Office of Inspector General
Audit Report
Procurement Practices
Under Grant No. X825532-01
Awarded to MBI International
Report Number 2002-2-00008
January 29, 2002

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Resource Center
Conducting the Audit:
Headquarters Program Offices
Involved:
Mid-Atlantic Division,
Philadelphia, PA
Grants Administration Division
Office of Policy, Economics,
and Innovation
Contributors:
Rich Howard
Michael Wall

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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
January 29, 2002
MEMORANDUM
SUBJECT: Audit Report:
Procurement Practices Under Grant No. X825532-01
Awarded to MBI International
Report Number 2002-2-00008
FROM: Carl A. Jannetti
Divisional Inspector General
Mid-Atlantic Division (3AI00)
TO:	Martha Monell, Director
Grants Administration Division (3903R)
At the request of the U.S. Environmental Protection Agency's (EPA's) Grants
Administration Division, we performed an audit to determine whether contracts
awarded by MBI International under the subject grant were executed in accordance
with Title 40 of the Code of Federal Regulations, Part 30.
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.
ACTION REQUIRED
In accordance with EPA Order 2750, you are required to provide a final
determination on the costs questioned and the findings contained in this report
within 120 days of the report date. This will assist us in deciding whether to close the
report. Should your position on the questioned costs differ from our
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recommendations, we would appreciate the opportunity to discuss the Grants
Administration Division's position before the determination is issued to MBI
International. Please provide us with a copy of the final determination when it is
issued.
We have no objection 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.

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Table of Contents
Purpose 		1
Background 		1
Scope and Methodology		2
Prior Audit Coverage		3
Results of Review		3
Recommendations		7
MBI Response and OIG Evaluation 		7
Exhibit 	 11
A: Statement of Incurred and Questioned Costs	 11
Appendix 	 27
1: Distribution	 27

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Purpose
We performed this audit at the request of the EPA Grants Administration
Division (GAD), which was concerned over the award of a contract by MBI
International (MBI) to its subsidiary, Grand River Technologies, Inc. (GRT).
Specifically, GAD asked that we determine whether MBI, the recipient of
funding under EPA grant X825532-01, had adhered to the procurement
procedures stipulated in Title 40 of the Code of Federal Regulations (CFR),
Part 30, as required by the grant agreement.
Background
MBI is a private, non-profit corporation in Lansing, Michigan, that seeks to
develop and market technology through processes that are "biobased," i.e.,
environmentally friendly and safe. To that end, in April 1997, EPA awarded
MBI a grant that as of May 1999 amounted to $6 million. MBI in turn
awarded a $250,000 sole source contract to GRT, its for-profit subsidiary, to
market MBI-developed technology. GRT itself created three for-profit
companies, as shown in the following flow chart:
Auxein Corporation
(For-profit)
BioPlastics, Inc.
(For-Profit)
MBI
(Non- Profit)
GRT
(For-Profit)
EFX Systems, Inc.
(For-Profit)
Noting that MBI proposed to award another sole source contract to GRT under
a new grant, GAD requested information on June 1, 2000, relating to
compliance with the procurement provisions of 40 CFR Part 30. Specifically,
MBI was requested to:
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~	Explain how the two GRT contracts complied with the Codes of Conduct
described in the Code of Federal Regulations (40 CFR § 30.42);
Q Provide information on the competition process regarding the award of
the GRT contracts (40 CFR § 30.43); and
~	Provide a cost or price analysis for the two GRT contracts
(40 CFR § 30.45).
MBI responded on July 13, 2000, and asserted that: (a) it had not violated the
Codes of Conduct, because it had disclosed to EPA its relationship with GRT
in the grant proposal; and (b) no competition was attainable because the
contracts were for "highly specialized procedures." MBI did not provide the
requested cost or price analysis.
GAD requested the Office of Inspector General (OIG) to review the sole source
contract award to GRT under EPA grant X825532-01. We expanded this
review upon learning that: (a) GRT had created three for-profit companies;
and (b) MBI had awarded 23 contracts under EPA grant X825532-01 and 20
of those 23 awards were sole source. In the meantime, GAD had imposed
special conditions upon the new $1.9 million grant to MBI (EPA grant
X828670-01) to preclude procurement procedure violations.
Scope and Methodology
EPA awarded $6 million to MBI under grant X825532-01 on April 25, 1997.
The scope of our work was limited to the award of contracts and consulting
agreements totaling $1.3 million. We performed our 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 we considered necessary.
Our review of MBI's procurement procedures was limited to assuring
compliance with the requirements in 40 CFR Part 30, which is the regulatory
authority governing grant X825532-01. We did not evaluate contract
administration or contract provisions. Our audit began on September 14,
2000 and ended on June 15, 2001. To accomplish our objective, we
interviewed the EPA project officer and various personnel within GAD. We
also reviewed their files, as well as documents supplied by MBI, including an
external report on MBI's purchasing system.
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On September 18, 2000, we sent a letter to MBI requesting information on the
contracts and consulting agreements funded under the grant. MBI's response
of October 6, 2000, did not provide all of the requested information. The
incompleteness of the response generated further questions, which we
submitted on October 31, 2000. MBI promised to respond to our questions by
year's end but did not. Instead, on February 13, 2001, MBI informed us that
it had engaged the services of a law firm to review its purchasing system. MBI
submitted the law firm's report of this review to us on April 11, 2001.
Prior Audit Coverage
MBI has not been previously audited by the OIG. We are not aware of any
other government audits of MBI's procurement system.
