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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
EPA Office of Air and Radiation
and Office of Water
Can Further Limit Use of
Level-of-Effort Contracts
Report No. 2006-P-00015
March 14, 2006

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Report Contributors:	Charles Randall
Andres Calderon
Stephen Burbank
Patricia Brooks Taylor
Abbreviations
EPA	Environmental Protection Agency
FAR	Federal Acquisition Regulation
LOE	Level-of-Effort
OAM	Office of Acquisition Management
OAR	Office of Air and Radiation
OIG	Office of Inspector General
OMB	Office of Management and Budget
OW	Offi ce of Water

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tf£D STAf..
s 		U.S. Environmental Protection Agency	2006-P-00015
s?	ah:««	March 14,2006
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\ Office of Inspector General
At a Glance
Catalyst for Improving the Environment
Why We Did This Review
We sought to determine
whether the acquisition
planning process for the
Environmental Protection
Agency's (EPA's) Office of
Air and Radiation (OAR) and
Office or Water (OW) used
knowledge gained from prior
acquisitions to limit the use of
cost reimbursable Level-of-
Effort (LOE) contracts. EPA
could reduce its risk and
potentially save money by
using other contract types.
Background
LOE contracts are cost-plus-
fixed-fee contracts that span
multiple years. Generally,
they are not performance
based - where the contractor
is compensated for results
rather than effort or process.
LOE contracts require the
contractor to provide only
required hours over a specified
time, with no final product or
deliverable required.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.aov/oia/reports/2006/
20060314-2006-P-00015.pdf
EPA Office of Air and Radiation and Office of Water
Can Further Limit Use of Level-of-Effort Contracts
What We Found
OAR and OW need to improve efforts to limit the use of LOE contracts. By
maximizing available opportunities to use other than LOE contracts, OAR and
OW can reduce EPA's financial risk, increase the possibility for greater
competition and cost savings, and improve the Agency's ability to increase the use
of performance-based contracts. Federal regulations indicate such cost-type
contracts are the least preferred method for acquiring services.
Based on the active list of OAR and OW contracts as of June 15, 2004, we
determined that 83 of those 169 contracts were LOE contracts. Significantly,
$288 million of the $383 in cumulative obligations for those 169 contracts, or
75 percent, were for LOE contracts:
Cumulative Obligations (millions)
Office	All Contracts	LOE Contracts
OAR	$235	$174
OW	148	114
Totals	$383	$ 288
In a judgmental sample of 14 cost-plus-fixed-fee contracts awarded for OAR and
OW, totaling approximately $105 million, we found that 61 of the 217 work
assignments, or 28 percent, could have been contracted out as other than LOE
procurements. These involve such projects as planning meetings and conferences
and maintaining computer systems.
What We Recommend
We recommend that OAR and OW require their program offices to reduce
reliance on cost reimbursable LOE contracts by improving acquisition planning
and increasing efforts to identify opportunities for performance-based acquisitions.
We also recommend that the Office of Administration and Resources
Management, which is responsible for contracts, work with OAR and OW to
better define contract requirements to make greater use of performance-based
contracts, and better enable contract officers to share best practices. The Agency
generally agreed with the findings and recommendations in the draft report and
has identified steps taken and planned to further reduce EPA's reliance on LOE
contracts and increase performance-based service acquisitions.

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^tDsx
j?	WASHINGTON, D.C. 20460
< JAflL \	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
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*l PRO"*^
OFFICE OF
INSPECTOR GENERAL
March 14, 2006
MEMORANDUM
SUBJECT:
FROM:
EPA Office of Air and Radiation and Office of Water
Can Further Limit Use of Level-of-Effort Contracts
Report No. 2006-P-00015
Carl A. Jannetti, Director for Contra
Office of Inspector General
TO:
Luis A. Luna, Assistant Administrator
Office of Administration and Resources Management
Bill Wehrum, Acting Assistant Administrator
Office of Air and Radiation
Benjamin H. Grumbles, Assistant Administrator
Office of Water
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 determination on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
Action Required
Your response to the draft report adequately addresses the findings and recommendations in this
report. Therefore, we will close this report upon issuance and no further response to this report
is necessary. We have no objection to the further release of this report to the public. This report
will be available at http://www.epa.gov/oig.
If you or your staff have any questions regarding this report, please contact me at (215) 814-5800
or Stephen Burbank at (617) 918-1489.

