing contracts, including the contracting
officer (CO), the contracting specialist, the procurement director, the project
officer (PO), five on-scene coordinators, and two people in the management
division who work on manpower strategy. We reviewed supporting
documentation for each task order and invoice in our sample as well as
compliance with applicable laws, regulations and guidance documents. During
our audit, we found that Region 6 staff was not evaluating the qualifications of
contractor personnel who were not considered key. Because this finding is being
addressed in another OIG report, we did not pursue the matter in this report.
Prior Audit Coverage
In April 2013, the OIG found that Region 9 did not require its contracting
personnel to verify that personnel for the contractor had the qualifications
necessary to execute a time-and-materials contract.1 To address this issue, the OIG
recommended that the Assistant Administrator for Administration and Resources
Management require task order contracting officer representatives to evaluate the
qualifications of contractor key staff proposed by the contractor in the work plan.
The task order contracting officer representatives should also review qualifications
for samples of the non-key staff billed on invoices.
1 EPA OIG Report No. 13-P-0209, Opportunities for EPA-Wide Improvements Identified During Review of a
Regional Time and Materials Contract, April 4, 2013.
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Chapter 2
Region 6 Needs More Frequent
Internal Control Reviews
Region 6 manages field activities under the ERRS contracts within the terms of
the contracts. However, our review of task order files and invoices submitted
under those task orders showed that infrequent internal control reviews and
inadequate staffing levels hampered Region 6's ability to prevent and detect many
contract management shortcomings. The EPA's Acquisition Handbook and
Contract Management Manual include policies and procedures that serve as
internal controls in the contract management process. The contract management
issues found during the course of this audit were attributable to insufficient
internal control reviews and, according to procurement personnel, insufficient
staff to handle the workload. When not conducting internal control reviews,
critical aspects in the acquisition cycle cannot be assessed and, subsequently,
strengths, weaknesses and vulnerabilities cannot be addressed properly by
management.
Contract Management Aspects Contained in EPA Guidance
Contract management at the EPA is guided primarily by two policies: the
Contracts Management Manual and Acquisition Handbook. Both documents
contain policy and procedures that serve as internal controls in the contract
management process. The internal controls pertinent to this report are:
•	Quality Assurance Program (QAP) - The Acquisition Handbook requires
the primary contracting organization, such as a regional office, to
establish, fully implement and sustain a QAP program. Under the QAP,
each contracting office is to develop, implement and maintain its own
unique plan to ensure its contracting processes and products are compliant
with governing rules and are consistently of high quality. The QAP also
serves as a tool to identify potential vulnerabilities and preempt the
creation of serious or systemic problems.
•	Invoice reviews - According to the Contract Management Manual, the
CO has ultimate responsibility for invoice processing under individual
contracts. POs review invoices monthly, and the CO conducts periodic
monitoring. CO review is to ensure that the contractor and PO are
fulfilling their roles properly. Periodic monitoring must be at the level of
frequency necessary to ensure all invoice elements are charged properly.
Periodic monitoring may include at least one detailed review of an invoice
on each contract each year.
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Effective Contract Management Lacking in Crucial Areas
Region 6 manages field activities under the ERRS contracts within the terms of
the contract. However, our review of task order files and invoices submitted under
those task orders showed that infrequent internal control reviews and inadequate
staffing levels hampered Region 6's ability to prevent and detect many of the
contract management shortcomings described in table 1.
Table 1: Contract management shortcomings
Issue area
Condition observed
Annual invoice reviews
Seven out of 10 required annual invoice reviews were
not performed.
Adjustment vouchers
One adjustment voucher was not submitted within the
required 60 days and another voucher was not submitted
at all.
Subcontract agreements
Eight of 10 team subcontract agreements were not
received in the required timeframe.
Definitized task orders
One of 10 task orders was not definitized within 5 days.
EPA's Acquisition System
Five out of 10 task orders were coded incorrectly in the
EPA's Acquisition System.
Source: OIG analysis.
The awarding CO under Region 6's ERRS contracts did not perform seven out of
10 required annual invoice reviews. One contract only had two annual invoices
reviewed and the other contract only had one annual invoice reviewed. Both
contracts were entering the sixth year of performance and each contract should
have had five CO annual invoices reviewed at the time we conducted the audit.