Results of Review
MBI did not have adequate justification to support the award of sole source
contracts. Also, MBI's procurement practices did not meet federal
requirements. As a result, $1,301,365 is not eligible for federal
reimbursement. Further, there were apparent conflicts of interest between
MBI, its subsidiary (GRT), and companies created by GRT.
Inadequate Sole Source Justifications
In its October 6, 2000 response, MBI provided us with justifications for 23
contracts, 20 of which were for sole source procurements. Although MBI's Vice
President of Operations had signed these documents, none of them were dated.
Moreover, none of these documents actually justified any sole source
procurements, nor did MBI provide any cost or price analyses as required by
40 CFR § 30.45. Our subsequent requests for this information yielded no
response, except to be informed that the Vice President had decided to reduce
his employment to part time, and that MBI had hired a law firm to review its
purchasing system. According to this law firm:
G The purchasing procedures "... can be improved, especially in the areas of
'writing down' some of the 'understood' policies so that as personnel
change, there is a greater likelihood of seamless compliance."
G The contracts can be improved by including provisions that "MBI feels
were 'understood' but are better made an express part of the Agreement."
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G Contractor and consultant invoices "... should indicate the hours worked,
the rates charged, and the services performed."
~	"MBI has made a cost or price analysis with every subcontract or
consulting agreement it has entered in support of its EPA work. In
addition, MBI has prepared a written justification for the award and
included it in the file. Although the process used by MBI contained in an
Affidavit of MBI's Vice President for Operations, [name deleted] explains
the Company's effort in this regard in greater detail than the written
justifications, for future awards the written justifications need to be
expanded .... From my interview of MBI personnel, most notably [the
Vice President for Operations], it is clear the Company was going
through the process in prudently spending assistance funds, but the
documentation does not always evidence this effort."
~	In his affidavit, the Vice President for Operations stated, "It was our
practice to get competitive bids whenever possible, however, due to the
unique nature of our work and the object of our grant, major
subcontracting efforts were done with MBI affiliates. Our intent to
subcontract such work was included in our proposal to EPA and we
believed our intent to enter into such agreements was clear in our
proposal and furthermore that by awarding MBI the grant, EPA was
consenting to the subcontract awards identified in the proposal."
The Vice president also noted that while he knew MBI performed a cost
or price analysis for every contract "... I now realize we were not as
diligent in documenting our cost/price analysis as we were in performing
it, or in retaining the documentation of this work."
We agree with the attorneys that MBI's purchasing procedures and contracts
need improvement, but do not necessarily agree with all the other conclusions.
It should be pointed out that, despite repeated requests, MBI never submitted
cost or price analyses. Also, as previously mentioned, the justifications
submitted by MBI were not dated and did not actually justify any sole source
procurement. Finally, EPA's award of a grant does not constitute approval of
a contract - simply naming a contractor in a proposal does not exempt a
grantee from adhering to Federal procurement regulations.
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Costs Questioned
We determined that MBI incurred $1,201,857 in ineligible contract costs and
$99,508 in ineligible consultant costs, for a total of $1,301,365 in ineligible
costs.
According to 40 CFR § 30.45, some form of cost or price analysis shall be made
and documented in the procurement files in connection with every
procurement action. Price analysis may be accomplished in various ways,
including the comparison of price quotations submitted, market prices, and
similar indicia, together with discounts. Cost analysis is the review and
evaluation of each element of cost to determine reasonableness, allocability,
and allowability.
According to 40 CFR § 30.46, procurement records and files for purchases in
excess of $100,000 shall include at a minimum: (a) the basis for contractor
selection; (b) the justification for lack of competition when competitive bids or
offers are not obtained; and (c) the basis for award cost or price.
According to 40 CFR § 30.27(b), EPA is to limit its participation in the salary
rate (excluding overhead) paid to individual consultants retained by
recipients to the maximum daily rate for level 4 of the Executive Schedule
unless a greater amount is authorized by law.
We found that MBI generally failed to adhere to the above criteria when
awarding contracts and consulting agreements under EPA grant X825532-01.
The results of our review are presented in detail in Exhibit A.
We were also concerned that six MBI contracts were signed after work began.
For one contract, work had been performed up to a year prior to actual
contract signing. These six contracts were with: GRT; EFX Systems, Inc.;
BioPlastics, Inc.; Auxein Corporation; Jacobs Engineering Group, Inc.; and
Michigan State University. According to MBI:
This is not a normal practice for MBI but was done in these cases
to continue project work and preserve project timelines during the
lengthy process of finalizing agreement language. In these cases,
work did, in fact, start prior to signature due to the length of time
necessary to finalize agreement language. However, MBI did not
disburse and it was made clear we would not disburse for work
performed until the agreements were signed. Contractors
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recognized they were working at their own risk on the assumption
the agreement would be finalized. In only one instance was an
invoice paid in error prior to signature. That error was resolved
and the contract signed within 3 weeks.
Apparent Conflicts of Interest
According to 40 CFR § 30.42, "No employee, officer, or agent shall participate
in the selection, award, or administration of a contract supported by Federal
funds if a real or apparent conflict of interest would be involved. Such a
conflict would arise when the employee, officer, or agent, any member of his or
her immediate family, his or her partner, or an organization which employs or
is about to employ any of the parties indicated herein, has a financial or other
interest in the firm selected for an award."
MBI, a non-profit company, created GRT, a for-profit subsidiary. GRT then
created Auxein Corporation, BioPlastics Inc., and EFX Systems, Inc., all for-
profit companies. MBI awarded
two sole source contracts to
GRT, under the EPA grant.
