Mi,
5 U.S. ENVIRONMENTAL PROTECTION AGENCY
"'-u»/ OFFICE OF INSPECTOR GENERAL
EPA Could Recover
More Indirect Costs
Under Reimbursable
Interagency Agreements
Report No. 12-P-0835
September 19, 2012

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Report Contributors:
Paul Curtis
Margaret Hiatt
Edgar Dumeng-Roman
Robert Evans
Alfred Falciani
Kevin Ross
Phil Weihrouch
Abbreviations
EPA
U.S. Environmental Protection Agency
FY
Fiscal Year
G&A
General and Administrative
GAO
U.S. Government Accountability Office
HQ
Headquarters
IA
Interagency Agreement
OCFO
Office of the Chief Financial Officer
OFM
Office of Financial Management
OGC
Office of General Counsel
OIG
Office of Inspector General
RIA
Reimbursable Interagency Agreement
RMDS
Resources Management Directive System
SA
Statutory Authority
SFFAS
Statement of Federal Financial Accounting Standards
Hotline
To report fraud, waste, or abuse, contact us through one of the following methods:
e-mail: OIG Hotline@epa.gov	write: EPA Inspector General Hotline
phone: 1-888-546-8740	1200 Pennsylvania Avenue NW
fax:	202-566-2599	Mailcode 2431T
online:
http://www.epa.gov/oiq/hotline.htm
Washington, DC 20460

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|	\ Office of Inspector General	September 19, 2012
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At a Glance
Why We Did This Review
Our objectives were to
determine the methodology the
U.S. Environmental Protection
Agency (EPA) uses to calculate
indirect cost rates for
reimbursable interagency
agreements (RIAs), and
whether EPA is applying the
correct indirect cost rates for
selected RIAs.
An interagency agreement is a
written agreement between
federal, state, or local agencies
through which goods or
services are provided on a
funds-out orfunds-in basis.
The term funds-in applies to an
interagency agreement in
which EPA provides goods or
services to another agency or
to a state or local government
and is reimbursed for its
expenses.
This report addresses the
following EPA Goal or
Cross-Cutting Strategy
• Strengthening EPA's
workforce and capabilities.
EPA Could Recover More Indirect Costs
Under Reimbursable Interagency Agreements
What We Found
EPA did not recover $11 million in indirect costs on funds-in RIAs. Federal
entities are required to recognize the full cost of goods and services provided
among federal entities; full cost includes both direct and indirect costs. For 54 of
59 RIAs reviewed, EPA did not bill other federal agencies the full amount of
indirect costs. This occurred because:
•	EPA exempted itself from recovering indirect costs on RIAs awarded
under 19 statutory authorities.
•	EPA issued polices where indirect costs do not apply to RIAs awarded
before the policies were effective nor to any agreement amendments.
•	EPA issued policies stating that indirect rates in effect at the time the RIA
is negotiated will apply for the life of the RIA.
•	Other miscellaneous calculating and billing errors occurred.
We estimated that EPA could have recovered $11 million in indirect costs based
on rates for fiscal years 2010 and 2011. Based on amounts remaining in open
agreements, we calculated an additional $2.5 million could be billed during the
remaining project periods. The additional indirect costs recovered could be used
to pay for other environmental activities.
Recommendations and Agency Corrective Actions
We recommend that the Chief Financial Officer revise Agency policy to include
indirect costs in all RIAs; revise the rules and policies for future actions to include
the ability to recover indirect costs and educate the EPA on the new policies
while implementation is in progress; revise Agency policy to require that
amendments to all RIAs include indirect costs based on current rates; correct the
indirect cost rate billing errors noted; and develop policy and procedures to verify
that correct indirect cost rates are used.
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at:
www.epa.aov/oia/reports/2012/
20120919-12-P-0835.pdf
EPA agreed with all our recommendations or agreed to take actions that satisfy
the intent of the recommendations. The Agency has updated policy to clarify that
indirect costs should be included in all RIAs, is correcting billing errors, and plans
to develop policy to ensure that correct indirect cost rates are used.
Recommendation 4 is unresolved pending receipt of a date to correct billing
errors.
Noteworthy Achievement
EPA centralized interagency agreement activities within two service centers to
increase consistency in operations and improve efficiency and effectiveness.

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
THE INSPECTOR GENERAL
September 19, 2012
MEMORANDUM
SUBJECT: EPA Could Recover More Indirect Costs Under
Reimbursable Interagency Agreements
Report No. 12-P-0835
FROM:
TO:
# JL \
|®|
Arthur A. Elkins, Jr.	^
Barbara J. Bennett
Chief Financial Officer
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.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days. You should include a corrective action plan for agreed-upon
actions, including milestone dates. Your response will be posted on the OIG's public website,
along with our memorandum commenting on your response. Your response should be provided
as an Adobe PDF file that complies with the accessibility requirements of Section 508 of the
Rehabilitation Act of 1973, as amended. The final response should not contain data that you do
not want to be released to the public; if your response contains such data, you should identify the
data for redaction or removal. In addition to providing us with a paper copy of your response,
please e-mail a Microsoft Word version to curtis.paul@epa.gov and hiatt.margaret@epa.gov.
We have no objections to the further release of this report to the public. We will post this report
to our website at http://www.epa.gov/oig.
If you or your staff has any questions regarding this report, please contact Paul Curtis
at (202) 566-2523 or Meg Hiatt at (513) 487-2366.