The CO and PO do not monitor the submission of adjustment vouchers for the
prime contractors under both contracts. These adjustment vouchers reflect the
negotiated indirect cost rate between the prime contractor and cognizant federal
agency. Once the indirect cost rate is negotiated, prime contractors submit
vouchers that reflect the difference between the billed indirect costs and the
indirect costs resulting from the negotiated agreement. Out of the eight invoices
we reviewed, we noted one instance where the adjustment voucher was not
submitted within the required 60 days and one instance in which the adjustment
voucher had not been submitted as of March 2013, making it more than 6 months
late.
Team subcontractors are contractors that the prime contractor identifies in its
proposal that will conduct work under the contract. The CO and PO for both
contracts did not receive eight out of the 10 team subcontract agreements in the
required timeframe. The contract requires that within 5 (calendar) days of the
issuance of a notice to award, the contractor must provide the team subcontract
agreement to the CO and PO. The team subcontractor agreements are contracts
between the prime contractor and team subcontractor and serve to formalize that
legal relationship.
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One out of 10 task orders reviewed was not definitized within 5 days as required
by the contract. Instead, contractors performed services based on a verbal
authorization for 31 days before the task order was put into writing. A verbal
authorization usually occurs when it is impossible to negotiate the terms due to
time constraints and the criticality of the requirements. In this case, changing staff
delayed the definitization of the task order. The period of time in which a task
order is not definitized can pose significant risks to the government. For example,
the government may pay increased costs during the undefinitized period because
the contractor has little incentive to control costs.
We reviewed EPA's Acquisition System and found five out of 10 task orders
were coded incorrectly. Those five task orders were coded as fixed-price when
they were actually time-and-materials task orders.
Procurement personnel for Region 6 stated that the section's staffing levels were
inadequate based on the workload-to-staff ratio. The director provided us with a
matrix developed in November 2012 that detailed crucial acquisition activities
that were not being performed at all or that were being performed sporadically at
different staffing levels. The procurement activities that are not being performed
at the current staffing level include the following:
•	Contract placement (oversight, quality assurance reviews and cost
analysis): Region must outsource major contract placements to other EPA
locations.
•	Training and outreach: No training or customer outreach can be done at
this staffing level.
Meanwhile, the procurement activities being performed sporadically at the current
staffing level include the following:
•	Contract management (oversight, quality assurance reviews, cost analysis,
filing and data entry).
•	Simplified acquisitions (oversight and quality assurance reviews).
•	Contract close-out.
•	Commenting on and responding to new acquisition guidance and policy.
•	Reading, digesting and implementing new acquisition guidance and
policy.
•	Responding to the Office of Acquisition Management's data calls.
Infrequent Internal Control Reviews Hinder Effective
Contract Management
Infrequent internal control reviews allowed the contract management issues to
occur. These internal control reviews are not being conducted as often as required
per Region 6's QAP. The QAP requires that internal control reviews, which the
document refers to as peer reviews, occur semiannually. The purpose of the
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review is to ensure that COs are properly exercising their authority and to ensure
that individuals and the organization comply with applicable rules and
regulations. Procurement personnel indicated to us that they do not have the
adequate amount of staff to perform the reviews. These reviews are a key element
in Region 6's quality control program. Without them, crucial aspects in the
acquisition cycle cannot be assessed and, subsequently, strengths, weaknesses and
vulnerabilities cannot be exposed properly by management.
Recommendations
We recommend that the Regional Administrator, Region 6:
1.	Require procurement personnel to conduct internal control reviews twice a
year; or
2.	Identify contract management as a weakness in Region 6's next
Federal Managers' Financial Integrity Act annual assurance letter unless
Region 6 starts conducting internal control reviews twice a year.
Agency Response and OIG Evaluation
Recommendations 1 and 2 represented an either/or option as they were linked
together. EPA Region 6 agreed with our findings and opted for recommendation 1,
namely, that it pledged to conduct internal control reviews twice a year. The OIG
believes that doing so will help Region 6 effectively monitor its contract
vulnerabilities and be proactive about reducing contract risk. Therefore, we
consider recommendations 1 and 2 adequately addressed because Region 6's
proposed corrective action, when implemented, will address the problems
identified.