Likewise, MBI awarded sole
source contracts to the three
companies created by GRT
(Auxein, BioPlastics, and EFX)
to market technology developed
by MBI. As seen in the chart at
right, apparent conflicts of
interest existed because officers
of MBI and GRT served on the
Boards of Directors of subsidiary
companies.
MBI stated conflicts of interest did not exist because its Board members were
only involved in the approval of contracts that exceed $500,000, and no such
contracts were made to a subsidiary. However, even if the Board members
were not formally involved in a decision, at a minimum, there was the
appearance of a conflict of interest. In addition to having officers intermixed
among the various Boards of Directors, the President of GRT, who was also the
Interim President of BioPlastics, awarded sole source contracts on behalf of
MBI with GRT and BioPlastics on the same day. Moreover, MBI's Vice
President for Operations, a member of the EFX Board of Directors, also
Officer
Board Member
President of MBI
MBI
GRT
Vice President of MBI
EFX
President of GRT &
Interim President
of BioPlastics
MBI
Auxein
BioPlastics
Chairman of GRT
MBI
Auxein
BioPlastics
Director of GRT
MBI
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awarded a sole source contract to EFX. Regardless of the dollar amount, if a
board member is involved in the approval of a contract and also serves on the
board of the company receiving the contract, there is an apparent conflict of
interest.
Conclusions
It was inappropriate for board members to award each others' companies sole
source contracts, especially without adequate justification and without cost or
price analyses, as prescribed in 40 CFR § 30.45 and § 30.46. In addition, the
absence of "arms length" bargaining in the award of contracts by these board
members constituted an apparent conflict of interest as defined in 40 CFR §
30.42.
Recommendations
We recommend that the Director, Grants Administration Division disallow the
$1,301,365 of ineligible costs incurred under EPA grant X825532-01 at the
time of our review.
MBI Response and OIG Evaluation
MBI strongly disagreed with the draft report and maintained that all costs
questioned by the OIG, other than those noted as ineligible in MBI's own
external review report, should have been accepted. MBI also provided some
additional documentation as part of their response to the draft report. We
reviewed MBI's response and our position has not changed.
We have summarized MBI's overall comments below, followed by our
evaluation of the response. MBI's specific comments to individual notes are
included with each note, along with our evaluation. Due to volume, we did not
include MBI's entire response as an attachment to this report. However, the
response is available for review upon request.
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Sole Source Awards to GRT and EFX
MBI Response
MBI disagreed with the OIG's evaluation of its sole source awards to GRT, Inc.
and EFX Systems, Inc. MBI stated that since these awards were clearly
explained and identified in its grant proposal and part of the approved award,
it was reasonable for MBI to conclude EPA agreed with these sub-awards, and
since EPA had approved MBI's pricing it likewise had reviewed and approved
the pricing of the proposed awards to GRT and EFX.
O/G Evaluation
We disagree with MBI's response. Regardless of whether MBI disclosed its
intentions to hire GRT and EFX as contractors in its grant application, EPA's
award of grant funds to MBI did not constitute approval of its contractors, nor
did the award of funds grant MBI an exception from the procurement
requirements of 40 CFR Part 30.
Cost or Price Analysis
MBI Response
According to MBI, the most significant aspect of the Draft Report concerned
the requirement to conduct and document some form of cost or price analysis
for every procurement action. MBI disagreed with the OIG's finding that it
did not perform cost or price analyses. Per MBI, Office of Management and
Budget (OMB) Circular A-l 10 does not prescribe any form or format for a cost
or price analysis other than it be done and documented. MBI claimed the
guidance does not require that this analysis be signed or dated, or that it be
done prior to an award being made. MBI claimed that in every instance it
conducted at least a price analysis and documented its decision, and that the
OIG is demanding a cost or price analysis in a format not required by OMB
Circular A-110 or 40 CFR Part 30.
O/G Evaluation
We disagree with MBI's response. MBI claimed that in every instance it
conducted at least a price analysis and documented its decision. However,
MBI did not provide this information for its GRT contracts when GAD first,
requested it in a letter dated June 1, 2000. Based on MBI's failure to provide
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this information, it appeared that MBI did not perform a cost or price analysis
for its contracts with GRT. Moreover, when we asked MBI for the same
information for GRT and MBI's other contracts in September 2000, MBI
provided the OIG written "justifications" that were identical in format,
contained little information, and did not contain any cost or pricing data.
They also did not contain adequate sole source justifications for those
contracts greater than $100,000. Further, none of the justifications were
dated. Based on the appearance and content of the justifications, and because
MBI did not provide justifications for GRT when GAD requested them, we
question whether the justifications were prepared prior to MBI's procurements
rather than after we requested them.
In addition, MBI's response to the draft audit report claims that OMB
Circular A-110 does not specify that a cost or price analysis be done prior to
an award being made. We question MBI's interpretation of the Circular,
along with MBI's logic. Performing a cost or price analysis after hiring a
contractor serves no purpose in determining whether the contractor is
providing a fair and reasonable price.
Conflicts of Interest
MBI Response
MBI stated that the OIG makes allegations concerning the appearance of a
conflict of interest between Board members and Officers of MBI, GRT and
other companies with which MBI or GRT have some ownership interest. MBI
claims that 40 CFR § 30.42 does not address a Director or Trustee, either as
an individual or as a Board. MBI also claims that OMB Circular A-110 does
not apply to Directors, yet the audit report attempts to extend these rules to
Directors. Further, MBI states that its Directors are only involved in the
award of contracts when the award exceeds $500,000, and MBI has made no
such awards. MBI claims that every subcontract or consulting agreement was
awarded on its own merit and upon the recommendation of the project
manager.