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EPA Could Recover More Indirect Costs	12-P-0835
Under Reimbursable Interagency Agreements
		Table of C	
Purpose		1
Background		1
Noteworthy Achievement		4
Scope and Methodology		4
Results of Review		5
Conclusion		8
Recommendations		8
Agency Response and OIG Evaluation		9
Status of Recommendations and Potential Monetary Benefits		10
Appendices
A Details on Scope and Methodology		11
B Indirect Costs That EPA Could Have Recovered		14
C Potential Future Monetary Benefits		16
D Agency Response		17
E Distribution		21

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Purpose
With the Administration's current focus on reducing the federal budget deficit, we
performed this audit to determine whether the U.S. Environmental Protection
Agency (EPA) was recovering all appropriate indirect costs related to
reimbursable interagency agreements (RIAs). Our objectives were to determine:
•	The methodology EPA uses to calculate indirect cost rates for RIAs,
including the source of data used and composition of rates.
•	Whether EPA is applying the correct indirect cost rates for selected RIAs.
Background
An interagency agreement (IA) is a written agreement between federal, state, or
local agencies through which goods or services are provided on a funds-out or
funds-in basis. Funds-in refers to an IA through which EPA provides goods or
services to another agency or to a state or local government and is reimbursed for
its expenses. Under RIAs, EPA uses reimbursable authority provided by the
Office of Management and Budget to perform IA activities.
Criteria
The Statement of Federal Financial Accounting Standards (SFFAS) Nos. 4 and 30
establish standards and policies on the recovery of full costs (direct and indirect)
for RIAs.
•	SFFAS No. 4, Managerial Cost Accounting Concepts and Standards for
the Federal Government, states: "The managerial cost accounting
concepts and standards are aimed at providing reliable and timely
information on the full cost of federal programs, their activities, and their
outputs." SFFAS No. 4 includes standards to determine the full costs of
government goods and services and recognize the costs of goods and
services provided among federal entities. Full cost is the total amount of
resources used to produce outputs (goods or services) and includes direct
and indirect costs. SFFAS No. 4 states that a federal entity providing
goods or services has the responsibility to provide the receiving entity
with information on the full cost of such goods or services either through
billing or other advice.
•	SFFAS No. 30, Inter-Entity Cost Implementation, requires full
implementation of the inter-entity cost provision in SFFAS No. 4. By fully
implementing the provisions in SFFAS No. 4, this standard requires that:
"each entity's full cost should incorporate the full cost of goods and
services that it receives from other entities. This standard requires full
implementation for reporting periods beginning after September 30,
2008."
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Statutory Authorities
EPA started recovering indirect costs in 2005 for Oil Spill RIAs, in 2008 for
Economy Act RIAs, and in 2009 for other cooperation authority RIAs. An Office
of General Counsel (OGC) memorandum dated July 26, 2007, indicates that the
two types of statutory authorities (SAs) for IAs that EPA uses most often are the
Economy Act (31 U.S. Code 1535) and EPA's cooperation authorities, such as
Clean Water Act Section 104(b)(2) and Clean Air Act Section 103(b)(2).
The Economy Act is the authority for an IA when one agency
acquires goods or services from another federal agency and the
performing agency does not have an interest in providing the
goods or services, apart from its interest in performing the work
for the requesting agency. In contrast, EPA's cooperation
authorities generally authorize the Agency to cooperate with other
entities, including federal agencies, in a broad range of specified
activities.
The cooperation authorities themselves are silent with respect to
payments between agencies for these particular types of costs.
However, the fact that the cooperation authorities are silent with
respect to payments between agencies for these types of costs
does not mean that such payments are unauthorized.
The OGC memorandum also refers to other SAs that provide for reimbursement
of the Agency's costs. There are statutory authorities that expressly contemplate
the use by EPA of another agency's personnel, services, or other resources,
referred to as utilization authorities. Certain utilization authorities expressly
authorize EPA to pay for the personnel and associated indirect costs, as well as
for travel, supplies, and equipment costs directly related to the IA project.
In addition, the memorandum says that "some utilization authorities contemplate
the use by EPA of another agency's personnel and associated resources but do not
address reimbursement of the other agency." Further, "if EPA did not reimburse
the agency providing assistance to EPA, the other agency would be using its
appropriation to perform functions under EPA's statutes and would augment the
EPA appropriation that supports the activities in question." OGC's opinion is "the
silence of the statutes regarding reimbursement does not foreclose reimbursement
and, in fact, the better argument is that reimbursement is required."
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Responsibilities
The following offices are responsible for recognizing and recovering indirect
costs on RIAs:
•	The Office of the Chief Financial Officer's (OCFO's) Office of Financial
Management (OFM), Program Costing Staff, computes and disseminates
the indirect cost rates.
•	Program offices ensure that indirect costs are assessed and negotiated on
IAs with other agencies.
•	The Interagency Agreement Shared Service Centers review RIAs to
ensure the appropriate indirect rates have been negotiated into agreements.
•	The Cincinnati Finance Center issues bills to the other agencies for
reimbursable direct and indirect costs.
Calculation of Indirect Rates
EPA calculates separate indirect cost rates for agreements originating in the
headquarters (HQ) general and administrative (G&A) offices, headquarters
program offices, and each of the 10 regional offices.
Indirect costs are calculated as a percentage of direct costs. For funds-in IA
billings, the indirect cost rate is applied to the direct cost portion of the bill. The
rates are updated annually and available on the Office of Grants and Debarment
website. The Agency has established different cost pools and allocation bases for
the different offices to identify the support organizations and their related costs
that cannot be associated in a practical manner with a particular IA.
HQ G&A Rates: Pool costs include an allocable share of costs for
facilities, human resources, and Office of Personnel Management
inter-entity costs. Facilities costs are allocated based on the number of
full-time equivalents. Human resources and Office of Personnel
Management inter-entity costs are allocated based on personnel
compensation and benefits costs. The pools also include depreciation costs
incurred by these HQ offices, and HQ administrative and management costs
charged to each of these offices. The allocation base used to distribute the
HQ indirect cost pool to benefitting cost objectives is calculated by
subtracting the HQ indirect cost pool from total Agency costs.