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Chapter 3
Contractor Applying G&A Rate
Inconsistent With Rate Letter
One of Region 6's prime ERRS contractors is incorrectly applying a general and
administrative rate to its team subcontractors' other direct costs (ODCs). Based on
the contractor's negotiated indirect cost rate letter, team subcontractors should
have received the lower subcontract administration rate and not the higher G&A
rate. The prime contractor's proposal and indirect cost rate letter do not clearly
distinguish between team and non-team subcontractor costs. This has resulted in
the prime contractor overbilling subcontractor indirect costs.
The indirect cost rate agreement describes how contractors apply indirect costs.
The rate agreement identifies the type of expense pool, the basis of application,
the applicable rate, the contracts affected and the period to which the rate will
apply. The expense pool represents a grouping of indirect costs such as fringe
benefits, overhead and G&A expenses. The basis for application identifies
whether the indirect cost rate is applied to direct labor costs, subcontract costs or
some other combination of costs. The basis for application will vary by contractor
and is based on the contractor's accounting system. The indirect cost rate
agreement is considered part of each contract.
One of Region 6's prime ERRS contractors did not follow its own proposal and
indirect cost rate letter when it applied G&A to its team subcontractors' ODCs.
When we reviewed one prime contractor's proposal, we determined that the
contractor has several pools for allocating indirect costs. Of importance to this
audit were the contractor's G&A and subcontract administration pools. The basis
for application, per the contractor's negotiated rate agreement, is as follows:
• G&A: Total costs incurred excluding G&A and subcontract costs.
• Subcontract Administration: Direct subcontract costs.
During our review of task order files and invoices under this contract, we
determined that the prime contractor was applying the higher G&A rate to its
team subcontractors' ODCs.2 Based on this contractor's proposal and indirect rate
letter, team subcontractors should have received the subcontract administration
rate and not the higher G&A rate. The contractor's negotiated indirect cost rate
letter states that the G&A pool's basis for application does not include subcontract
costs. The subcontract administration rate is substantially lower than the G&A
rate.
2 The rates are not being disclosed in this report because they are confidential business information.
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The proposal does not clearly differentiate between team and non-team
subcontractors. The proposal also contradicts itself in describing how the indirect
costs associated with team subcontractors should be applied. Under the
contractor's "General Information" section of its proposal, it states that,
"Non-team subcontractor costs will be billed at cost plus a mark-up for
Subcontract Administration costs." This would indicate that team subcontractors
are to receive the G&A rate as opposed to the subcontract administration rate.
However, the prime contractor's proposal states that its accounting practice is to
apply subcontract administration rates on all subcontractor costs.
The prime contractor has been overbilling team subcontractors' ODCs by
applying the G&A rate instead of the subcontract administration rate. In three of
the five invoices analyzed, the contractor overbilled by a total of $3,435. This
practice results in the government paying a higher rate for subcontract indirect
costs.
Recommendations
We recommend that the Regional Administrator, Region 6:
3. Direct COs to require that the contractor adjust all its billings to reflect the
application of the correct rate to team subcontract ODCs.
4. Direct COs to work with the contractors to modify future billings.
Agency Response and OIG Evaluation
EPA Region 6 did not agree with recommendations 3 and 4. Region 6 reviewed a
Defense Contract Audit Agency audit, Financial Administrative Contracting
Officer review, contractor's statement, and Removal Cost Management System
data and concluded that the contractor is applying the correct G&A rate to the
team subcontract ODCs. We reviewed the EPA and Defense Contract Audit
Agency reports, and neither specifically addressed the application of the G&A
rate to team subcontract ODCs. In addition, the reports are more than 5 years old
and may not reflect current practices.
After receiving the response, the OIG discussed the disagreement at the exit
conference, exchanged additional information, and had several followup
discussions in order to try and reach agreement on the finding. Region 6 obtained
assistance from Office of Acquisition Management (OAM) to further analyze the
issue. OAM determined that the contractor should have been applying a
composite rate to team subcontractor ODCs. The composite rate consisted of a
handling charge plus the contractor's subcontractor administration rate.3 The
3 The subcontractor agreements state that the subcontractor can charge a handling charge if consistent with the
subcontractor's accounting system. There is no evidence that the EPA or the contractor has verified that the handling
charge was consistent with the subcontractor's system.