OIG Evaluation
We disagree with MBI's response. Members of MBI's and GRT's Boards
served on each others' Boards, as well as the Boards of companies created by
GRT. MBI's failure to compete these contracts and to perform required cost or
price analyses, along with having officers intermixed among the various
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companies' Boards of Directors, gives at a minimum the appearance of
conflicts of interest.
We also disagree with MBI's interpretations of 40 CFR § 30.42 and OMB
Circular A-110. MBI is attempting to claim exemption from these regulations
since the regulations do not specifically address Directors or Trustees.
However, these regulations do not discuss any specific positions. Rather, they
set the standards for conduct that must be followed by all employees,
including officers and agents of a firm. Therefore, regardless of title, all MBI
employees, officers, and agents are governed by these regulations.
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Exhibit A
Statement of Incurred and Questioned Costs
For EPA Agreement X825532-01 Awarded to MBI International
for the Period of May 1, 1997 to April 30, 2001
Cost Category
Incurred
Ineligible
Note
Contracts
$1,221,432
$1,201,857
1
Consultants
99,508
99,508
2
Totals
$1,320,940
$1,301,365

MBI entered into 23 contracts, 20 of which were awarded sole source, under EPA
grant X825532-01. The 23 contracts totaled $2,138,322 of which $1,320,940 was
incurred, according to the invoices submitted by MBI at the time of our review.
We found $1,301,365 of these incurred costs to be ineligible.
Note 1: Contract Costs
(a) Grand River Technologies. Inc. (GRT)
MBI awarded two sole source contracts in the amounts of $100,000 and
$250,000 to GRT, its for-profit subsidiary. MBI and GRT representatives did
not sign the $100,000 contract until nearly 3 months after the period of
performance began. GRT billed MBI $95,000 under the first contract and
$250,000 under the second contract. Although MBI asserted the costs of these
contracts were competitive, it provided no documentation to support this
assertion as required by 40 CFR § 30.46. Also, MBI did not submit a cost or
price analysis as required by 40 CFR § 30.45. Thus, the costs billed were
ineligible.
Ineligible Costs $345,000
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MBI Response
MBI's initial grant proposal to EPA dated January 1997 included a
subcontract award to MBI in the amount of $50,000. The subsequent proposal
of December 1997 included an award of $250,000. During performance, part of
the work originally subcontracted to EFX was transferred to GRT at a value of
$50,000. MBI's proposal clearly identified GRT as MBI's for-profit subsidiary,
and highlighted the role GRT would play in performing the grant. As stated in
MBI's written price analysis, "Costs were determined to be competitive based
on a comparison of consulting services provided by management firms. GRT's
knowledge of MBI's technical and physical expertise clearly overrode
consideration of other management firms."
OIG Evaluation
Our position remains unchanged. Although MBI included its intentions to
award contracts to GRT in its grant proposals, the award of grant funds does
not constitute EPA approval of MBI's contractors or an exception to 40 CFR
Part 30. The written price analysis referred to in MBI's response was not
provided to the OIG. We received only one GRT "justification" that contained
a one line "cost analysis" that read: "Based upon the services provided, the cost
was determined to be competitive."
Auxein Corporation
GRT created this for-profit company to market MBI-developed technology.
MBI awarded a $50,000 sole source contract for Auxein to conduct field
demonstrations of natural plant growth primers. According to MBI, only
$30,000 of the $50,000 was paid. MBI and Auxein representatives did not
sign this contract until nearly 2 months after the period of performance began.
Because MBI did not submit a cost or price analysis as required by 40 CFR §
30.45, the costs were ineligible.
Ineligible Costs $30,000
MBI Response
MBI provided to the OIG the breakdown of trials, which was used to determine
the reasonableness of cost and also documented the amounts being cost-
shared by Auxein (roughly half). Auxein billed at agreed upon "task pricing"
for particular tests. The justification documented that "based on costs for
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other large-scale field tests, the cost of application, labor and supervision were
competitive." GRT created this company to further develop, produce and
commercialize technology developed at MBI. Auxein had the rights to the
technology being tested.
OIG Evaluation
Our position remains unchanged. The breakdown provided by MBI is neither
a cost nor price analysis - it is a project budget that simply lists MBI's and
Auxein's costs for each test, which equal the cost of the contract. There is no
support for how the "agreed upon" costs were determined. Regarding Auxein
possessing the technology, MBI did not provide any detail or support for either
a market survey of other companies' technologies or any cost analyses.
BioPlastics. Inc.
GRT created this for-profit company to market MBI-developed technology.
MBI awarded a $99,450 sole source contract for BioPlastics to provide
proprietary film technology. MBI and BioPlastics representatives did not sign
the contract until nearly 3 months after the period of performance began. Two
days later, BioPlastics billed MBI for the entire contract amount, despite the
fact that 7 months remained on the contract. Because MBI did not submit a
cost or price analysis as required by 40 CFR § 30.45, the costs were ineligible.
Ineligible Costs $99,450
MBI Response
The Statement of Work in the subcontract came directly from the grant
proposal to EPA. The demonstration included in the proposal included seven
companies. BioPlastics was one of only three companies that were deemed
acceptable, and the only known domestic producer of yard waste scale bags.