HQ Program Office Rates: Pool costs include the three components
included in the HQ indirect cost pool as described above, and a separate
program office component added for each office. This component is
comprised of the administrative costs for each of the program offices for
which rates are computed. For example, the Office of Solid Waste and
Emergency Response cost pool is comprised of the HQ indirect cost pool,
plus the administrative costs of the Office of Solid Waste and Emergency
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Response. The allocation base used to distribute the HQ program offices'
indirect cost pool to benefitting cost objectives is calculated by subtracting
the HQ indirect cost pool, excluding the administrative costs of the
respective program office, from total Agency costs.
Regional Program Office Rates: Pool costs consist of regional
administrative management and support expenses incurred by each region,
and an allocable share (by region) of nationwide costs for facilities and
human resources. Nationwide costs are those costs that benefit all
organizations, including regional offices. Facilities costs are allocated
based on the number of full-time equivalents. Human resource costs are
allocated based on personnel compensation and benefits costs, and a share
of the HQ non-program office costs (i.e., HQ G&A office costs) are
allocated to each region by applying the HQ indirect cost rate to total
regional costs. National management and support costs are primarily
comprised of those costs incurred by HQ non-program offices. The
allocation base used to distribute the entire regional indirect cost pool to
benefitting cost objectives is equal to total regional non-G&A costs.
Noteworthy Achievement
EPA centralized IA activities within two service centers to increase consistency in
operations and provide a more streamlined, efficient, and effective performance of
IA functions.
Scope and Methodology
We conducted our audit from January 11, 2012, through June 11, 2012, in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our conclusions based on our audit objectives.
We reviewed EPA policies and laws and regulations concerning full costing, and
the ability to recover expenses under IAs. We performed a Compass Data
Warehouse Accounts Receivable Query for fiscal years (FYs) 2010 and 2011
using the following reporting categories:
•	01-Reimbursable IAs (Direct Costs only)
•	17-Reimbursable IAs (Full Cost IAs)
•	56-Oil Spill Indirect Costs
•	5 7-All Other IA Indirect Costs
•	76-DWH (BP) Oil Spill Indirect Costs
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The population consisted of 384 IAs totaling $244,949,192 in billings for
FYs 2010 and 2011. We performed a statistical sample of the population to select
59 RIAs totaling $220,592,610 in direct and indirect costs billed. We interviewed
OGC staff on interpreting SAs, and OCFO staff on indirect cost rate policies and
developing indirect cost rates. We reviewed spreadsheets and other documents
containing the detailed calculations and methodology supporting the reimbursable
indirect cost billing rates for funds-in IAs. We reviewed IA files and conducted
interviews at the Cincinnati Finance Center and the East and West Interagency
Agreement Shared Service Centers.
Appendix A contains further details on our scope and methodology.
Results of Review
EPA could have recovered over $11 million in funds-in RIAs billed to other
federal agencies. For 54 of 59 RIAs reviewed, EPA did not bill other federal
agencies the full amount of indirect costs. SFFAS No. 4 requires federal entities
to recognize the full cost of goods and services provided among federal entities;
full cost includes both direct and indirect costs. EPA did not recover all indirect
costs on RIAs because:
•	EPA policies have been interpreted as excluding indirect costs for 15 RIAs
awarded under 19 SAs.
•	EPA policies requiring indirect costs do not apply to RIAs awarded before
the policies were effective nor to any amendments for 23 agreements.
•	EPA policies state that indirect rates in effect at the time the RIA is
negotiated will apply for the project period of 13 RIAs.
•	Other miscellaneous errors occurred in calculating and billing indirect
costs, such as applying an incorrect rate.
Based on the unbilled amounts remaining on open agreements, we calculated that
an additional $2.5 million of indirect costs could be billed during the remaining
project periods. The additional indirect costs recovered could be used to pay for
other environmental activities. Appendix B provides calculations for costs EPA
could have recovered.
EPA Did Not Recover Indirect Costs Based on the Statutory Authority
EPA exempted itself from recovering indirect costs on RIAs awarded under
19 different SAs—such as the Foreign Assistance Act, Homeland Security Act,
and Intergovernmental Personnel Act—for which exemptions do not appear
warranted. In addition, EPA is not pursuing recovery of indirect costs under the
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Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act).1
However, the Stafford Act, under which the Federal Emergency Management
Agency and EPA operate disaster relief efforts, does not prevent another federal
agency from recovering indirect costs. Stafford guidance states that agencies that
qualify and may be seeking reimbursement must submit certified annual overhead
rate proposals to the Federal Emergency Management Agency for approval prior
to billing. Office of Management and Budget Circular A-87 should be used as a
guide for this purpose. Indirect cost pools must be defined to explain how the
costs are derived and applied. Indirect rates should be negotiated with the Federal
Emergency Management Agency annually.
EPA did not recover indirect costs under certain SAs because EPA policies have
been interpreted as excluding indirect costs for RIAs awarded under SAs other
than the Economy Act or cooperation authorities. However, OCFO's January 26,
2009, Policy Procedure, Resources Management Directive System (RMDS) 2540-
13-P1, Cost Accounting Methods: Agency Indirect Cost Allocation System for
Funds-In Interagency Agreements, says that "EPA's policy is to recover the full
cost of IAs, consistent with the authority for a particular IA, the circumstances
involved, and the nature of the costs for which payment is made." EPA's
exemption of certain statutory authorities stems from OCFO's January 26, 2009,
Policy Technical Interpretation (RMDS 2540-13-T1) Cost Accounting Methods:
Full Cost Funds-In Interagency Agreements, which clarifies the types of funds-in
IAs subject to full cost billing by EPA. The technical interpretation clarifies that
indirect costs shall be assessed under the Economy Act, and are authorized under
the cooperation authorities it lists and the 1996 National Defense Authorization
Act. EPA followed its technical interpretation and did not include indirect costs
on RIAs with statutory authorities other than those specified. However, OCFO
staff stated that no SA should prevent EPA from recovering its full cost under
funds-in IAs unless they expressly prohibit recovery of full costs. OGC staff
believed there was little if anything in the statutes governing EPA's work with
other federal agencies that prevents EPA from recovering all of its costs.