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composite rate was not mentioned in the contractor's proposal or contract.
However, the agency believes it is a valid cost since the handling fee was
included in the contractor's agreements with the team subcontractors. According
to OAM, the contractor should have been using a composite rate. Instead, the
contractor was using its G&A rate in the billings. According to Region 6, the
G&A rate was applied because the Removal Cost Management System that is
used to create the invoices only allows one indirect cost rate.
OAM did recommend that if the supporting explanation and documentation
proved acceptable to the OIG, the contracting officer could take corrective action
to address the issue in the future. However, OAM believes that based on the
review of a couple of invoices, the difference is immaterial. Further, OAM
believes the immaterial nature of the finding does not justify the investment of
time that would be needed to review all past invoices.
OAM's analysis identified that the contractor should have been applying a
composite rate rather than the G&A rate. We agree that the contracting officer
needs to work with the contractor to correct invoices in the future. We disagree
regarding whether the past invoices need to be reviewed and adjusted. We
calculated the composite rate using approved billing rates for 2008 to 2012 and
compared it to the G&A rate that was billed. The rate billed was higher than what
the contractor was entitled to for each of the years.
Table 2: Difference between
composite and G&A rate
Year
Difference
2008
2.77%
2009
3.26%
2010
3.41%
2011
1.03%
2012
1.05%
Source: OIG analysis of contractor
information.
For the one invoice reviewed as part of reaching agreement on this finding, the
difference was $85. However, the difference on each invoice will vary depending
on the amount of team subcontractor ODCs included on the invoice and the year
the costs were incurred. There are over 125 task orders under the contract, each
with multiple invoices. Therefore, the OIG continues to recommend that Region 6
work with the contractor to adjust past invoices to correct the application of
indirect costs.
We revised the draft report recommendations to reflect the additional analysis that
was conducted after the draft report was issued. The audit resolution process will
be used to resolve the recommendations.
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Chapter 4
By Not Separating Subcontracted Labor Rates,
Prime Contractors Receiving Additional Profit
Prime contractors are billing subcontracted labor at the prime contract's labor
rates even though they negotiated lower rates with their subcontractors. Under
Federal Acquisition Circular 2005-15, the Federal Acquisition Regulation (FAR)
was amended to require offerors to establish, for each category of labor, fixed
hourly rates using one of three options: separate rates for prime and subcontracted
labor, blended rates, or a combination of separate and blended rates. Because this
rule became effective shortly before the ERRS contracts were awarded, the prime
contractors were not required to comply with the new rule when they submitted
their proposals for these noncommercial services. As a result, the prime
contractors on Region 6's ERRS contracts were receiving extra profit.
At the time the EPA analyzed the cost proposals for the ERRS contracts,
Federal Acquisition Circular 2005-15 was not in effect. The fixed rates negotiated
between the EPA and the ERRS prime contractors were based solely on the
prime's rates. These negotiated rates were then applied to the prime contractors
and their team subcontractors. Because the rule was not in effect during the
solicitation phase of the contract, it allowed the prime contractors to negotiate
lower rates with its team subcontractors. The lower rates allowed the prime
contractors to receive additional profit that was not disclosed to the EPA during
contract negotiations.
Our analysis determined that one of the two ERRS prime contractors negotiated
agreements with its team subcontractors that were approximately 9.1 percent
lower for all labor categories (excluding laborer). This spread in costs equated to
the prime contractor receiving roughly 9.1 percent extra profit on those labor
categories based on the difference between the rates. Our review found that for
two task orders the prime contractor received approximately $3,600 and $12,800
in extra profit.
For the other ERRS contract, the prime contractor generally negotiated rates with
its subcontractors that were lower than the established rates in the prime contract.
For one subcontractor, the labor rates were approximately 8 percent less than the
prime's rates with Region 6. For another subcontractor, the labor rates in the
agreement were 14 to 16 percent less than the prime's rates with Region 6. The
third subcontractor had only a few labor rates in the agreement and some labor
rates were higher and some were lower than the prime's rates. Overall, a majority
of the labor rates in the subcontract agreements were significantly lower than the
rates in the prime's contract with Region 6.