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	Table of Contents	
At a Glance
Chapters
1	Introduction		1
Purpose		1
Background		1
Scope and Methodology		2
Prior Reports		3
Internal Control Structure		3
Compliance with Laws and Regulations		3
2	OAR and OW Need to Further Limit Future Use of LOE Contracts		4
Opportunities Exist to Use Other than LOE Contracts		4
OAR and OW Continue to Prefer LOE Contracts		6
Potential Benefits Exist for Moving Away from LOE Contracts		7
Recommendations		8
Agency Comments and OIG Evaluation		8
Appendices
A Excerpts from Federal Acquisition Regulation 		10
B Contracts and Work Assignments Reviewed and Results of Review		11
C Work Assignments Identified that Could Have Been Other Than LOE		12
D Agency Response 		14
E Distribution 		17

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Chapter 1
Introduction
Purpose
We sought to determine whether the acquisition planning process for the
Environmental Protection Agency's (EPA's) Office of Air and Radiation
(OAR) and Office of Water (OW) used knowledge gained from prior
acquisitions to limit the use of cost reimbursable Level-of-Effort (LOE)
contracts. EPA could reduce its risk and potentially save money by
using other types of contracts.
Background
Contracts play a major role in supporting the regulatory requirements of the Clean
Air Act and Clean Water Act, as well as Agency initiatives to improve human
health and the environment. In 2004, contracts accounted for 36 percent and
30 percent of the operating budgets for OAR and OW, respectively. These
program offices use contracts to provide regulatory and programmatic support for
a variety of professional engineering, technical, and management services.
LOE contracts are cost reimbursable contracts that span multiple years (base
period and option years) and are predominantly awarded to large vendors.
Generally, the contracts are not performance based - where the contractor is
compensated for results rather than effort or process. LOE contracts describe the
scope of work in general terms and obligate a contractor to devote a specified
level of effort for a stated time period. LOE contracts have the contractor provide
only required hours over a specified time period with no final product or
deliverable required.
The Federal Acquisition Regulation (FAR) identifies cost-type contracts that are
not performance based as the least preferred method for acquiring services. FAR
states that such contracts can be used for research or preliminary exploration but
cautions against using them after experience from prior acquisitions provides a
basis for firmer pricing. FAR urges greater use of performance-based, fixed-price
contracts, particularly for follow-on acquisitions. FAR notes that if a cost-type
contract is to be used, one that identifies a deliverable is preferred over an LOE
contract. The use of other than LOE contracts is also reinforced by the Federal
Acquisition Streamlining Act of 1994, which makes Multiple Award Contracts the
preferred method (through this method, agencies award multiple contracts
covering the same scope of work and, as specific needs are identified, can
compete the orders among the multiple contract holders). Use of LOE contracts is
further discouraged in the EPA Contracts Management Manual, which states that
the contract should be either (1) performance-based, or (2) a "hybrid," combining
1

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both cost reimbursement and fixed-price type provisions. Appendix A contains
further details on FAR requirements.
EPA's Office of Acquisition Management (OAM), within the Office of
Administration and Resources Management, provides the policies, procedures,
and operational support for OAR and OW procurements, from contract planning
through close out. OAR and OW initiate the contracts, identify the tasks or work
assignments to be accomplished, and monitor the tasks through completion.
In a September 7, 2004 memorandum, Increasing the Use of Performance-Based
Acquisition, the Office of Management and Budget (OMB) set a Government-
wide goal of 40 percent of eligible contract dollars to be placed as performance-
based in Fiscal Year 2005. Procurements where at least 50 percent of the
acquisition is performance-based can be counted toward this goal.
Scope and Methodology
We performed this audit from September 2004 to September 2005 in accordance
with Government Auditing Standards, issued by the Comptroller General of the
United States. Our audit included visits to OAR and OW offices in Washington,
DC, and OAM's Headquarters Procurement Operations Division in Washington
and the Cincinnati Procurement Operations Division, Cincinnati, Ohio.
We interviewed OAR and OW personnel responsible for review and approval of
contract actions, and OAM contracting personnel, to determine how contract type
is selected and managed. We specifically interviewed program staff from three
OAR and two OW offices, as shown in Table 1.1. Combined, those offices are
responsible for almost 80 percent of OAR's and OW's cost-type contracts.
Table 1.1: Offices from Which Staff Were Interviewed
OAR
Office of Atmospheric Programs

Office of Transportation and Air Quality

Office of Air Quality Planning and Standards
OW
Office of Science and Technology

Office of Ground Water and Drinking Water
We reviewed pertinent documentation, including the relevant sections of the FAR,
EPA's Contracts Management Manual, Office of Federal Procurement Policy's
Best Practices, and OMB's Program Assessment Rating Tool reports for Air and
Water programs.
To identify the universe of contracts, we used OAM's Active Contract Listing as
of June 15, 2004. As of that date, OAR and OW had a total of 169 contracts.
Included in this amount were 93 cost reimbursable contracts, of which 83 were
LOE contracts. Details, including cumulative obligations, are in Table 1.2.
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Table 1.2: Breakdown of Contracts Sampled