We estimate that EPA could have recovered $6.4 million on 15 agreements
originally exempted based on SA had EPA billed indirect costs using the
prevailing indirect cost rates in effect during FYs 2010 and 2011.
EPA Did Not Recover Indirect Costs on RIAs Awarded Before
Polices Were Effective
According to established Agency guidance, EPA started recovering indirect costs
in 2005 for Oil Spill RIAs, 2008 for Economy Act RIAs, and 2009 for other
cooperation authority RIAs. Prior to these dates, EPA did not recover indirect
1 The Act provides "... an orderly and continuing means of assistance by the Federal Government to State and local
governments in carrying out their responsibilities to alleviate the suffering and damage which result from such
disasters [as floods, earthquakes, etc.]...."
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costs on RIAs citing these SAs. On RIAs awarded before these dates that were
subsequently amended, EPA also did not recover indirect costs.
RMDS 2540-13.1, Agency Indirect Cost Allocation System, requires IAs
authorized by the Economy Act negotiated on or after January 28, 2008, to
include indirect costs. RMDS 2540-13-P1 and technical interpretation 2540-13-
T1 further required funds-in IAs awarded under cooperation authorities on or after
January 26, 2009, to include indirect costs. Neither policy applies to funds-in IAs
negotiated or awarded before the date of the policies or to any subsequent
amendments to the agreements. OCFO staff agreed that the current policy could
be revised so that amendments to all RIAs include indirect costs.
Based on our analysis using the prevailing indirect cost rates in effect during
FYs 2010 and 2011, we estimate that EPA could have recovered $3.5 million in
indirect costs on 23 agreements awarded before indirect cost polices were
effective.
EPA Did Not Recover Indirect Costs Based on Actual Indirect Rates
in Effect for the Entire RIA Project Period
EPA did not recover indirect costs based on the indirect cost rates in effect over
the entire project period for some RIAs. Indirect cost rates for funds-in IAs are
computed and disseminated by OFM each year. However, EPA applied the
indirect cost rate in effect at the time the RIA was negotiated throughout the entire
project period of the original award and any amendments.
EPA Policy 2540-13-P1 states that the indirect rates in effect at the time an IA is
negotiated will apply for the project period of the IA. However, staff in OGC and
OCFO agreed that RIAs, if amended, could be re-negotiated to include current
indirect cost rates.
We estimate that EPA could have recovered an additional $601,774 in indirect
costs based on our calculation of the difference between applying the prevailing
FYs 2010 and 2011 indirect cost rates and the fixed indirect cost rates in effect at
the time of award to the FYs 2010 and 2011 direct costs billed for 13 agreements.
Other Reasons Why EPA Did Not Recover All Indirect Costs
We found that EPA did not recover over $584,264 of indirect costs for three RIAs
tested. For example, the Agency indirect cost policy for Economy Act IAs
became effective January 28, 2008. However, we identified one RIA awarded on
February 20, 2008, with the Economy Act cited as the SA, without including
applicable indirect costs of about $376,727. We identified an RIA where EPA did
not recover $6,564 of indirect costs because the Agency used an FY 2009 indirect
cost rate instead of the FY 2010 rate. The FY 2010 rate was applicable when the
agreement was awarded in FY 2010. We identified another RIA where EPA did
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not recover approximately $200,973 because the Agency charged the direct costs
to one agreement and the indirect costs to another agreement. As a result, EPA
billed the direct costs in FY 2011 and has not billed any indirect costs.
Conclusion
EPA could have recovered an additional $11 million in indirect costs in FYs 2010
and 2011 from other federal agencies. Appendix B provides details, while table 1
shows the overall results of our analysis of amounts that could have been recovered.
Table 1: Indirect costs that EPA could have recovered
Reason for not recovering
indirect costs
No. of
agreements
Estimated amount of
indirect costs that could
have been recovered
Excluded under 19 SAs
15
$6,353,482a
Awarded before policy effective
23
3,467,348a
Negotiated rates used over life of RIA
13
601,774b
Subtotal amounts not billed

$10,422,604
Errors in costs billed
3
584,264
Total
54
$11,006,868
Source: Office of Inspector General (OIG) analysis
a We multiplied the prevailing indirect cost rates in effect during FYs 2010 and 2011 by the
amount of direct costs billed during each year to calculate the amount of indirect costs
EPA did not recover.
b We estimated the amount based on the difference between applying the FYs 2010 and 2011
indirect cost rates to direct costs billed each year and the amount of indirect costs billed for
the selected agreements.
Based on the unbilled amounts remaining on the 22 open agreements, we
calculated that an additional $2.5 million of indirect costs could be billed during
the remaining project periods. The additional indirect costs recovered could be
used to pay for other environmental activities. Appendix C provides our
calculation of these future monetary benefits.
Recommendations
We recommend that the Chief Financial Officer:
1.	Revise Agency policy to clarify that indirect costs should be included in
all RIAs unless a determination has been made that an SA used for an RIA
specifically exempts charging of indirect costs.
2.	Revise the rules and policies for future actions to include the ability to
recover indirect costs and educate the EPA on the new policies while
implementation is in progress.
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3.	Revise Agency policy to require that amendments to all RIAs include
indirect costs based on current indirect rates.