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When the EPA negotiated labor rates for the ERRS contract, it only had
information on the rates of the prime contractors employees and not the
subcontracted labor. The prime contractor charged its own labor and team
subcontract labor to the EPA at the negotiated rate. As a result, the prime
contractors were receiving additional profit based on the difference between the
rates in the prime contract and the rates in the subcontract agreements.
Recommendation
We recommend that the Regional Administrator, Region 6:
5. Require that proposals for future ERRS contracts include subcontractor
rates as required by the amended FAR.
Agency Response and OIG Evaluation
EPA Region 6 concurred with recommendation 5, noting that the award of any
future ERRS contracts would be subject to FAR and EPA Acquisition Regulation
requirements. The OIG believes that separate or blended rates for prime
contractors and team subcontractors make good business sense for the
government. Each category of labor should have fixed hourly rates using separate
rates, blended rates, or a combination of separate and blended rates to reduce the
risk of prime contractors receiving additional profit. Consequently, we consider
this recommendation closed.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official	Date
1	6 Require procurement personnel to conduct internal
control reviews twice a year; or
2	6 Identify contract management as a weakness in
Region 6's next Federal Managers' Financial
Integrity Act annual assurance letter unless
Region 6 starts conducting internal control reviews
twice a year.
3	8 Direct COs to require that the contractor adjust all
its billings to reflect the application of the correct
rate to team subcontract ODCs.
4	8 Direct COs to work with the contractors to modify
future billings.
5	11 Require that proposals for future ERRS contracts
include subcontractor rates as required by the
amended FAR.
Claimed
Amount
Ag reed-To
Amount
Regional Administrator, 6/30/14
Region 6
Regional Administrator, 9/23/13
Region 6
Regional Administrator,
Region 6
Regional Administrator,
Region 6
Regional Administrator, 9/23/13
Region 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 unresolved with resolution efforts in progress.
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Appendix A
Agency Response to Draft Report and OIG Evaluation
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
REGION 6
1445 ROSS AVENUE, SUITE 1200
DALLAS, TEXAS 75202 - 2733
Office of the Regional Administrator
September 23, 2013
MEMORANDUM
SUBJECT: Response to Office of Inspector General Draft Report No. OA-FY13-0046
"Internal Control Reviews Would Improve Region 6's Management of
Emergency
and Rapid Response Services Contracts," dated August 20, 2013
FROM: Ron Curry
Regional Administrator
TO:	Richard Eyermann
Acting Assistant Inspector General
Thank you for the opportunity to respond to the findings and recommendations presented in the
Office of Inspector General (OIG) Draft Report, "Internal Control Reviews Would Improve
Region 6's Management of Emergency and Rapid Response Services Contracts". We appreciate
the OIG's audit of our ERRS contracts and your recommendations on internal control and
contract management.
Region 6 has reviewed the findings and has determined that the recommendations in Chapter 2
and Chapter 4 have merit for improving Region 6's management of current and future
Emergency and Rapid Response Services (ERRS) contracts. With respect to the findings and
recommendations in Chapter 3, we do not concur with the OIG's assertion that one contractor is
incorrectly applying a general and administrative (G&A) rate to its team subcontractors' other
direct costs. For your consideration, we have included our position and corrective actions or
proposed alternatives to the recommendations and a Technical Comments Attachment.
Agency's Response to Report Recommendations
Recommendation Nos. 1 and 2: The OIG identified findings related to the accuracy, timeliness or
completion of annual invoice reviews, adjustment vouchers, subcontract agreements, definitized
( ^ )
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task orders and the EPA Acquisition System. We understand that those findings are attributed to
Region 6's non-compliance with the semi-annual Internal Control Reviews as required by the
Quality Assurance Plan (QAP). Therefore, Region 6 concurs with the conclusion and agrees to
implement a corrective action to ensure that we are complying with applicable rules and
regulations. The OIG's recommendation was to require procurement personnel to conduct
internal control reviews twice a year or identify contract management as a weakness in Region
6's next Federal Managers' Financial Integrity Act annual assurance letter, unless Region 6 starts
conducting internal control reviews twice a year. Due to the OIG's either-or option in
Recommendation Nos. 1 and 2, we have decided to combine the recommendations with the
understanding that our final decision will negate the need for the other corrective action.