The OIG was provided the written cost breakdown used to determine
reasonableness and competitiveness. The written price analysis justification
documented "Costs were determined to be competitive in the field based upon
the need for labor, materials, and travel to produce the biodegradable resins
and then blow them into thin film bags for the demonstration in the collection
of yard waste and subsequent composting."
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OIG Evaluation
Our position remains unchanged. The information provided to us by MBI
mentions nothing about seven companies being included in the demonstration
or BioPlastics being one of three companies deemed acceptable. The written
cost breakdown that MBI claims was used to determine reasonableness and
competitiveness is nothing more than a project budget that does not provide
any detail as to how MBI determined costs to be competitive. As stated before,
although MBI included in its grant proposal its intentions to award the
contract, the award of grant funds does not constitute EPA approval of MBI's
contractor or an exception to 40 CFR Part 30.
EFX Systems. Inc.
GRT created this for-profit company to market MBI-developed technology.
MBI awarded a $307,850 sole source contract to EFX to conduct a field
demonstration for the bioremediation of trichloroethylene. MBI's Vice
President of Operations, who was also a member EFX's Board of Directors,
awarded the contract to EFX, although neither party signed the contract until
3 months after the period of performance began. Although MBI asserted that
EFX was the only firm with the necessary technology, it did not provide
adequate documentation to justify the sole source assertion as required by 40
CFR § 30.46. Moreover, MBI did not submit a cost or price analysis as
required by 40 CFR § 30.45. Thus, the costs were ineligible.
Ineligible Costs $307,850
MBI Response
The purpose of the subcontract was to demonstrate innovative environmental
treatment of trichloroethylene as indicated in the proposal in detail. EFX is
the only known possessor of such technology. The subcontract to EFX was
clearly stated in the proposal, and numerous references are made to EFX,
including its capabilities and experience. The OIG was provided the detailed
written cost breakdown used to determine the reasonableness of cost as well as
the justification stating that the costs were determined to be reasonable. The
fact MBI's Vice President for Operations signed the contract does not mean he
"awarded" it. The award was processed routinely and recommended by the
Program Manager.
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OIG Evaluation
Our position remains unchanged. MBI did not provide the results of any
market surveys or any other type of information to prove that EFX is the only
possessor of this technology. The detailed cost breakdown MBI is referring to
is nothing more than a project budget that does not include any information
as to how MBI determined that costs were reasonable. MBI's "justification"
contains a "cost analysis" that merely states, "The costs established were
determined competitive for the nature of the work performed." As stated
before, although MBI included its intentions to award this contract in its
grant proposal, the award of grant funds does not constitute EPA approval or
an exception to 40 CFR Part 30.
(e) Tennessee Vallev Authority (TVA)
MBI awarded a $750,000 contract to the TVA for pilot testing of the
production of animal feeds. At the time of our review, the Authority had billed
MBI for $166,428 in contract costs. MBI asserted that it had identified three
locations for the work but that TVA was the only site able to comply with all of
the required technical conditions. MBI also asserted that it had negotiated a
rate equal to TVA's internal use. However, we considered these costs to be
ineligible because MBI did not provide any documentation to support these
assertions or submit a cost or price analysis, as required by 40 CFR § 30.45
and 30.46.
Ineligible Costs $166,428
MBI Response
Within the contract there were five tasks that had a high level of uncertainty
due to the immaturity of the technology. On June 27, 1998 MBI internally
estimated the costs of those tasks to be $571,837 based on the industry, prior
knowledge, and input from sites identified. On August 10, 1998, TVA faxed a
detailed cost estimate to MBI for the tasks to be included under the
subcontract. This estimate was for $437,134.95 - well below the MBI estimate
and considered reasonable. Of the entities identified, TVA was the only
organization with ammonia experience. The other two were in highly
populated areas and could not handle the necessary ammonia process for the
technology. A fourth entity provided an estimate in excess of $1 million.
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OIG Evaluation
Our position remains unchanged. MBI did not provide any evidence to
support that it performed market surveys to determine that the TVA was the
only organization that possessed the experience necessary for the project.
MBI's "cost estimate" is an estimated budget that it states was submitted in its
proposal. However, the budget consists simply of project totals and does not
contain a breakdown of the costs, how MBI arrived at the amounts, or how
MBI determined that the costs were reasonable. Also, MBI did not provide
any cost information for the three additional entities it claims it identified.
(f) University of Illinois
MBI awarded a $20,000 contract to the University of Illinois, asserting that
the costs were competitive. At the time of our review, the University billed
MBI for $16,609 in contract costs. These costs were ineligible because MBI
did not submit a cost or price analysis as required by 40 CFR § 30.45.
Ineligible Costs $16,609
MBI Response
The subcontract was to evaluate a technology owned by the University for
possible in-license and development that was believed to represent substantial
improvement in the ability to kill undesirable/pathogenic microorganisms
that are often present in food processing systems. The cost for this evaluation
was typical for a one-student project for one semester at a university and was
considered reasonable. A detailed budget was submitted by University of
Illinois and, after review, was included as an attachment to the subcontract.
The written price analysis concluded that the price quoted was competitive.
Also, note that this contract is below the small purchase threshold.
OIG Evaluation
Our position remains unchanged. Although this contract is below the small
purchase threshold, MBI is not exempt from performing a cost or price
analysis and documenting it in its procurement files as required by 40 CFR §
30.45. MBI's "justification" contains a "cost analysis" that states, "Based upon
the work to be completed, the cost was determined to be competitive." MBI did
not provide any evidence to show how this determination was made, how the
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costs were reasonable, or that the costs were both typical and reasonable for a
one-student one-semester project.