All Contracts
Cost Reimbursable
LOE
Office
No. of
Contracts
Cumulative
Obligations
(millions)
No. of
Contracts
Cumulative
Obligations
(millions)
No. of
Contracts
Cumulative
Obligations
(millions)
OAR
111
$235
59
$180
54
$174
OW
58
148
34
128
29
114
Totals
169
$383
93
$308
83
$288
% of All
Contracts


55%
80%
49%
75%
To identify opportunities to use other than LOE contracts, we selected a
judgmental sample of 14 cost-plus-fixed-fee contracts awarded for OAR and OW
with total obligations of about $105 million. See Table 1.3 for details; specific
contracts reviewed are further identified in Appendix B. To examine Statements
of Work for planned acquisitions, we queried OAM Web sites.
Table 1.3: Sample of OAR and OW LOE Contracts
Office
No. of
Contracts
Cumulative Obligations
(millions)
Work Assignments
Reviewed
OAR
9
$70
144
OW
5
35
73
Total
14
$105
217
Prior Reports
We are not aware of any prior reports specifically on the acquisition planning
process for OAR and OW.
Internal Control Structure
In planning and performing the audit, we reviewed management controls relating
to our objectives. These included procedures for initiating contracts and selecting
contractors. As discussed in Chapter 2, while certain controls were in place,
OAM and program offices need to work closely to better define contract needs
and promote the use of other contract types. We examined the Fiscal Years 2003
and 2004 Federal Managers' Financial Integrity Act Annual Assurance Letters
issued to the EPA Administrator for OAR and OW. The letters did not identify
any contract-related issues for either OAR or OW.
Compliance with Laws and Regulations
EPA complied with the laws and regulations outlined in the FAR pertaining to its
efforts in the selection of contract type. However, we have identified
opportunities for improvement in OAR and OW acquisition planning through
utilization of knowledge gained from prior acquisitions to refine statements of
work and/or contract type to limit the use of cost reimbursable (LOE) contracts.
We discuss needed process improvements in Chapter 2.
3