4.	Correct the indirect cost rate billing errors.
5.	Develop policy and procedures to ensure that the correct indirect costs
rates are used.
Agency Response and OIG Evaluation
The Agency agreed with four of the five recommendations. The Agency has
updated policy to clarify that indirect costs should be included in all RIAs and
require that amendments to all RIAs include indirect costs based on current
indirect rates. The Agency is correcting billing errors and plans on developing
policy and procedures to ensure that the correct indirect cost rates are used. We
concur with the Agency's actions.
The Agency disagreed with the second recommendation that stated EPA should
amend RIAs awarded prior to the policy effective dates to include the ability to
recover indirect costs, indicating that to do so would be impractical. While we
agree that it is impractical to amend all agreements awarded prior to the policy
effective dates, our intent was to recommend considering the recovery of indirect
costs on any future amendments to existing agreements. In its response the
Agency stated it has agreed to revise the rules and policies for future actions and
has begun this process. Therefore, the Agency's actions satisfy the intent of our
recommendation. Recommendation 4 is unresolved pending receipt of a date to
correct billing errors.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
Rec.
No.
Page
No.
Subject
Status1
Planned
Completion
Action Official	Date
Revise Agency policy to clarify that indirect costs C
should be included in all RIAs unless a
determination has been made that an SA used for
an RIA specifically exempts charging of indirect
costs.
Revise the rules and policies for future actions to q
include the ability to recover indirect costs and
educate the EPA on the new policies while
implementation is in progress.
Revise Agency policy to require that amendments C
to all RIAs include indirect costs based on current
indirect rates.
Correct the indirect cost rate billing errors.	U
Develop policies and procedures to ensure that the 0
correct indirect cost rates are used.
Chief Financial Officer	07/11/12
Chief Financial Officer	07/11/12
Chief Financial Officer	07/11/12
Chief Financial Officer
Chief Financial Officer	12/15/12
POTENTIAL MONETARY
BENEFITS (In $000s)
Claimed
Amount
Ag reed-To
Amount
$2,524
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
Details on Scope and Methodology
We reviewed EPA's methodology for calculating the indirect costs on RIAs. OFM provided us
with electronic spreadsheets containing the detailed calculations and methodology supporting the
reimbursable indirect cost billing rates for funds-in IAs. We verified the mathematical accuracy
of the indirect cost rates using the FY 2010 rates for HQ G&A offices, HQ program offices, and
regional offices. We reviewed OCFO's method for computing both the indirect cost pools and
the allocation base used to distribute the indirect costs.
We reviewed OCFO and Grants and Interagency Agreement Management Division policy and
technical documents related to funds-in IAs and indirect costs. We also reviewed OGC's
memorandum concerning the Reimbursement under Interagency Agreements of Personnel,
Indirect, and Travel Costs, and the Interagency Agreement Policies and Procedures Manual. We
reviewed standards promulgated by the Federal Accounting Standards Advisory Board.
We conducted interviews with the OGC's Civil Rights and Finance Law Office and with OFM to
understand how EPA determines the SAs it cites when entering into IAs, and how the SAs are to
be interpreted for full cost recovery. We reviewed selected SAs for language concerning
reimbursements of costs between federal agencies.
We generated a list of RIAs with billings from October 1, 2009, through September 30, 2011,
using EPA's Compass Data Warehouse Accounts Receivable Query. We used reporting
categories that EPA uses in its billing system to properly categorize accounts receivables as a
basis for pulling our data. The population consisted of 384 IAs totaling $244,949,192 in billings
for FYs 2010-2011. We performed a statistical sample of the population to select 59 RIAs
totaling $220,592,610 in direct and indirect costs billed.
We reviewed spreadsheets and other documents containing the detailed calculations and
methodology supporting the reimbursable indirect cost billing rates for funds-in IAs. We
conducted interviews with the Cincinnati Finance Center to determine how indirect costs are
billed. We also examined the IAs and amendments maintained by the Cincinnati Finance Center
for our 59 sampled RIAs. We conducted interviews about the IA process with staff in the East
and West Interagency Agreement Shared Service Centers. We also examined the IA files
maintained by the service centers.
To determine the amount of indirect costs EPA could have recovered, we obtained the billed
direct costs for FYs 2010 and 2011 and multiplied them by the appropriate indirect cost rates in
effect when the agreement was awarded to arrive at the billed indirect costs. We then multiplied
the same billed direct costs for FYs 2010 and 2011 by the prevailing FYs 2010 and 2011 indirect
cost rates to arrive at the indirect costs that could have been billed. We calculated the difference
between the billed indirect costs and the amount that could have been billed to arrive at the
difference, which is the amount that could have been billed if the indirect cost rates were
adjusted based on the prevailing FYs 2010 and 2011 rates.
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To determine the amount of future monetary benefits, we subtracted the total amount billed
through September 30, 2011, from the total amount awarded for the 22 active RIAs. We applied
the FY 2012 indirect cost rates to the outstanding balances of each agreement. We calculated
$2.5 million in potential future monetary benefits to be obtained if EPA implemented our
recommendations.
Prior Reviews
We researched prior EPA OIG and U.S. Government Accountability Office (GAO) reports
related to full costing and the recovery of indirect costs. We noted one pertinent EPA OIG report
and one GAO report:
•	EPA OIG Audit Report No. 2000-P-0029, "Follow-up on Headquarters Interagency
AgreementsSeptember 29, 2000: The audit found that EPA continued to transfer an
unknown amount of its resources to other agencies in violation of the Economy Act. EPA
was not being reimbursed for the full cost of its work under Economy Act IAs. EPA was
not billing other agencies for indirect costs related to performing work or furnishing
materials.