Subsequently, we decided to implement Recommendation No. 1, and our corrective action is to
conduct internal control reviews in the 1st Quarter of FY 2014 and 3rd Quarter of FY 2014 and in
accordance with the Peer Review Process in the QAP.
Recommendation Nos. 3 and 4: The OIG reviewed the ERRS prime contractors' proposal and
indirect cost rate letters and concluded that the documents do not clearly distinguish between
team and non-team subcontractor other direct costs (ODCs) with regards to the application of
G&A or subcontract administration G&A. Due to this ambiguity, the OIG asserts that one
contractor is incorrectly applying a G&A to its team subcontractors' other direct costs and this
practice may result in the government paying a higher rate for subcontract indirect costs. As
corrective actions, the OIG recommended that we direct the COs to require that the contractor
adjust all its billings to reflect the application of the subcontract administration rate to team
subcontract ODCs and direct the COs to modify the contract to explicitly explain that team
subcontract ODCs receive subcontract administration rate.
We understand the OIG's concerns and we have made many efforts to determine the contractor's
intent at pre-award and its accounting practice after contract award. We reviewed a Defense
Contract Audit Agency (DCAA) audit, Financial Administrative Contracting Officer (FACO)
review, contractor's statement, and Removal Cost Management System (RCMS) data and
concluded that the contractor is applying the correct G&A rate to team subcontract ODCs.
Therefore, Region 6 does not concur with Recommendation Nos. 3 and 4. Our corrective action
is to remove the ambiguity in the contract via a modification to explicitly explain that team
subcontract Other Direct Costs (ODCs) will receive the general and administrative (G&A) rate.
We have combined Recommendation Nos. 3 and 4 in our response because they are integrally
related to each other. Additionally, OAM reviewed the Region's response to Recommendation
No. 3 and concurs with this position. For your consideration, we are providing the following
results of our review.
Defense Contract Audit Agency: The DCAA examined the contractor's Indirect Cost Pools and
Allocation Bases to determine if the accounting system provided for, in part, the following
procedures:
• Direct and indirect costs are appropriately identified, accumulated, and reported; and
• Indirect costs are allocated equitably and consistently to contracts and other cost objectives.
Based on DCAA Audit Report No. 1621-2006B17740009 dated October 24, 2006, the contractor's
accounting system is adequate for accumulating and billing costs under government contracts.
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Although the aforementioned audit was conducted seven (7) months prior to the award, the
current contract is a follow-on requirement to the previous ERRS contract, in which the general
and administrative (G&A) rate was applied in the same manner (i.e. G&A rate applied to team
subcontract ODCs).
Financial Administrative Contracting Officer: The FACO reviewed the contractor's accounting
and financial records under the contract. The FACO released Financial Monitoring Report No.
8DFM010 dated July 29, 2008 in which a finding was identified that related to the contractor's
Value Added Total Cost Input G&A base. The report stated that the contractor incorrectly
excluded subcontract administration labor, fringe benefits applicable to subcontract
administration labor and warehouse labor from its value added G&A base calculation; however,
the report did not identify any findings related to an incorrect application of the G&A rate to
team subcontract Other Direct Costs.
Contractor's Statement: "This practice has been a standard and consistent practice on our ERRS
contracts, it is fully compliant with our contracts, and it is in compliance with our accounting
system and practices. There is no documentation related to this practice from previous audits
because no auditors have questioned or disputed this practice."
Removal Cost Management System: Region 6 reviewed and verified data through RCMS
related to the application of the G&A rate to team subcontract ODCs under the ERRS
contracts in Region 5, 9 and 10. Our internal review indicated that the contractor applied a
standard and consistent business practice for team subcontract ODCs under the contractor's
ERRS contracts.
Recommendation No. 5: The OIG reviewed the ERRS labor rates in the proposals and contract
files and concluded that Region 6 did not require separate or blended rates for the prime contractor
and team subcontractors. Under the Federal Acquisition Circular 2005-15 and the subsequent FAR
amendment, contractors are required to establish, for each category of labor, fixed hourly rates
using separate rates, blended rates, or a combination of separate and blended rates. When the FAC
2005-15 came into effect, Region 6 was in the process of awarding the contracts. The OIG
recognized the timing issue with the current ERRS contracts and recommended that we require
proposals for future ERRS contracts to include subcontractor rates as required by FAR 52.216-29.