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Chapter 2
OAR and OW Need to Further Limit
Future Use of LOE Contracts
OAR and OW need to improve efforts to limit the use of LOE contracts. By
maximizing available opportunities to use other than LOE contracts, OAR and
OW can reduce EPA's financial risk, increase the possibility for greater
competition and cost savings, and improve the Agency's ability to achieve
OMB's goals to increase the use of performance-based contracts. Although the
FAR cautions against the protracted use of cost reimbursable LOE contracts,
OAR and OW continue to use them. At the time of our audit, these program
offices had more than $288 million in LOE contracts, and OAR and OW
acquisition plans indicate the trend to predominately use LOE contracts will
continue due to convenience.
Opportunities Exist to Use Other than LOE Contracts
FAR 16 provides guidance on why and how to minimize LOE procurements. As
noted, a September 2004 OMB memo set a Government-wide goal of 40 percent
of eligible contract dollars being performance-based in Fiscal Year 2005.
However, as shown back in Table 1.2, of the $383 million in cumulative
obligations as of June 2004 for OAR and OW, 80 percent were cost reimbursable
($308 million), including $288 million in LOE (75 percent of the $383 million).
Although OW is making progress, OAM's statistics indicate that both OAR and
OW have not met the OMB 40-percent goal. In Fiscal Year 2004, 14.5 percent
and 24 percent of OAR's and OW's eligible contracts, respectively, were
performance based. Preliminary data for Fiscal Year 2005 show that OAR
increased to 17 percent and OW to 38 percent. Our audit demonstrated that OAR
and OW have opportunities available to help meet or exceed the 40-percent goal,
and it is important that EPA take advantage of these opportunities.
For our audit, we reviewed 217 of the procurements (work assignments) initiated
under 14 contracts awarded for OAR and OW. These contracts totaled
approximately $105 million, and had obligated amounts ranging from about
$425,000 to $33,000,000. We determined that 61 work assignments, or
28 percent, could have been other than LOE procurements, as shown in Table 2.1.
Table 2.1: Work Assignments That Could Have Been Other Than LOE
Office
Work Assignments
Reviewed
Work Assignment Opportunity
for Other than LOE
Percent
OAR
144
52
36%
OW
73
9
12%
Totals
217
61
28%
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We had determined that other than an LOE procurement was appropriate if the
task or service procured met one or more of the following criteria:
•	Similar to items or tasks previously purchased under the same contract;
•	Able to stand alone and a deliverable was specified;
•	Similar to items or tasks acquired elsewhere within EPA using a contract other
than LOE; or
•	Available commercially.
By relying on LOE contracts for these procurements, OAR and OW forfeited
opportunities to obtain the benefits associated with other contract types, such as
reducing the Government's risk and increasing contractor input and innovation.
Many of the 61 work assignments reflected procurements for which the Agency
had considerable historical data, such as the labor hours used and costs paid to
complete similar work. For example, during the past 5 years, OAR issued six
work assignments for contractors to develop and present training courses.
Another contract contained work assignments to task a contractor to plan four
conferences during 3 consecutive years.
Also, each of the 61 work assignments was to procure a specific quantifiable task
that could have been purchased using other than an LOE contract (see
Appendix C for details). For example, work assignments procured tasks and
services such as:
•	Facilitating classes
•	Planning meetings and conferences
•	Maintaining computer systems
•	Writing brochures
•	Creating videos
•	Translating documents
Other EPA offices used a variety of contract types besides LOE to accomplish a
number of these tasks. The historical data within OAR and OW, as well as the
experiences of other EPA offices, demonstrates that OAR and OW have the
opportunity to move away from their reliance on LOE contracts.
In addition to the 61 work assignments discussed above that could have been
procured in their entirety as other than LOE, we identified 86 other work
assignments for which a portion of the tasks could have been separated from the
work assignment and awarded other than LOE. For example, for a $3 million
contract with 28 work assignments, 24 of the assignments contained some tasks
that were ordered repetitively and fairly common to all 24, such as technical and
general support and recordkeeping. The repetitive tasks could have been other
than LOE if procured separately from the non-repetitive tasks.
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OAR and OW Continue to Prefer LOE Contracts
OW is making efforts to move away from LOE in future acquisitions by
identifying some of its future contracts as candidates for performance-based
acquisitions. However, both OAR and OW contend they need to continue relying
on cost-plus-fix-fee LOE contracts because they provide the ability to change
priorities easily and adjust funding. Further, they said LOE contracts better allow
them to control how the contractor does work and hold one contractor responsible
for work under a single contract.
Changes in priorities and funding occur continually throughout the Agency and
should not inhibit the use of other contract types. This is demonstrated by several
other EPA offices that deal with the same uncertainties as OAR and OW but do
not use LOE contracts to the same extent. While LOE contracts provide the
ability to control how the contractor does its work, it can result in limited
contractor innovation. Although program offices contend that using a single
contractor can be convenient, this presupposes that the contractor is the best
available resource for all tasks.
Also, OAR and OW said there are inherent uncertainties in defining tasks at the
time of contract planning. However, uncertainties at the time of award usually
should be limited to new tasks. As work assignments are completed during
contract performance, program offices gain the knowledge needed to identify and
quantify resources for future acquisitions. Currently, EPA awards LOE contracts