•	GAO Report RCED 94-196, "EPA Has Opportunities to Increase Recoveries of Costs, "
September 28, 1994: The report noted that EPA, by excluding some indirect costs
including research, development, and site assessment costs, had lost $2.9 billion of the
$8.7 billion it spent on cleanup actions. Although EPA was considering broadening its
definition of recoverable indirect costs, it had not set a date for adopting a final rule.
GAO recommended that to ensure maximum recovery of EPA cleanup costs from the
parties responsible for these costs, the EPA Administrator should expedite the issuance of
the regulation on indirect costs. EPA implemented the recommendation.
Internal Control Review
In planning and performing our audit, we reviewed management controls related to our audit
objectives. We examined EPA's FY 2011 Federal Managers' Financial Integrity Act Annual
Assurance Letters issued by the regional administrators and assistant administrators for the
various EPA programs to identify any weaknesses pertaining to indirect costs applied to RIAs.
There were no material weaknesses identified for Office of Administration and Resources
Management or OCFO pertaining to indirect cost rates on RIAs.
We examined EPA's Office of Management and Budget Circular A-123 Appendix A review of
internal controls to identify any weaknesses related to indirect costs applied to funds-in
(reimbursable) IAs. We did not note any weaknesses related to indirect costs in EPA's A-123
review of internal controls.
We obtained an understanding of control activities through reviews of EPA's policies, guidance,
and directives related to full costing and indirect costs. We obtained an understanding of the
indirect costing process through review of background information, indirect cost rates, and a
preliminary research walk-through. We did not review the internal controls over EPA's
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Integrated Financial Management System from which we obtained information, but relied on
reviews of systems conducted during the audit of EPA's FY 2011 financial statements. While the
Agency has established policies for calculating indirect cost rates and billing indirect costs on
IAs, based on our audit, the polices did not provide adequate assurance of compliance with
SFFAS for recognizing and billing the full amount of indirect costs for goods and services
provided to other federal agencies.
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Appendix B
Indirect Costs That EPA Could Have Recovered
Agreement no.
Other agency
Direct costs
billed
Indirect
costs
billed
Indirect costs
per OIG1
Difference
(some
differences
due to
rounding)
MA1909DRTN2
DISASTER FINANCE CENTER
$791,671
$0
$111,798
($111,798)
MA1980DRMO1
DISASTER FINANCE CENTER
205,743
-
34,215
(34,215)
MA1980DRMO4
DISASTER FINANCE CENTER
813,161
-
135,229
(135,229)
RW96954025
US COAST GUARD - Army-C.
7
-
1
(1)
RW19923244
DOS/OES-DRL/EX/FMD
500,000
-
30,800
(30,800)
RW57955751
DEPARTMENT OF DEFENSE
584,080
-
81,811
(81,811)
RW70957688
DHS
772,500
-
48,734
(48,734)
RW96944308
USACE-C/O USACE FINANCE
369,009
-
56,207
(56,207)
MA1981DRND2
DISASTER FINANCE CENTER
1,276,029
-
223,305
(223,305)
RW19923251
DOS/OES-DRL/EX/FMD
1,560,000
-
105,045
(105,045)
RW19923377
DOS/OES-DRL/EX/FMD
2,500,000
-
182,500
(182,500)
RW19923463
DOS/OES-DRL/EX/FMD
1,300,000
-
88,140
(88,140)
RW96950522
COE/NEW ORLEANS
17,519,843
-
2,316,721
(2,316,721)
RW96950527
COE/NEW ORLEANS
19,345,178
-
2,545,061
(2,545,061)
RW97922769
DEPT OF DEFENSE
5,963,824
-
393,915
(393,915)
Subtotal: Indirect costs excluded under 19 SAs
($6,353,482)
MA1604DRMS5
DISASTER FINANCE CENTER
$8,072
$0
$483
($483)
RW12922688
DEPT OF AGRICULTURE
102,797
-
11,670
(11,670)
RW13922088
DOC/NOAA COSTAL SERVICE
136,803
-
10,862
(10,862)
RW14955746
DOI/OIA
75,549
-
10,533
(10,533)
RW19922450
DOS/OES-DRL/EX/FMD
1,160,130
-
82,687
(82,687)
RW19922655
DOS/OES-DRL/EX/FMD
954,783
-
84,180
(84,180)
RW69922499
FED. HIGHWAY ADMIN.
1,044,151
-
116,558
(116,558)
RW70940324
DHS
1,007,484
-
157,858
(157,858)
RW96922535
Corps of Engineers-US Army
22,863
-
1,452
(1,452)
RW75922609
DHHS/CDC/ATSDR/FMO/AP
1,130,775
-
71,925
(71,925)
RW75922615
DHHS/CDC/ATSDR/FMO/AP
638,140
-
73,234
(73,234)
RW75948011
DHHS/CDC/ATSDR/FMO/AP
44,848
-
6,346
(6,346)
RW89922396
DOE, OFFICE OF HDQTRS DIV
169,834
-
11,101
(11,101)
RW89945955
US DEPARTMENT OF ENERGY
1,235,905
-
173,482
(173,482)
RW96950504
COE/NEW ORLEANS
233,834
-
35,505
(35,505)
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Agreement no.