Michigan State University
MBI awarded a $120,000 sole source contract to Michigan State University
for "the development of synthetic polymer membranes." However, MBI and
University officials did not sign this contract until nearly 1 year after the
period of performance began. Based on invoices provided, the University
billed MBI $59,319 under this contract. MBI asserted that the costs were
competitive based upon the scope of work, and that it was able to negotiate a
favorable internal rate. However, these costs were ineligible because MBI did
not provide any documentation to support the sole source award or submit a
cost or price analysis, as required by 40 CFR § 30.45 and 30.46.
Ineligible Costs $59,319
MBI Response
One of the objectives of the EPA grant to MBI was to "evaluate innovative
technologies under development by federal labs, universities, and industries
that can be in-licensed." There is no additional documentation that can be
submitted to support the sole source subcontract to the University. The
University is the owner of the technology being developed and there are no
other entities that could work on a technology patented by the University.
The costs budgeted for the contract were again typical of university labor and
cost structures. However, MBI was billed less overhead than other external
agencies are billed by the University. The overhead rate was 15 percent. This
particular work was less as a subcontract to the University than the cost would
have been if performed at MBI.
OIG Evaluation
Our position remains unchanged. MBI claims that the costs were typical of a
university. However, no evidence was provided to support this statement,
such as a comparison of several universities' costs. MBI's "justification"
contains a "cost analysis" that states, "The cost was determined to be
competitive based upon the scope of work." We do not consider this adequate.
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(h) Michigan State University
MBI awarded a $31,050 sole source contract to Michigan State University for
"the continued development of Ammonia Fiber Explosion (AFEX) technology
and required support systems." However, MBI and University officials did not
sign the contract until nearly 4 months after the period of performance began.
At the time of our review, the University billed MBI for $6,025 in contract
costs. However, these costs were ineligible because MBI did not submit a cost
or price analysis as required by 40 CFR § 30.45.
Ineligible Costs $6,025
MBI Response
One of the objectives of the EPA grant to MBI was to "evaluate innovative
technologies under development by federal labs, universities, and industries
that can be in-licensed." (Name Deleted) was one of the inventors of the
ammonia fiber explosion technology in-licensed from the University. The
subcontract was provided to continue development of the environmentally
friendly technology to convert agricultural by-products into nutritional
animal feed.
The costs budgeted for the contract were again typical of university labor and
cost structures. However, MBI was billed less overhead than other external
agencies are billed by the University. The overhead rate was 15 percent. This
particular work was less as a subcontract to the University than the cost would
have been if performed at MBI.
OIG Evaluation
Our position remains unchanged. Again, MBI did not provide any
"justification" or cost or price analysis for this contract.
(i) Cedarburg Laboratories
Although MBI did not provide a copy of a contract, based on invoices, it paid
the contractor $46,500. MBI asserted that it selected this lab over two other
labs based on Cedarburg's prior knowledge of the process, availability of
facilities, and cost. However, these costs were ineligible because MBI did not
submit a cost or price analysis as required by 40 CFR § 30.45.
Ineligible Costs $46,500
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MBI Response
Three companies were considered for the scale up and manufacture of the base
polymer - Caymen Chemical, Bridge Organics, and Cedarburg Laboratories.
MBI did not have a lab designated and it would have been cost and time
prohibitive to try to perform the work internally. Cedarburg Laboratories
were chosen primarily for their capabilities and established and proven
practices. As the written price analysis justification documented, the costs
were determined to be competitive, and Cedarburg was determined to provide
the best overall value based on cost, development, and production capabilities.
OIG Evaluation
Our position remains unchanged. The "justification" wording in MBI's
response to the draft report differs from the previous "justification" provided to
the OIG by MBI. The first "justification" provides a "cost analysis" that states,
"Following the evaluation of the listed facilities, the cost was determined to be
competitive." We do not consider this statement, nor the one made in MBI's
response to the draft report, to be either a cost or price analysis.
U.S. Department of Agriculture. Agricultural Research Service (USDA ARS)
MBI awarded a $12,870 contract to USDA ARS to evaluate "ammonia fiber
exploded rice straw as a fiber and energy source for lactating cows." MBI
asserted that USDA ARS was best suited to conduct the work, and that the
cost was one-fourth that of a university. However, these costs were ineligible
because MBI did not submit a cost or price analysis as required by 40 CFR §
30.45.
Ineligible Costs $12,870
MBI Response
Three entities were identified to possibly conduct the feed trial with the feed
produced by MBI's technology - University of California at Davis, New York
Dairy, and USDA ARS. University of California at Davis quoted a cost of
$55,000, and New York Dairy required more feed to conduct the trial than
could be produced. USDA ARS quoted a cost of $12,870, which, as documented
in the written price analysis justification, was one-fourth of a University. Note
this contract is below the small purchase threshold.
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OIG Evaluation
Our position remains unchanged. MBI claims in its response that it identified
three entities, and quotes the cost of two and the requirements of a third, but
does not provide any documentation to support this statement. MBI's
"justification" does state in a "cost analysis" that, "The USDA cost estimate is
roughly one-fourth that of a university," but this statement alone is not a cost
analysis. Also, although this contract is below the small purchase threshold,
MBI is not exempt from performing a cost or price analysis and documenting
it as required by 40 CFR § 30.45.
Jacobs Engineering Group. Inc.