for multiple years. Once contract type is determined and the contract awarded,
the terms are fixed for the duration of the contract, which can extend up to
5 years. If the contract awarded permitted flexibility by being structured to allow
for the use of other than LOE in subsequent years, OAR and OW would be able to
change the way work is procured as they gained experience and knowledge.
The Statement of Work outlines the services to be procured and is the primary
document used to determine contract type. While OAR and OW initiate the
Statement of Work and identify the type of contract they desire, the contracting
officers at OAM ultimately determine the contract type, based on the information
in the Statement of Work. The degree of specificity in the Statement of Work
strongly impacts contract-type selection. Contracting officers will usually
recommend using an LOE contract when the Statement of Work is broadly
worded or vague and it is difficult to determine the specific tasks needed, whether
the tasks were procured previously, and whether sufficient historical data exists to
estimate costs. To move away from LOE procurements, OAR and OW need to
prepare more definitive Statements of Work that more effectively portray the
actual services needed and the historical knowledge available. When OAM did
convert LOE contracts to other types, it often was because OAM worked
collaboratively with OAR or OW to clarify the Statement of Work.
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Potential Benefits Exist for Moving Away from LOE Contracts
EPA will need to move toward more innovative contract types to comply with
OMB's goal of 40 percent of eligible contracts being performance-based. LOE
contracts are less conductive to such performance-based contracting. It is
difficult to write incentives for superior performance and innovative techniques
into LOE contracts because this contract type procures the contractor's "best
effort" and the Agency directs how the contractor accomplishes the work. As a
result, continued use of LOE contracts inhibits OAR and OW from developing
performance measures/incentives, and obtaining the benefits that would accrue
from other contract types. Such benefits can include:
•	Increased competition.
•	Increased opportunities for small businesses.
•	Sharing more of the risk with the contractor.
•	The economic "encouragement" for the contractors to provide new and
innovative/creative solutions and methodologies.
•	Reduced administrative costs for EPA programs.
Our audit results demonstrate that OAR and OW have opportunities available to
help meet the 40-percent goal. It is important that EPA take advantage of these
opportunities because OMB's 40-percent goal may increase in future years.
EPA's recent efforts to use "hybrid" contracts (i.e., contracts that combine both
LOE and fixed-price components) are a step in the right direction. For example,
we identified three contracting officers in OAM who worked with program
offices to convert three long-running LOE contracts into hybrid contracts, two of
which are multiple award. A contracting officer noted the program had
contracted this work for the past 10 years in the same fashion and that changing
contract type would foster improved competition and contractor effectiveness.
OAM officials also told us that they provided training to the programs offices to
increase the use of other than LOE contracts.
The work assignments and tasks we identified that could have been other than
LOE impacted 11 of the 14 contracts reviewed. While all the tasks would not
necessarily be convertible to other than LOE, there are repetitive work
assignments and tasks that could be awarded differently. Once contracts are
awarded as LOE, there are no other options available for assigning the future
work. Since OAM is responsible for making the final determination on contract
type, it should take the lead in helping OAR and OW move away from LOE
contracts by advocating the use of other contract types or forms, such as:
• Fixed-Price
• Multiple Award
• C ompl eti on F orm
• Indefinite Delivery Indefinite Quantity
• Task Order
• Hybrid
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According to OAR and OW acquisition plans, they planned to award 32 LOE
contracts during Fiscal Years 2005 through 2008. Of that amount, 24 represent
follow-on efforts for expiring LOE contracts. Given the historical information
available, at least a portion of the future contracts could be candidates for
conversion to other than LOE.
Recommendations
We recommend that the Assistant Administrator for Air and Radiation and the
Assistant Administrator for Water:
2-1 Require program offices to reduce reliance on cost reimbursable LOE
contracts by making a more concerted effort to identify opportunities
for performance-based acquisitions. The offices should improve
acquisition planning by utilizing contract history and experience to
develop Statements of Work that are more specific, definitive, and
detailed.
We recommend that the Assistant Administrator for Administration and
Resources Management, through the Office of Acquisition Management:
2-2 Instruct contracting officers to adhere to the FAR guidance and work
collaboratively with OAR and OW to:
a.	Improve Statements of Work to better define contract requirements
and identify opportunities to limit the use of LOE contracts.
b.	Utilize knowledge gained and lessons learned from current and
planned OAM procurements to assist OAR and OW to develop
new and innovative contracts that provide flexibility and minimize
risk, and move the Agency toward its goals for increased small
business participation and performance-based acquisition.
2-3 Establish a process to assure that the best practices and
accomplishments of contracting officers in developing new and
innovative contracts to service program offices are shared among all
the contracting officers as a guide and incentive for similar success.
Agency Comments and OIG Evaluation
OAR and OW agreed that less reliance should be placed on the use of LOE
contracts, and indicated they will work collaboratively with OAM to make this
happen. Since 2002, when only 7 percent of the OAR and OW contracts awards
were Performance-Based Service Acquisitions, considerable progress has been
8