Other agency
Direct costs
billed
Indirect
costs
billed
Indirect costs
per OIG1
Difference
(some
differences
due to
rounding)
RW96950520
COE/NEW ORLEANS
1,081,192
-
154,929
(154,929)
RW57921609
DFAS-COLUMBUS
1,102
-
118
(118)
RW58950477
DISASTER FINANCE CENTER
3,504,005
-
472,642
(472,642)
RW70939856
DEPT OF HOMELAND
SECURITY
1,366,884
-
121,063
(121,063)
RW72922607
USAID/EL SALVADOR
1,693,217
-
110,811
(110,811)
RW86921823
DEPT OF HUD
1,917,656
-
177,393
(177,393)
RW89939695
DOE, OFFICE OF HDQTRS DIV
1,700,000
-
148,410
(148,410)
RW96950486
COE/NEW ORLEANS
10,907,667
-
1,434,106
(1,434,106)
Subtotal: RIAs awarded before the policy effective date
($3,467,348)
RW14957875
DOI-US GEOLOGICAL SURVEY
$98,651
$7,350
$8,810
($1,460)
RW17923209
DFAS-CLEVELAND
671,608
86,369
103,095
(16,726)
RW69944293
FED H'WAY ADM-AOM
22,098
2,901
2,955
(53)
RW75922992
DHHS-OFC FIN MGMT, NIH
679,380
62,163
86,213
(24,050)
RW89923247
DOE FIN/ACCTNG SVCE
44,692
5,975
7,164
(1,189)
N10036-HQ
US COAST GUARD
4,131,918
262,377
303,572
(41,195)
N10036-R4
US COAST GUARD
3,125,089
416,887
471,780
(54,893)
N10036-R6
US COAST GUARD
7,135,013
936,114
1,053,769
(117,655)
RW19923042
DOS/OES-DRL/EX/FMD
4,922,905
377,095
520,351
(143,257)
RW70957613
DEPT OF HOMELAND
SECURITY
1,277,030
150,690
168,882
(18,193)
RW70957863
DHS-BFC
1,480,592
94,018
111,637
(17,619)
RW72923073
USAID M/FM/CMP
1,388,602
106,367
143,220
(36,853)
RW95922996
R. ACCTBLTY&TRANSP BD
13,050,750
687,775
816,405
(128,631)
Subtotal: Negotiated rates used over life of RIA
($601,774)
RW12923178
USDA-RURAL DEVELOPMENT
$251,401
$19,257
$25,821
($6,564)
RW12923097
DOA, USDA FOREST SERVICE
1,466,958
-
200,973
(200,973)
RW75922711
D H H S-NIH/OF M/GAO
6,085,561
-
376,727
(376,727)
Subtotal: Indirect costs excluded for other reasons
($584,264)
Total


$13,215,336
$24,222,205
($11,006,868)
Source: OIG analysis
1 We multiplied the billed direct costs for FYs 2010 and 2011 by the appropriate indirect cost rates in effect during
FYs 2010 and 2011 to arrive at the amount of indirect costs that could have been recovered.
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Appendix C
Potential Future Monetary Benefits
Agreement
no.
Agency
Total award
Amount billed
at 9/30/11
Remaining
balance
Indirect
cost
rate
(2012)
Monetary
benefits
RW14955746
DOI/OIA
$190,000.00
$138,975.67
$51,024.33
10.27%
$5,240.20
RW19922450
DOS/OES-DRL/EX/FMD
2,995,000.00
2,735,932.18
259,067.82
4.49%
11,632.15
RW57955751
DEPARTMENT OF
DEFENSE
1,288,316.00
876,104.42
412,211.58
10.27%
42,334.13
RW69922499
FED. HIGHWAY ADMIN.
3,341,970.00
1,895,440.42
1,446,529.58
7.55%
109,212.98
RW70940324
DEPT OF HOMELAND
SECURITY
1,650,999.00
1,197,237.82
453,761.18
11.12%
50,458.24
RW70957688
DISASTER FINANCE
CENTER-DHS
1,571,168.54
772,499.81
798,668.73
6.44%
51,434.27
RW75922609
DHHS/CDC/ATSDR/FMO/AP
3,208,797.00
1,923,703.00
1,285,094.00
4.36%
56,030.10
RW75922615
DHHS/CDC/ATSDR/FMO/AP
1,750,000.00
1,020,955.60
729,044.40
7.55%
55,042.85
RW89945955
US DEPARTMENT OF
ENERGY
4,051,200.00
3,412,217.74
638,982.26
9.49%
60,639.42
RW96944308
USACE-C/O USACE
FINANCE CENTER
624,699.00
369,009.41
255,689.59
10.14%
25,926.92
RW96950504
COE/NEW ORLEANS
785,223.00
237,502.70
547,720.30
9.80%
53,676.59
RW96950520
COE/NEW ORLEANS
1,971,907.00
1,545,227.78
426,679.22
9.80%
41,814.56
RW12923097
DOA, USDA FOREST
SERVICE
1,750,000.00
1,466,957.91
283,042.09
9.80%
27,738.12
RW19923377
DOS/OES-DRL/EX/FMD
3,820,000.00
2,500,000.00
1,320,000.00
4.49%
59,268.00
RW58950477
DISASTER FINANCE
CENTER
214,762,528.00
210,666,236.86
4,096,291.14
9.80%
401,436.53
RW72922607
USAID/EL SALVADOR
4,494,155.00
3,751,815.41
742,339.59
4.49%
33,331.05
RW86921823
DEPT OF HUD
4,046,000.00
3,291,217.72
754,782.28
6.21%
46,871.98
RW89939695
DOE, OFFICE OF HDQTRS
DIV
7,096,000.00
5,060,000.00
2,036,000.00
6.44%
131,118.40
RW96950486
COE/NEW ORLEANS
17,110,594.00
16,018,446.88
1,092,147.12
9.80%
107,030.42
RW96950522
COE/NEW ORLEANS
21,798,518.00
17,576,590.28
4,221,927.72
9.80%
413,748.92
RW96950527
COE/NEW ORLEANS
23,211,108.00
19,623,312.51
3,587,795.49
9.80%
351,603.96
RW97922769
DEPT OF DEFENSE
22,279,628.00
13,839,432.27
8,440,195.73
4.61%
389,093.02
Total





$2,524,682.81
Source: OIG analysis
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Appendix D
Agency Response
July 12, 2012
MEMORANDUM
SUBJECT: Response to the Office of Inspector General's Audit: "EPA Could Recover More
Indirect Costs under Reimbursable Interagency Agreements," Project No. OA-
FY12-0151, dated June 22, 2012
FROM: Barbara J. Bennett /s/ Original Signed By:
Chief Financial Officer
TO:	Arthur A. Elkins, Jr.