MBI awarded a $202,800 contract for engineering expertise related to the
further development of fiber extrusion. MBI and Jacobs officials did not sign
the contract until nearly 1 month after the period of performance began. MBI
stated that only $83,087 was charged to the EPA grant. According to MBI,
this firm was the only one with the expertise to conduct the work, and the cost
was competitive within the range of current rates charged by other
engineering firms. However, these costs were ineligible because MBI did not
provide any documentation to support these assertions or submit a cost or
price analysis, as required by 40 CFR § 30.45 and 30.46.
Ineligible Costs $83,087
MBI Response
The detailed proposal submitted by Jacobs was used to determine the
reasonableness of the costs and the level of expertise committed to conducting
the work. As shown in the included e-mail, there was discussion between MBI
and Jacobs regarding the levels of cost. According to the written price
analysis, "The cost was determined to be competitive within the range of
current hourly (sic) charged by other comprehensive construction engineering
firms."
OIG Evaluation
Our position remains unchanged. MBI included Jacobs' proposal as part of its
response, but did not provide any evidence that a cost or price analysis was
performed. The e-mail referred to in MBI's response was not part of the
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attachment containing Jacobs' proposal. MBI's statement that "the cost was
determined to be competitive" is neither a cost nor price analysis.
(1) Auburn University
MBI paid the University $18,000 for cherry peat meal experiments, asserting
its unique capability to perform the work at a lower than normal cost.
However, these costs were ineligible because MBI did not submit a cost or
price analysis as required by 40 CFR § 30.45.
Ineligible Costs $18,000
MBI Response
The cost breakdown used in determining whether the costs were reasonable
was provided to the OIG. The justification in the written price analysis
documented that, "An analysis of conducting the work as a service provided
the opportunity to complete the work at a lower than normal cost due to a
discounted rate for greenhouse and small plot nematicide tests." An employee
of MBI analyzed the costs proposed by Auburn. His experience was
considered more than sufficient for this price analysis. Note this contract is
below the small purchase threshold.
OIG Evaluation
Our position remains unchanged. MBI provided a four-line breakdown of the
cost of the tests, but did not provide any cost or price analysis to show where
the costs came from, or if they were reasonable. MBI's "justification" did not
contain a cost or price analysis to support how it determined that the method
it was using was lower than normal cost. Further, MBI did not provide the
cost analysis it claims was performed. Although this contract is below the
small purchase threshold, MBI is not exempt from performing a cost or price
analysis and documenting it as required by 40 CFR § 30.45.
(m) Sills. Law. Essad. Fiedler. & Charboneau
MBI awarded a $30,294 sole source contract to this law firm for
commercialization assistance regarding potential licensing issues. In
response to our information request, MBI acknowledged that it had charged
EPA $10,719 for services not related to the grant, and that amount was
ineligible.
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Ineligible Costs $10,719
MBI Response
In responding to the OIG's inquiry, MBI's Vice President sought the law firm's
invoices from MBI's President. When the invoices came to MBI, the detailed
explanation was marked "Attorney-Client Privilege" so they were not
distributed beyond the President's office. A review of these invoices revealed
certain charges ($10,719) that should have gone into MBI's indirect cost pool
(costs incurred for the overall benefit of the Company) as opposed to a direct
charge to the EPA grant. As a result, MBI self disclosed this mischarge to
EPA.
OIG Evaluation
MBI stated it mischarged the $10,719. No further action is needed if MBI
makes the necessary accounting adjustments and does not charge these costs
to the assistance agreement.
Note 2: Consultant Costs
(a) Consultant "A"
MBI paid $12,937 to conduct an industry evaluation of MBI's enzyme
technologies. MBI asserted that it selected this consultant over two others
based on the ability to deliver and because of cost. However, in response to our
request for additional information, MBI acknowledged that it had charged
EPA $6,452 in excess of the allowable daily consulting rate allowed by 40 CFR
§ 30.27 and by the grant, and we determined that amount to be ineligible. In
addition, the remaining $6,485 was also ineligible because MBI did not submit
a cost or price analysis, as required by 40 CFR § 30.45.
Ineligible Costs $12,937
MBI Response
Although we were unable to locate the original proposals from the different
sources, the following is an excerpt from the February 1, 1999 Specialty
Enzyme Team Meeting: "(Name Deleted) presented proposals for an enzyme
market analysis. (Name Deleted), as well as SRI, and (Name Deleted) quotes
are in the $40,000-$50,000 range and are considered too expensive by
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management. Two remaining quotes, one from (Name Deleted) ($8,500), and
another from Consultant "A" ($16,000) were discussed. Only Consultant "A's"
proposal addressed the specific topics requested. (Name Deleted) proposal did
not address the required information. (Name Deleted) said that he had spoken
with (Name Deleted) on several occasions and (Name Deleted) had not
responded in his proposal to our specific requests. After review of (Name
Deleted) proposal, it was believed that he was proposing to supply the same
information contained in the (Name Deleted) report already acquired by MBI.
Therefore, the team decided to recommend that Consultant "A" be used for
this analysis." The justification documented that, "Based upon the search of
available organizations and individuals with the required expertise,
Consultant "A" was selected based upon a combination of the depth of the
desired report product and cost."
This award probably should have been written as a subcontract, not a
consulting agreement as evidenced by the other prices quoted. MBI notified
GAD of the error in amount charged to the grant (due to the prior decision to
write this up as a consulting agreement as opposed to a subcontract) in
February 2001 prior to the OIG report. Note this award is below the small
purchase threshold.