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made. In 2005, OW increased Performance-Based Service Acquisition contract
awards to 38 percent and OAR increased such awards to 17 percent.
Nonetheless, both OAR and OW recognize that more progress can and should be
made in this area. These offices indicated they plan to work harder to identify
opportunities for performance-based contracting, in both new acquisition
requirements and future task/delivery orders under already existing contracts.
One valuable tool those two offices and OAM said they will be using is training
through the Federal Acquisition Institute. This training course enables EPA
program and contracting staff to meet with trainers and Performance-Based
Service Acquisition experts to develop performance-based requirements and
statements of work. Both OAR and OW said representatives will be taking this
training during Fiscal Year 2006.
OAM agreed with our recommendations and said it took a major step in the right
direction in October 2005 by issuing a revision to Chapter 37 of the Contracts
Management Manual. This revision acknowledges the FAR preference for
performance-based contracting when acquiring services and mandates that all
EPA contracts eligible for Performance-Based Service Acquisition be awarded as
such. The revised chapter includes guidance to contract and program offices on
establishing Performance-based Work Statements, Statements of Objectives,
Measurable Performance Standards, Quality Assurance Surveillance Plans, and
Incentives. OAM expects this new policy to enable the Agency to significantly
decrease its reliance on LOE contracts over the next several years. OAM said it
will continue to discuss Performance-Based Service Acquisition, increased small
business participation, and the use of new and innovative contracting vehicles
with customers during acquisition planning meetings. OAM said it also has a
network in place to share best practices.
We believe the increased training of program personnel and implementing the
revised Chapter 37 of the Contracts Management Manual should help the
programs move toward less reliance on LOE and more performance-based
contracting. The programs OAM has put in place, as well as those planned,
should provide strong impetus to further reduce the Agency's reliance on LOE
contracts.
The Agency's entire response is included as Appendix D
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Appendix A
Excerpts from Federal Acquisition Regulation
7.103 Agency-head
responsibilities
(2)(r) Ensuring that knowledge gained from prior acquisitions is used to
further refine requirements and acquisition strategies. For services, greater
use of performance-based contracting methods and, therefore, fixed-price
contracts (see 37.602-5), should occur for follow-on acquisitions.
16.103 Negotiating
contract type
(c) ... changing circumstances may make a different contract type appropriate
in later periods than that used at the outset. In particular, contracting officers
should avoid protracted use of a cost-reimbursement ortime-and-materials
contract after experience provides a basis for firmer pricing.
16.306 Cost-plus-
fixed-fee contracts
(1) The completion form describes the scope of work by stating a definite goal
or target and specifying an end product. . . .
(3) Because of the differences in obligation assumed by the contractor, the
completion form is preferred over the term form whenever the work, or
specific milestones for the work, can be defined well enough to permit
development of estimates within which the contractor can be expected to
complete the work.
16.202 Firm-fixed-price
contracts
2. A firm-fixed-price contract is suitable for acquiring commercial items or for
acquiring other supplies or services on the basis of reasonably definite
functional or detailed specifications when the contracting officer can establish
fair and reasonable prices at the outset, such as when-
(b) There are reasonable price comparisons with prior purchases of the same
or similar supplies or services made on a competitive basis or supported by
valid cost or pricing data.
16.104 Factors in
selecting contract type
(k) Acquisition history. Contractor risk usually decreases as the requirement is
repetitively acquired. Also, product descriptions or descriptions of services to
be performed can be defined more clearly.
37.102 Policy
When acquiring services, including those acquired under supply contracts,
agencies must—
(1)	Use performance-based contracting methods to the maximum extent
practicable
(2)	Use the following order of precedence (Public Law 106-398, section
821(a));
(i)	A firm-fixed price performance-based contract or task order.
(ii)	A performance-based contract or task order that is not firm-fixed price.
(iii)	A contract or task order that is not performance-based.
37.602-5 Follow-on
and repetitive
requirements
When acquiring services that previously have been provided by contract,
agencies shall rely on the experience gained from the prior contract to
incorporate performance-based contracting methods to the maximum extent
practicable. This will facilitate the use of fixed-price contracts for such
requirements for services.
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Appendix B
Contracts and Work Assignments Reviewed
and Results of Review
Office of Air and Radiation