Inspector General
Thank you for the opportunity to respond to the findings and recommendations in the subject
audit report. Attention to these issues should further strengthen the agency's fiscal integrity.
Attached is our Corrective Action Plan in response to the specific draft report recommendations.
We disagree with the recommendation that the agency amend Reimbursable Interagency
Agreements awarded before the policy effective dates to include the ability to recover indirect
costs.
If you have any questions concerning the audit response, please contact Jeanne Conklin, Deputy
Director, Office of Financial Management at (202) 564-5342 or Ellen Rajewski of the Program
Costing Staff at (202) 564-4977.
Attachment
cc: Maryann Froehlich
Joshua Baylson
Stefan Silzer
Jeanne Conklin
Raffael Stein
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Melvin Vi snick
Janice Kern
Howard Corcoran
Francis Roth
Armina Nolan
Melissa Heist
Paul Curtis
Bill Samuel
Janet Kasper
Meshell Jones-Peeler
Dale Miller
John O'Connor
Sandy Dickens
Ellen Rajewski
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Attachment 1
Office of the Chief Financial Officer's Response to the Office of the Inspector
General Draft Audit
"EPA Could Recover More Indirect Costs Under Reimbursable Interagency Agreements"
Project No. OA-FY12-0151, dated June 22, 2012
Rec.
No.
OIG Recommendation
Action
Official(s)
Proposed Action
Proposed
Completion
Date
1.
Revise agency policy to clarify
that indirect costs should be
included in all Reimbursable
Interagency Agreements unless a
determination has been made
that statutory authority used for
an RIA specifically exempts
charging of indirect costs.
OCFO
The U.S. Environmental
Protection Agency concurs with
this recommendation. Interim IA
and Financial Policy notices were
sent to all IA Project Officers and
the CFC by OFM and OGD.
Completed
04/02/12
2.
Amend RIAs awarded before the
policy effective dates to include
the ability to recover indirect
costs.
OCFO,
OARM
OCFO/OGD respectfully
disagrees with this
recommendation. Specific
reasons are outlined below
N/A
3.
Revise agency policy to require
that amendments to all RIAs
include indirect costs based on
current indirect rates.
OCFO
The OCFO/OGD concurs with
this recommendation. The OCFO
policy update has been posted in
the RMDS.
7/10/12
4.
Correct the indirect cost rate
billing errors.
OCFO
OCFO/OGD concurs with this
recommendation. The agency is
developing a cradle to grave
Standard Operating Procedures
on financial management of
RIAs. All existing RIAs that do
not have the appropriate indirect
cost rates applied will be
renegotiated if a new monetary
action is initiated by the program.
On-going
5.
Develop policy and procedures
to ensure that the correct indirect
costs rates are used.
OCFO
OCFO concurs with this
recommendation. The policy will
be posted in the RMDS.
12/15/12
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Response to Recommendation 2
The EPA disagrees with the OIG recommendation number two, amend RIAs awarded before the
policy effective dates to include the ability to recover indirect costs.
Implementing this recommendation is impractical for a number of reasons.
First, opening RIAs for the sole purpose of collecting indirect costs is not cost effective. In
addition to the time and effort of the Interagency Shared Service Centers, Project Officers would
need to renegotiate existing agreements to seek additional funding from our partner agencies
(funding the partners may not have available), and process new RIA amendments. The burden in
payroll costs would significantly offset any return. As an example of the scope, in FY 2011 and
FY 2012, fewer than 300 total actions (including amendments and no-cost extensions) have been
processed for reimbursable IAs.
Second, management and tracking of such an amendment process would be impractical. Given
the time and requirements necessary to negotiate and process amendments, these older awards
will continue to expire and be closed during the process. Additionally, depending upon the age
and funding sources of these awards, we would also need to manage multiple indirect rates
across each award.
Third, implementation of a policy retroactively is not recommended for practical reasons. We
cannot change the rules for the in-place RIAs that the agency negotiated and legally accepted.
We can, however, revise the rules and policies for future actions and educate the EPA on the new
policies while implementation is in progress. OCFO and OGD have begun this process.
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Appendix E
Distribution
Office of the Administrator
Chief Financial Officer
Agency Follow-Up Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for External Affairs and Environmental Education
Deputy Chief Financial Officer
Director, Office of Financial Management, Office of the Chief Financial Officer
Deputy Director, Office of Financial Management, Office of the Chief Financial Officer
Director, Office of Financial Services, Office of the Chief Financial Officer
Deputy Director, Office of Financial Services, Office of the Chief Financial Officer
Director, Financial Policy and Planning Staff, Office of the Chief Financial Officer
Director, Cincinnati Finance Center, Office of the Chief Financial Officer
Director, Office of Grants and Debarment, Office of Administration and Resources Management
Director, Grants and Interagency Agreements Management Division, Office of Administration
and Resources Management
Audit Follow-Up Coordinator, Office of the Chief Financial Officer
Audit Follow-Up Coordinator, Office of Administration and Resources Management
Audit Follow-Up Coordinator, Office of Financial Management, Office of the Chief Financial
Officer
Audit Follow-Up Coordinator, Office of Financial Services, Office of the Chief Financial Officer
Audit Follow-Up Coordinator, Financial Policy and Planning Staff, Office of the Chief Financial
Officer
Audit Follow-Up Coordinator, Office of Grants and Debarment, Office of Administration and
Resources Management
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