Region 6 concurs with the recommendation for future ERRS contracts and we agree to comply
with FAR and EPAAR requirements in effect. Our intent is to recommend negotiated blended
labor rates to the ERRS Placement Contracting Officers.
Furthermore, the Office of Acquisition Management (OAM) stance on FAR 52.216-29 is to
follow the FAR as written. Additionally, Chapter 1 in the Acquisition Handbook does not
contain a class deviation for ERRS solicitations. Should the ERRS Program request a class
deviation, a Determination & Findings (D&F) must be processed and submitted through the
Policy, Training and Oversight Division (PTOD) to the Senior Procurement Executive (SPE) for
review and approval.
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Response to Recommendations Table
Findings Region 6 is in agreement
No.
Recommendation
High-Level Intended Corrective
Action(s)
Estimated Completion
by Quarter and FY
1
Require procurement
personnel to conduct
internal control reviews
twice a year.
Region 6 concurs with Recommendation
No. 1 and agrees to conduct internal control
reviews in accordance with the Peer
Review Process in the Quality Assessment
Plan (QAP).
1st Quarter FY 2014
and 3rd Quarter FY
2014
2
Identify contract
management as a
weakness in Region 6's
next Federal Managers'
Financial Integrity Act
annual assurance letter
unless Region 6 starts
conducting internal
control reviews twice a
year.
Region 6 agreed to the corrective action in
Recommendation No. 1; therefore, a
corrective action for Recommendation No.
2 is not required.
Not Applicable
5
Require that proposals for
future ERRS contracts
include subcontractor
rates as required by the
amended FAR.
Region 6 concurs with Recommendation
No. 5 and agrees to require proposals for
future ERRS contracts to include
subcontractor rates as required by the
amended Federal Acquisition Regulations
(FAR) and to recommend negotiated
blended rates to the Placement Contracting
Officers.
FY 2015
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Findings Region 6 is in disagreement
No.
Recommendation
Agency Explanation/Response
Proposed Alternative
3
Direct COs to require that
the contractor adjust all
its billings to reflect the
application of the
subcontract
administration rate to
team subcontract ODCs.
Region 6 does not concur with
Recommendation No. 3.
Based on the DCAA audit, FMR,
contractor's statement, and an internal
data review, Region 6 determined that the
contractor's billings shall remain
unchanged.
The contractor's
billings shall remain
unchanged.
4
Direct COs to modify the
contract to explicitly
explain that team
subcontract ODCs receive
subcontract
administration rate.
Region 6 does not concur with
Recommendation No. 4.
Refer to Region 6's explanation on Pages
2 and 3 of this response.
The COs shall modify
the contract to
explicitly explain that
team subcontract
ODCs receive the
G&A rate.
Contact Information
If you have any questions about this letter, please call me at (214) 665-2100, or your staff may
contact Susan Jenkins, Audit Follow-up Coordinator, at (214) 665-6578, or by email at
i enkins. susan@epa. gov.
Attachment
cc: Kevin Christensen, OIG
Janet Kasper, OIG
Michael Petscavage, OIG
David Penman, OIG
Andres Calderon, OIG
Samuel Coleman, R6
James McDonald, R6/MD
Ronnie Crossland, R6/MD
Regina Milbeck, R6/MD
Carl Edlund, R6/SF
Pam Phillips, R6/SF
Connie Suttice, R6/SF
Anthony Talton, R6/SF
Susan Jenkins, R6/MD
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Response to Office of Inspector General Draft Report No. OA-FY13-0046
"Internal Control Reviews Would Improve Region 6's Management of Emergency
and Rapid Response Services Contracts," dated August 20, 2013
Technical Comments on the Draft Report
While we agree with most of the findings and recommendations, we have included Technical
Comments on the contract management shortcomings identified in Chapter 2 to further explain
the procurement and program office activities related to the findings and to clarify or improve the
accuracy of specific details in the report.
Page 4, Chapter 2 - Table 1: Contract Management Shortcomings:
Annual Invoice Reviews - Although the Administrative Contracting Officers could not locate
seven (7) out of ten (10) annual invoice reviews for the prior periods, the three (3) reviews that
were in the files were for the most recent required review periods (i.e. one for 2011 and two for
2012).