OIG Evaluation
MBI states that it was unable to locate the original proposals, and instead
quotes an excerpt from a February 1999 meeting. Regardless of whether the
award was written as a subcontract or consulting agreement, a cost or price
analysis was still required. We do not consider MBI's "justification" to be
either a cost or a price analysis because it does not support how Consultant
"A" was selected or provide any evidence of the costs reviewed or if they were
reasonable. Although the amount incurred is below the small purchase
threshold, MBI is not exempt from performing a cost or price analysis and
documenting it as required by 40 CFR § 30.45.
Consultant "B"
MBI paid $25,111 to provide technical assistance in the development of
environmentally friendly inks low in hazardous air pollutants. MBI asserted
that this consultant was uniquely qualified as the inventor of the technology,
and that it had determined the hourly rate to be competitive. However, in
response to our request for additional information, MBI acknowledged that it
had charged EPA $2,615 in excess of that allowable by 40 CFR § 30.27, and
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we determined that amount to be ineligible. In addition, the remaining
$22,496 was also ineligible because MBI did not submit a cost or price
analysis, as required by 40 CFR § 30.45.
Ineligible Costs $25,111
MBI Response
The inventor of the ink technology whom we were originally working with was
killed in a car accident. Based upon the recommendation of the team,
Consultant "B" was brought on due to his extensive experience in formulation
of novel inks and his work with this product. Consultant "B" served as part of
the team evaluating this technology and was essential in disproving the
usefulness of the technology and, therefore, preventing any further
investment into the technology. MBI notified GAD of the error in amount
charged to the grant in February 2001 prior to the OIG report. This
agreement is significantly below the small purchase threshold.
OIG Evaluation
MBI did not provide any type of market survey or analysis to show how
Consultant "B" was "uniquely qualified" to provide the necessary services as
stated in MBI's "justification." MBI states in a "cost analysis" provided in its
"justification" that "the hourly rate was determined to be competitive," yet
provided no evidence to support this statement. Although the amount
incurred is below the small purchase threshold, MBI is not exempt from
performing a cost or price analysis and documenting it as required by
40 CFR § 30.45.
Additional Consultant Charges We determined the amounts listed in the
following chart to be ineligible because MBI did not submit cost or price
analyses for consultants "C" through "I," as required by 40 CFR § 30.45.
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Consultant
Charges
„c»
$5,000
"D"
26,978
"E"
3,300
"F"
7,630
"G"
754
"H"
16,798
"1"
1,000
Total Ineligible
$61,460
MBI Response
"C" was able to conduct a literature search for less cost than if completed
internally at MBI. The written price analysis justification documented that
the hourly rate - $52.08, $62.50 fully loaded (containing overhead) - was
determined to be competitive. Note this award is significantly below the small
purchase threshold.
"D" was a former Vice President in the area of the technology being developed
for whom a fully loaded hourly rate of $52.08 was by far extremely reasonable.
This consultant has led this project in the development of the technology in
several different platforms. A written justification was prepared, but no
additional documentation was necessary since the rate was so low, and the
total amount significantly below the small purchase threshold.
"E" was used to evaluate, under the objectives of the grant, a material
invented by him for MBI to possibly in-license. This consultant did not charge
MBI any travel costs for his trips from Russia and charged only $37.50 per
hour (fully loaded) to perform the evaluation as directed by MBI. A written
justification was prepared, but no additional documentation was necessary
considering the rate was so low, and the total amount billed significantly below
the small purchase threshold.
"F" was also an inventor of the technology being developed at MBI. She was
used to perform tasks that could not be completed internally. A written
justification was prepared, but no additional documentation was necessary
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since the rate was so low ($62.50 per hour, fully loaded). The total of the
contract was significantly below the small purchase threshold.
"G" was an original inventor of the technology being examined and was
working at a fully loaded rate of $52.08 per hour. The written justification
concluded this cost was reasonable. The total amount billed, less than $1,000,
is way below the small purchase threshold.
"H" was only charging $25 per hour. In light of his previous experience with
respect to analyzing bioactive compounds this was viewed by all as a bargain.
A written justification was prepared, but no further documentation was
needed. The total amount billed was substantially below the small purchase
threshold.
T was brought in to assist in closing mass balances for which MBI was having
difficulty with interferences. This consultant was also part of the Hazardous
Waste Analytical Lab and Michigan State University and was able to answer
the necessary questions in the time frame required for only $62.50 per hour
(fully loaded). Due to the specialized skills needed and the expected
complexity of the work this price was determined to be reasonable as indicated
in the written price analysis. Note the total price is considerably below the
small purchase threshold.
OIG Evaluation
Regarding Consultants "C," "D," and "F," MBI's "justifications" state that the
hourly rates were determined to be competitive. However, we do not consider
these statements to be either cost or price analyses because MBI did not
provide any evidence to support them.
Regarding Consultants "E," "G," "H," and "I," MBI's "justifications" stated that
the hourly rates were determined to be competitive based upon the areas of
required expertise." However, we again do not consider these statements to be
either cost or price analyses because MBI did not provide any evidence to
support them.
Although the amounts incurred for consultants "C" through "I" are below the
small purchase threshold, MBI is not exempt from performing cost or price
analyses and documenting them as required by 40 CFR § 30.45.
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Appendix 1
Distribution
EPA
Assistant Administrator for Administration and Resources Management (3101)
Comptroller (2 731A)
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 Grants and Debarment (3901R)
Director, Suspension and Debarment Division (3902R)
Audit Follow-up Coordinator, Office of Grants and Debarment (3901R)
Director, Office of Executive Support (1104)
Director, Office of Business and Community Innovation (1808)
Office of Inspector General (2410)
Other
MBI International
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