No. of Work Assignments


Cumulative

Which Could
With


Obligations

Be Other
Recurring
Contract No.
Program
(millions)
Reviewed
Than LOE
Tasks
68-W-00-124
OAP
$ 32.6
5
5
0
68-W-02-001
OAP
14.5
5
5
0
68-C-01-155
OTAQ
11.9
4
0
3
68-C-02-022
OTAQ
1.0
5
0
0
68-D-01-078
OAQPS
3.1
49
7
26
68-D-02-079
OAQPS
1.9
47
24
0
68-D-02-104
OAQPS
0.7
17
7
4
68-D-03-052
OAQPS/QAP
3.4
8
0
0
68-W-04-014
OAP
0.4
4
4
0
Totals

$69.5
144
52
33
Office of Water



No. of Work Assignments


Cumulative

Which Could
With


Obligations

Be Other
Recurring
Contract No.
Program
(millions)
Reviewed
Than LOE
Tasks
68-C-01-098
OGWDW
$ 2.8
2
0
0
68-C-02-069
OGWDW
12.0
5
5
0
68-C-99-263
OST
9.7
36
0
27
68-C-99-239
OST
7.0
2
0
2
68-C-02-095
OST
3.3
28
4
24
Totals

$ 34.8
73
9
53
COMBINED TOTALS
$ 104.3
217
61
86
OAP:	Office of Atmospheric Programs
OAQPS:	Office of Air Quality Planning and Standards
OGWDW:	Office of Ground Water and Drinking Water
OST:	Office of Science and Technology
OTAQ:	Office of Transportation and Air Quality
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Appendix C
Work Assignments Identified that
Could Have Been Other Than LOE
No. of Work
Contract	Work Assignment	Assignments
68-D-02-079 Collecting emissions data from power plants	1
Review and summarize reports provided to EPA from States	1
Update software and provide phone assistance to users	1
Develop and present course	3
Update EPA's Air Quality Index brochure	1
Plan the 2004, 2005, 2006 Emissions Inventory and Air Quality Conferences	10
Develop a monitoring strategies brochure, Air Effects health brochure	4
Note taking at an EPA science meeting	1
Development of AQI meteorologists educational toolkit	_2
Sub-total	24
68-D-01-078 Develop GANT Chart using MS Project	1
Update Web site, respond to calls, produce users manual	1
Make editorial revisions to "Health Effects Notebook" profiles	1
Prepare draft for review then final inventory plan	1
Teach one day "Best Practices Course"	1
Technical support to update and maintain database	1
Update Microsoft Access database	1
Sub-total	7
68-D-02-104 Develop document and plan for data collection for 2002 National Emissions Inventory	1
Develop Web site	1
Document previously developed software tools	1
Develop user guide, consolidate several software tools into one	1
Update database	1
Software maintenance and support	1
Develop software tool	1
Sub-total	7
68-W-04-014 Develop training sessions and develop a comic book	1
Provide support for conferences, redesign a Web site and translate into Spanish	1
Convert updated tool kit to CD-ROM, prepare training guide and present training
sessions	1
Support for conferences, distribute educational materials	1
Sub-total	4
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No. of Work
Contract Work Assignment	Assignments
68-W2-00-001 Conduct meetings with potential Energy Star customers	1
Co-produce training material, conduct training	1
Edit and publish Energy Star Guide	1
Identify new industries for Energy Star	1
Maintain Database iStar	1_
Sub-total	5
68-W0-02-124 Develop public service advertisement, create brochure	1
Develop training strategy, modify Web site	1
Develop marketing campaign	1
Develop new materials, update Web site	1
Create marketing plan	1
Sub-total	5
Total Office of Air and Radiation	52
68-C-02-095 Prepare training material and provide logistic support for meeting	1
Guidelines Support, Litigation Support, and drafting guidelines	1
Provide training materials and set up meetings	1
Software update	1
Sub-total	4
68-C-02-0069 Translate materials into Spanish	1
Develop materials for Web cast training sessions, provide training	1
Contractor shall produce at least three videos, provide training	1
Convert documents into formats for a Web page on Internet sites	1
Develop materials, provide training	1
Sub-total	5
Total Office of Water	9
TOTAL ALL	£1
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Appendix D
Agency Response
MEMORANDUM
SUBJECT: Draft Audit Report: EPA Office of Air and Radiation and Office of Water Can
Further Limit Use of Level-of-Effort Contracts,
Assignment Number 2004-1314
FROM: Luis A. Luna /s/
Assistant Administrator
TO:
Carl A. Jannetti
Director for Contract Audits
Office of Inspector General
Thank you for the opportunity to comment on the draft report entitled "EPA Office of Air
and Radiation and Office of Water Can Further Limit Use of Level-of-Effort Contracts," dated
January 3, 2006. As requested, we have prepared a consolidated response which has been
coordinated with the Office of Air and Radiation (OAR) and the Office of Water (OW).
We generally agree with the findings and recommendations in the draft report, and offer
some specific comments below. While the Agency is definitely moving forward in decreasing
its use of level-of-effort (LOE) contracts, all three Offices recognize that we could and should do
better in this area. Accordingly, we will take your recommendations and suggestions very
seriously, and we will collaboratively work to further reduce EPA's reliance on LOE contracts in
the future, and increase the use of performance-based services acquisition (PBSA).
General -
We take no exception to the factual accuracy of this draft report. We would also like to identify
and highlight steps we have taken, and are going to take in the near future, to continue to reduce
the Agency's reliance on LOE contracts. We will address these steps under our comments on
your recommendations.
Recommendations -
RECOMMENDATION 2-1 - That the Assistant Administrator for Air and Radiation and the
Assistant Administrator for Water requires program offices to reduce reliance on cost
reimbursable LOE contracts by making a more concerted effort to identify opportunities for
performance-based acquisitions. The offices should improve acquisition planning by utilizing
contract history and experience to develop Statements of Work that are more specific, definitive,
and detailed.
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RESPONSE - The OAR and OW agree with this recommendation, and they will work
collaboratively with the Office of Acquisition Management(OAM/OARM) to make this happen.
Both Offices have made progress in increasing the use of PBSA over the past four years. OAR's
percent of obligations that has been PBSA has increased consistently from FY 2002 to 2005:
7.1%; 11.7%; 14.6%, and 17.0%. Similar figures for OW have been: 7.0%; 20.2%; 23.9%; and
38.1%. One of the major reasons for OW's success in this area was the 2002 award of four