It should be noted that the Administrative Contracting Officers identified the contract
management shortcomings of the Awarding Contracting Officers and implemented a corrective
action by conducting the required annual invoice reviews that were due at the time.
Adjustment Vouchers - The adjustment vouchers are required for negotiated interim and final
Indirect Cost Rates (ICR), and the vouchers must be submitted within sixty (60) days. Although
the voucher submissions were not timely, all monies due to the Government or to the contractors
for prior year indirect cost rates must be settled after contract completion and final DCAA ICR
audits and before contract closeout.
It should be noted that a corrective action has been implemented that requires the Project Officer
to monitor the submission of ICR adjustment vouchers and requires the Contracting Officer to
verify the receipt of periodic ICR adjustment vouchers during the annual invoice review process.
Subcontract Agreements - The Team Subcontract Agreements were not submitted to the
Awarding Contracting Officers and Project Officer within five (5) calendar days of the issuance
of a notice of award; however, the delayed submission of formal team subcontract agreements
did not have a financial or technical impact on the contracts.
As a corrective action, it should be noted that the Administrative Contracting Officers will
recommend to the Placement Contracting Officers for the future ERRS contracts to review the
requirement and make a determination regarding the reasonableness of the contractor's
timeframe to fully execute and submit formal team subcontract agreements to the Government.
Definitized Task Orders - One out of ten task orders was not definitized by the Awarding
Contracting Officer within five (5) days due to an administrative oversight related to internal
staffing changes (i.e. the transfer of the Contract Specialist to another EPA Section and Division,
and the changing of Administrative Contracting Officers).
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It should be noted that the administrative oversight only occurred once under the contracts. If
the subject task order was excluded from the sample because of the unusual circumstances or
replaced with another similar type of task order, it is our opinion that Region 6 success rating
would be 100%, which is effective and efficient contract management.
Furthermore, from an administrative and technical standpoint, the delayed definization did not
pose any significant financial or technical risks to the Government because a Contracting Officer
Technical Representative (COTR)/On-Scene Coordinator (OSC) was assigned to the project
when the verbal authorization for services was given to the contractor. The COTR/OSC
safeguarded the Government and controlled costs by being on-site during performance,
providing daily technical direction to the contractor, reviewing and signing daily 1900-55s of all
costs incurred, and developing a cost estimate and Statement of Work within five (5) days. As a
result, there were no changes in field performance/activities or an increase in government costs.
EPA's Acquisition System (EAS) - The system default for the Award Type/pricing
arrangement on all EPA orders is "Firm-Fixed Price" regardless of the contract pricing
arrangement, which poses a national EAS data quality issue.
The Administrative Contracting Officers (COs) identified the system default issue prior to this
audit and was working with the national EAS Focus Workgroup on a resolution to change the
award type/pricing arrangement from "Firm-Fixed Price" to "Time-and-Materials". Also, the
COs presented the issue to OAM's Information Technology Service Center (ITSC) and
recommended two options, one was the removal of the default feature (i.e. automatic population
of the field), which would allow for user selection, and the other was to retain the default feature
but with the automatic population of the contract pricing arrangement as the award type. The
COs recommendation was not implemented by ITSC, and the EAS default remains unchanged.
Nonetheless, the paper file is the official contract file, and all task orders under the ERRS
contracts fall under the "Time-and-Materials" pricing arrangement, unless otherwise negotiated
as "Firm-Fixed Price" and stated on the task order in the official contract file.
It should be noted that the Administrative Contracting Officers understand that data quality is
important and necessary so they have implemented a corrective action to verify and validate that
the information in the EAS award type field is consistent with the official contract file.
Additionally, the COs have taken corrective action by changing the award type on incorrectly
coded task orders in EAS when a modification is required.
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Appendix B
Distribution
Office of the Administrator
Regional Administrator, Region 6
Agency Follow-Up Official (the CFO)
Agency Follow-Up Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Director, Office of Acquisition Management, Office of Administration and Resources Management
Deputy Regional Administrator, Region 6
Chief, Procurement Section, Region 6
Contract Specialist, Emergency and Rapid Responses Services Contracts, Region 6
Audit Follow-Up Coordinator, Region 6
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