multiple award contracts with the Office of Wetlands, Oceans and Watersheds. Under these
hybrid contracts, 55% of task orders issued, and 46% of the $22M in obligations to-date ha been
issued under performance-based vehicles. Please note that these contracts and task orders were
not selected as part of your sample during the audit. Both Offices believe a fuller picture of each
Office's contracting would show that they use a wide variety of contract vehicles, and not
primarily LOE contracts.
Nonetheless, both OAR and OW recognize that more progress can and should be made in this
area, and they will work harder to identify opportunities for performance-based contracting, in
both new acquisition requirements, and future task/delivery orders under already existing
contracts. Please note that, in the latter case, sometimes the administrative costs of converting
new task/delivery orders may outweigh the benefits of converting them. In such cases,
conversions will not be done; nonetheless, we will consider and analyze all such cases.
One valuable tool the two program offices and OAM will be using is training through the Federal
Acquisition Institute (FAI). FAI's PBSA training course consists of the program and contracting
staff involved in a specific upcoming acquisition requirement meeting with FAI trainers and
contractor PBSA experts to develop performance-based requirements and statements of work.
Both OAR and OW representatives will be taking this training during FY 2006. We believe this
valuable training will greatly help the Agency reach future OMB goals regarding PBSA.
RECOMMENDATION 2-2 - That the Assistant Administrator for Administration and
Resources Management, through the Office of Acquisition Management, instruct contracting
officers to adhere to the FAR guidance and work collaboratively with OAR and OW to: (a)
improve Statements of Work to better define requirements and identify opportunities to limit the
use of LOE contracts; and (b) utilize knowledge gained and lessons learned from current and
planned OAM procurements to assist OAR and OW to develop new and innovative contracts that
provide flexibility and minimize risk, and move the Agency toward its goals for increased small
business participation and performance-based acquisition.
RESPONSE - OAM agrees with this recommendation. As a major step in helping EPA head in
the right direction in this area, OAM issued a new PBSA policy in October 2005, Contracts
Management Manual (CMM) Chapter 37, Section 37.1, "Performance-Based Service
Acquisition." The policy acknowledges that the FAR establish a preference for performance-
based contracting when acquiring services, and it mandates that all EPA contract requirements
that are eligible for PBSA be awarded as such. Guidance for EPA contract and program offices
is provided in this new CMM Chapter, including how to establish Performance Work
Statements, Statements of Objective, Measurable Performance Standards, Quality Assurance
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Surveillance Plans, and Incentives. We expect this new policy will enable the Agency to
significantly decrease its reliance on LOT contracts over the next several years.
OAM will also continue to discuss PBSA, increased small business participation, and the use of
new and innovative contracting vehicles with its program customers during acquisition planning
meetings (as prescribed in the CMM, Chapter 7.1.5.1), usually held several times a year, and
customer service meetings with Senior Resource Officials, which are held annually. In addition
to OAM and program representatives, the Agency's Competition Advocate and Office of Small
and Disadvantaged Business Utilization representatives are also invited to attend these meetings.
Additionally, as mentioned under Recommendation 2-1, above, OAM actively participates in
FAI PBSA team training courses, along with program representatives. Improving Statements of
Work and developing innovative contracts to provide flexibility and minimize risk to the
Government are two of the chief goals of these courses.
RECOMMENDATION 2-3 - That the Assistant Administrator for Administration and
Resources Management, through the Office of Acquisition Management, establish a process to
assure that the best practices and accomplishments of contracting officers in developing new and
innovative contracts to service program offices are shared among all the contracting officers as a
guide and incentive for similar success.
RESPONSE - OAM has a network in place for sharing best contracting practices. This network
includes: monthly Contract Customer Relations Council (CCRC) meetings with program office
representatives; discussing noteworthy accomplishments at weekly OAM staff meetings;
addressing major contracting issues in OAM's "Buy-Lines" newsletter; posting best practices on
OAM's intranet web site; and sharing/posting best contracting practices found during reviews of
contracting offices' compliance with their internal Quality Assurance Plans. For an example of
this network in action, the Agency's first award-term contract established for the OW has its
Performance Work Statement posted on the Best Practices website for PBSA as an example of
an award-term contract.
We appreciate the opportunity to provide comments on the draft report. OAM strongly
supports the need to increase PBSA and decrease EPA's reliance on LOE contracts. If you have
any questions or comments, please contact Judy Davis, Director, Office of Acquisition
Management, at 564-4310, or John Oliver, Policy Training and Oversight Division, at 564-4399.
cc: Bill Wehrum
Benjamin H. Grumbles
Judy Davis
Chuck Gherardini
Joan Wooley
Ron Kovach
John Oliver
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Distribution
Appendix E
Office of the Administrator
Acting Assistant Administrator, Office of Air and Radiation
Assistant Administrator, Office of Water
Assistant Administrator, Office of Administration and Resources Management
Agency Followup Official (the CFO)
Agency Followup Coordinator
Audit Followup Coordinator, Office of Air and Radiation
Audit Followup Coordinator, Office of Water
Audit Followup Coordinator, Office of Administration and Resources Management
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Director, Office of Acquisition Management
Acting Inspector General
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